Buy : SAREGAMA CMP Rs 302 with a target of Rs 405

(BSE: 532163 | NSE: SAREGAMA | ISIN: INE979A01017)

OUTPERFORMER : Potential Upside 34%

Changing business model Saregama is set to script a turnaround piggybacking on the emergence of new entertainment media such as FM Radio, mobile music and digitalized music on internet. The company has built a moat around its huge music business by diversifying into digital music, internet radio and online music sales.

Financials back on track Piracy at the turn of the century killed the world music industry worldwide and Saregama was no exception. However, since FY2005 the company has turned the corner with a new management and more focus on new income streams such as FM, mobile ring tones etc.

Film foray to be key contributorWe expect the film and home video division to contribute handsomely with key tie-ups with big international studios in place. Re-entry into the film distribution and production space and 14 hours/week of TV content production will diversify the business and drive growth from non-music segment

New portal – the next big catalyst With key features such songs, video & entertainment downloads etc and strong macro undercurrents of online music sales we believe that Saregama has winner in its new portal saregama.com. We believe this to be its valuation catalyst with newer e-commerce portals such Naukri being valued upwards of Rs 2000 crore.

Valuations We expect Saregama to once again dominate the Indian music industry and replicate its dominant performance which it showed for decades. Given the robust growth in the high margin business like publishing anhome video coupled with effectively utilization of the music library we expect Saregama to command improved valuations given its high earnings visibility. At the current price of Rs 302, the stock at a P/E of21.15x FY08E EPS of Rs14.28 and 16.77x FY09E EPS of Rs 18.01. We rate the stock as an OUTPERFORMER with a price target of Rs 405, 22.5x FY09E.

Company Background Saregama India Ltd, formerly known as the Gramophone Company of India , is India largest and most popular music recording company. The company has a music library of more than 3 lakh songs and covers more than 50% of the songs recorded in the country. The company also has relationships with top international studios along with having global footprints. Saregama has four subsidiaries Saregama PPLC, RPG Global Music for distribution and licensing in Europe , USA , South Africa , East Asia , Dubai and Mauritius . Saregama Films Ltd produces and distributes films and TV content while Kolkata Metro houses the internet portal. Saregama over the years has expanded its business from audio to home video, publishing, digital, events, films production and distribution and audio visuals.

Saregama has more than 3 lakh music tracks i.e more than half of the Indian rights and declining sales and realizations, Saregama turned into red in 2002 for the first time. However since 2005 the company once again crawled to profitability with a changing business model capturing newer and profitable ways to monetize the existing catalogue on digital platforms such as radio, mobile and internet. Changing business model to spurt growth and increase margins Rs 160 crore opportunity with more than 266 new FMstations coming within 1year for music industry

Radio to bring good business We see the current spurt of radio stations as a boon to music companies including Saregama. Every radio station has to pay royalties to the music industry for the music they play per needle hour basis. Under the recent phase II policy for FM radio, 266 licenses were sold and further de-regulation is expected in the Phase III taking the total FM licenses to more than 500. Saregama has more than 33% share of the catalogue music played on the FM stations and 15% share of the new music played. We believe this will bring in significant revenues to the company in the coming years. In FY07 radio contributed Rs 6.9 crore to the topline and is expected to contribute around Rs16.88 crore by FY09.

Convergence with telecom to provide regular cash flows Music industry is expect to be the biggest beneficiary of the convergence of media with telecommunication as it is expected to contribute more than 35% of the value added services. Indian telecom market has seen an exponential growth in the last few years and we expect the mobile subscribers to increase from current 170 million to 410 million by 2010. 10% of the average revenue per user (ARPU) comes from value added services of which 35-40% is non SMS and from ring tones, images, videos, full track downloads etc. On an average the companies have more than 70,000-80,000 download per day.

Telecom operators are also marketing these services to subscribers as they have higher margins for the operators as they get to retain a higher share compared to the content provider. Saregama has tied up with handset manufactures such as Motorola, Nokia for pre loaded content on their phones and is in talk with other manufactures as well. The company has also signed deals with operators for mobile downloads through their networks. Saregama has also started selling Value Added Services (VAS) cards directly to the subscribers where in the customer can download three tones in Rs 25 card. We believe the time is right for Saregama

Internet-biggest growth opportunity We believe internet is the biggest growth opportunity for any music company to fully exploit the music rights and hence since last couple of years we have seen opening of more than 500 legitimate online music site in over 40 countries with the global digital market growing as shown. Currently Saregama offers its music library to multiple websites such as MSN music, Sony Connect and hosts of other sites in different countries for India focused music downloads through its offices in UK , USA , Dubai and other places in the world.

New Portal – next big catalyst To capture this global digital Indian music demand the company is planning to launch its own website similar to the iTunes model and is expected to offer hosts of services as shown in exhibit8. Users will be able to download more than 27,000 hours of music at Rs 12 per song while other services are expected to be priced between Rs 5-100. Subscription services for users are also expected for hosts of products which will have the customer come back to the portal regularly. We believe such a business model to deliver in long run.

  • HamaraCD.com to a unique proposition to create one’s own music CD
  • Exclusive tie-up with top 5 international studio houses for distribution of English home videos in India
  • Rs 2500 crore opportunity by 2011 & with more than 30% margins in home video to drive growth
  • Increasing home video share in the film industry revenues
  • Ken Ghosh and Aparna Sen to drive film production
  • 14 hours of TV content to increase to 20 hours by year end
  • Margins to expand steadily on back of increasing digital music sales
  • Revenues to grow at a CAGR of 16.6% while PATto grow at 62.9% from FY06-09
  • Win-win situation for both, the content provider and the telecom operator
  • Internet: The best way to fully exploit music rights
  • Increasing music downloads from internet sites with growing broadband penetration and portable player sales
  • Hosts of services to be offered by Saregama on its website

Diversification into film production and TV content first Indo-US English movie titled Karma Confession & Holi by December 07 while its Hindi movie Chain Kuli Ki Main Kuli directed by Ken Ghosh and staring Since last one year the company has also infused capital in TV content programming wherein they produce 14 hours of programming content for Sun

Key Concerns Declining Market Share regular cash flows from the digital income will provide enough cash to acquire more rights in coming years.

Competition from corporate houses movies. Houses such as Yash Raj Films, Mukta Arts producing blockbuster movies have done the same and we expect other to follow soon. This could impact Saregama’s market share for hit music further

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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.