Angel Broking neutral on DQ Entertainment IPO

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The initial public offering of DQ Entertainment has opened for subscription today. The 1,60,48,011 equity shares IPO is being done through 100% book building process and will close on March 10, 2010. The price band for the issue is fixed at Rs 75 - Rs 80 per equity share of Rs 10 each.

In an exclusive interview with CNBC-TV18, Anand Shah, Angel Broking, speaks about the issue and gives his outlook going forward.

Here is a verbatim transcript of the exclusive interview with Anand Shah on CNBC-TV18. Also watch the accompanying video.

Q: What is it a buy or avoid in your book?

A: We have given neutral view on the initial public offerings (IPO), more or less neutral to avoid view because while there are no major negatives in the IPO, we do not find anything exciting as well. There are several uncertainties related to the business model, clarity in terms of revenue and also the valuations are not compelling for us to subscribe to the IPO.

Q: How do you read this Rs 450 crore odd orderbook that DQ Entertainment has? Is it a firm order book which can be executed over the next couple of years?

A: The Rs 450 crore orderbook is predominantly into the production department. They are largely an animation company where they have an outsourced model which is based on fixed price contracts, so that is where the Rs 450 crore order book is to be executed in the next two-three years. Out of that about 40% is still to be confirmed, but the remaining is more or less confirmed, so that is a risk portion attached. But the Rs 450 crore order, we expect that to be executed though, it is safe orderbook. They have a client base of about 90 odd clients with well-established names in the international domain in the animation industry, so that way they are well placed.

Q: What makes you apprehensive about valuations? Can you give us your assumptions for 2011 and how you are mapping the multiples?

A: In terms of growth rates, in the last two-three years, DQ Entertainment has done well in terms of posting more than 35% growth rates. But going forward they have outlined a major growth driver to be intellectual property (IP) creation, they are entering into intellectual property rights (IPR) model and co-production, so they expect major revenue driver to that. But they do not have much experience in IPR creation, so that makes us apprehensive.

In terms of valuations, based on the details in Red Herring Prospectus (RHP) and our assumptions, we expect the companies to grow at about 25-30% topline and about 10-15% bottomline. So that is giving us a valuation of 22-23 times FY11 earnings, which we believe investors are much better off with investing in other media companies which are also available at 15-20% and have a strong track record and are placed in much better domains in terms of growth rates.