Shemaroo IPO: Valuation stiff; operating cash flow a worry

IPO Object

The main objective of the public issue is to fund the working capital requirements. Further, the company believes that the listing of its shares on the stock exchanges would enhance its visibility and brand name among existing and potential customers and business partners. Though Rs 106 cr public money is earmarked for working capital, the fund deployment has not been appraised by any public bank or financial institution.

Grading

The company has not sought rating for its IPO.

Company Background

The Mumbai-based Shemaroo Entertainment Ltd (Shemaroo) was originally incorporated in December 2005 in the name and style of Shemaroo Holdings Private Limited (SHPL). Pursuant to a ‘Scheme of Arrangement’ in March 2008 between SHPL and its group company, Shemaroo Entertainment Private Limited (SEPL), the entertainment business of SEPL was transferred to SHPL and the names were swapped. SEPL (Shemaroo) was converted into a public company in March 2011.

As regards people behind Shemaroo, the company has been promoted by Raman Maroo (63) and his brother Atul Maru (53). Raman Maroo, designated as managing director, has reportedly been associated with the media and entertainment industry for more than three decades. He has been instrumental in Shemaroo‘s expansion into television rights syndication as well as transformation of Shemaroo into a content house.  Atul Maru, joint managing director, claims to have 34 years of experience in the media and entertainment industry.

Business profile 

Founded in 1962 as a circulating book library, Shemaroo has now established itself as an integrated media content house engaged in content acquisition, value addition and content distribution. In 1979 Shemaroo set up India's first video rental business and thereafter in 1987, it forayed into distribution of content through the home video segment. Over the years, the company has adapted to changing content consumption patterns by expanding into content aggregation and distribution for broadcasting on television platforms.

Shemaroo’s content library consists of more than 2,900 titles spanning across various languages. It is claimed to be one of the largest independent content aggregators in Bollywood. Shemaroo distributes contents through various mediums such as satellite TV, cable television, mobile, internet, DTH, etc. Recently Shemaroo has even tied up as an official channel partner for Google Inc’s ‘You Tube’ where it is managing 32 channels.

Financial Performance

Shemaroo’s revenue has shown consistent growth in recent years at a CAGR of over 26 percent, from Rs 102 cr in FY10 to Rs 263 cr in FY14. The company operating margin, which was at 18 percent in FY10 gradually improved to 27 percent in FY13. However, the OPM witnessed a dip (24.7 percent) in FY14. Net profit though grew unevenly has reached Rs 28 cr in FY14 from just Rs 1.26 cr in FY10. EPS in FY14 worked out to over Rs 14 on a capital of Rs 19.85 cr. The company has been paying a token dividend of 5 percent since FY 2012.

However, a disturbing feature of the company’s operation is that in last two years, the company’s operating cash flow has been negative. Further, the company’s inventories have been shooting up (Rs 97 cr in FY12 to Rs 198 cr in FY14) which makes the profit margin suspect. Also while profits have been growing, the company’s receivables are bulging. Whereas the company’s revenue grew by Rs 50 crore in fiscal 2014, debtors increased by Rs 69 crore. In other words, the company’s current attractive EPS is only notional.   

Prospects

Shemaroo’s strategy is structured around its Content Library and its successful exploitation to ensure that it can be monetized through diversified platforms on a worldwide basis. No doubt, the company’s established brand name, its vast growing content library, diversified distribution platforms, experienced management and its strong relationship in the industry should augur well for the future of the company. But, what could cause for worry is the arbitrary performance of the group companies. For instance, Shemaroo Holdings (SHPL), engaged in the business of holding brands, trademarks and other intellectual property rights, had nil revenue in FY12 but posted Rs 55.37 cr as top line next year. Astonishingly, the entire revenue became net profit! How was this possible? The offer document is silent.

Valuation and Perception

Even though, there are hordes of entertainment players in the listed domain, Shemaroo compares itself with just two namely, Eros International and Balaji Telefilms. Perhaps, as compared to Eros and Balaji, Shemaroo may look attractive. But, what about the overall track record of the industry? Except just two, none of them is in the dividend list. Of the 15 scrips traded, 8 are quoting even below their paid-up value which shows that investors do not trust the entertainment players.  Will Shemaroo change the investor perception? For the promoter Raman Maroo, Shemaroo is not the first public experience. He has been associated as an independent director with Orbit Corporation since May 21, 2007. Orbit launched its IPO in March 2007 at a price of Rs 110. Within three years the company came out with a 1:1 bonus thereby bringing down the IPO cost to Rs 55. Surprisingly, Orbit went out of dividend list in 2012 and it was declared as a willful defaulter by RBI.

If Raman Maroo was an independent director with Orbit Corporation, why should he continue to be on the board even after attaining the ‘willful defaulter’ tag? It is a well known fact that many real estate and film industry promoters have close connections. Does Maroo have any business stake in Orbit? Or else, whose interest is he protecting in Orbit? Shemaroo’s representative and the Investment Banker who did the due diligence vouch that Maroo has no business interest in Orbit and he is only a close friend of the Aggarwals of Orbit. From the corporate governance perspective, if Maroo is a close friend of Orbit’s promoters, how would he discharge his duty independently?    

Lead Managers’ Track

The success of a couple of book-building IPOs seems to have changed the morale of the investment bankers who suddenly sound over optimistic. It is high time they remember their past. Shemaroo has hired Yes Bank and ICICI Securities whose track record is a mixed bag.  Whereas the issues managed by these merchant bankers in the past have sailed through without any devolvement, the post-issue record of the issuers is none too impressive to talk about. For Yes Bank, Shemaroo is the first IPO in four years. Notwithstanding the current stock boom, the last two public issues managed by Yes Bank (in 2010) are languishing at a discount.   The record of the high profile ICICI Securities is still worse. I-Sec was associated with twenty one IPOs since 2010. Of these, save Wonderla Holidays and five public sector undertakings, none has fetched decent returns.  As many as 13 IPOs are quoting at a discount, nine of which have lost more than 50 percent. Predominantly FIIs-supported Parabolic Drugs has turned sick in no time after the IPO. The much talked about A2Z Maintenance, where the so called `Big Bull’ had a significant stake, is trading at a disastrous 92 percent discount!  A2Z’s offer, managed by half a dozen investment bankers including I-Sec, was priced at Rs 400 in December 2010. Today it is available at less than Rs 30!