Why This Moviemaker’s Stock Is Down Over 40% This Year

Shares of Eros International Media Ltd. have tumbled this year as one of India's largest listed moviemakers hasn't given a blockbuster in nearly three years and struggles to generate cash.

Shares of Eros International Media, which co-produces, acquires and distributes Indian language films worldwide, have fallen 42 percent so far this year. In contrast, its NYSE-listed parent Eros International Plc gained 51 percent during the period. While the Indian arm makes and distributes films within India, the parent manages overseas business.

Eros International Media's last big release was Ranveer Singh and Deepika-starrer Bajirao Mastani in December 2015. The company has now changed its strategy to focus on low-cost, franchise-based movies, according to its filings. It would hunt for profitability by investing in content-driven films with high return on investment potential and low risk, steering away from big-budget movies. That's still untested though.

The change comes at a time digital entertainment driven by online services is expected to take over the film industry in the next two years with revenue of Rs 22,400 crore, according to an EY study. Eros International said in its filings that its Eros Now app has 100 million users. About 7.9 million were paid subscribers as of March and the company targets 16 million by end of the current financial year. Its average revenue per user is about $4-4.5 in India compared with $35 in the U.S., it said.

That could present an opportunity to unlock value for shareholders in the future given the rise of platforms like Amazon Prime and Netflix in India. But the digital services business is owned by its parent.

And the Indian arm's revenue has been falling.

Net debt rose due to investments in its film content and growing slate of Eros Now originals, the company said in its filings.

The backing of India's richest man Mukesh Ambani in February hasn't helped boost investor confidence. Reliance Industries Ltd. acquired 5 percent stake in Eros International Plc and entered into a partnership with Eros International Media to jointly invest Rs 2,000 crore to produce and consolidate content, a partnership the billionaire called a “win-win”.

But soon after the deal, Eros International's Group Chief Executive Officer Jyoti Deshpande quit to head RIL's media and entertainment business. Deshpande had steered the company for 18 years.

The veteran's exit created discomfort among investors given her credible record in this space, said Avinash Gorakshakar, head of research at brokerage Joindre Capital Services.

The company had announced an Indo-Chinese project in July 2016. It however missed the first deadline of releasing two movies in the year ended March.

The first film under the Indo-Chinese project will be released in the ongoing financial year, Chief Corporate Officer Abhay Bhalerao told BloombergQuint. “The joint venture with Reliance for content will kick in the first half of FY19 and that will provide incremental momentum. Digital content growth may lead to double-digit growth in FY19.”

Eros International Media remains focused on its productions with 40-50 films across languages slated to release by March next year, according to its company filings.

Investors are not buying into that yet. A decline this year means the company's stock is cheaper than its long-term valuation. It trades at 4.8 times its earnings compared with the five-year average of 10.4 times.

It hasn't been an exciting year for Eros and operating cash flows has been negative, Gorakshakar said. While the company's overall business fundamentals and promoters experience remain key positives in the long run, monetisation of the digital business is a key thing to watch, he said.