Bollywood calling

Niren Shah / Mumbai January 21, 2008

Technological advances, increasing corporatisation  and favourable macroeconomic conditions promise excellent rewards for those who tune in.

It has been a few months now that concerns of a global economic slowdown have been looming large across industries, which has been adequately reflected in the volatility in the equity markets too. Amid this turmoil, there is also a streak of hope rising from back home, where growing domestic consumption, increasing disposable incomes and a continued economic growth of over 8 per cent a year promises to keep the engines of industry running and in turn, cash registers ringing. It is therefore logical to cast a serious eye toward those sectors, which are likely to ride the domestic consumption wave over the coming few years.

The filmed entertainment segment of the Indian media industry is one of the top contenders in this space, with the Hindi film industry -- the Bollywood as its frontrunner. Bollywood has been around for over a century now, having traversed a long way in the past decade from being an industry ridden with arbitrary practices, which lacked transparency, to taking up an all-new corporate identity and spreading its wings across the globe.

The madness…

Just shy of the turn of the millennium, the film industry had not yet organised itself, and the trade was stricken with many an ailment, such as unorganised means of financing films leading to opaque transactions across the value chain of producing, distributing and exhibiting films.

Film-making being a high-risk-high-reward business, the unorganised sources of finance extracted exorbitant returns in the form of high interest rates from borrowers, namely, the producers. Traditionally, it was a handful of influential families or select banners, which made to the league of film producers, who would further exercise their clout on the remainder of the value chain.

In this era, the business was driven by individuals, as more often than not, the producers doubled up as directors or selected the director, script, the cast and crew and embarked upon a film project. As a result, it was difficult for production banners to work on more projects, or 'slates' – as goes the industry terminology – at once, thus concentrating all efforts on just one slate. Once the film was ready, the producer either distributed it himself or sold the distribution rights, outright or partially, to distributors. In the final stage of the value chain, theatres were rented out to exhibit the film to the audiences.

In a rare case, if the theatre owners had an organised presence, box office revenues were shared to some extent between the producer-distributor duet and the exhibitor in a predefined ratio. Depending upon the performance of the film, all the three parties stood to gain or lose. Publishing of films through home videos and broadcasting were not as popular as today, and piracy caused a significant revenue leakage. This culture prevailed until the year 2000, when the film-making business was awarded an industry status by the government.

… and the method

As the industry woke up to competition from across the globe while the film budgets back home shot off the roofs, it became increasingly necessary for film-makers to organise and raise funds for their projects from other, more feasible sources, such as banks and investment institutions. Entry of foreign studios as well as the rise of Indian companies such as Adlabs, Balaji Telefilms, Mukta Arts and UTV Software, which raised funds by making public offerings, showed the way forward.

With eased access to funds, these companies became capable of taking on more slates at once, thus derisking their businesses. Professionals from various creative industries such as advertising jumped the film-making bandwagon and the ways of working started witnessing a sea change. The process of taking on a film project turned a tad rigorous with producers making an effort to research the markets beforehand, in order to estimate the film's ability to succeed at the box office.

"Before selecting content to make a film, we employ teams to research the markets and try to gauge the receptiveness of the audiences," says Sandeep Jain, chief financial officer, Balaji Telefilms. As the industry wakes up to professionalism, companies are willing to sign on directors at higher sums and charting out package deals for more than one slate. This makes sure that production companies have a steady supply of quality content.

As a by-product of this approach, experimentation with genres of films took place and one can see successful low-budget launches focused mainly at multiplex-goers like Bheja Fry and Khosla ka Ghosla. This also helps companies recover their production costs of certain projects by selling the rights to music and broadcast well in advance of the release.

Last year's releases, Balaji Telefilms' Shootout at Lokhandwala and UTV Software's Dhan Dhanadhan Goal are good examples, which recovered their costs before release, thus leaving little to worry about, at the box office front. Incidentally, these films were not outright blockbusters, with Shootout grossing Rs 33.5 crore in nine weeks, while Goal scored just about Rs 17 crore in seven weeks.

Goal had cost UTV about Rs 16 crore to produce, which means the box office revenues largely added to the company's bottomline. "These days, with better quality content, the prices for satellite rights of films are on the rise," says Siddharth Roy Kapur, executive vice president, marketing distribution and syndication, UTV.

Further down the value chain, once the film's print is ready, it is distributed across different territories by the distributor, in India and abroad. The prints are then routed to the theatres and multiplexes. With digitalisation of theatres, films are digitally transmitted to theatres using satellite delivery techniques, which reduce the threat of piracy as they are less prone to illegal duplication.

Across the value chain, companies are attempting to employ a scientific approach to price the content, and the services required to distribute and exhibit it. "In this era, the risk of producing and distributing films is shared across the value chain, with the producer, distributor and exhibitor sharing the responsibility of the upside or downside from a film's performance," says UTV's Kapur.

Now showing…

The Indian film industry figures among the largest by the number of films produced every year, with over 1,000 films. Of this, the Hindi, Telugu and Tamil film industries produce over 200 films each. According to a FICCI-PricewaterhouseCoopers report on Indian entertainment industry, titled Frames 2007, the size of the Indian film industry was estimated to be around Rs 8,500 crore in 2006, having grown by 24 per cent from 2005.

Going forward, it is expected to grow at a compound annual growth rate (CAGR) of 16 per cent to Rs 17,500 crore by 2011. Of this, the domestic box office revenues account for over 75 per cent at present, with the rest distributed among overseas box office, home video and sale of music and satellite rights. While the domestic box office still dominates the pie, home videos and music is growing its share.

This is in spite of the rampant piracy in all forms, which is estimated to bleed the industry to the tune of 42 per cent of its revenues. Going forward, the overseas box office collection, currently estimated at Rs 700 crore, is expected to grow at a CAGR of 18 per cent over the next five years.

Increasingly, film producers are exploiting alternative sources of revenue, besides increasing the box office reach by spending more on marketing of films. For some films, such as Rang De Basanti, the marketing budget was equivalent to the cost of production.

Among the alternative sources of revenues are broadcast rights (satellite and internet) of a film, its music, copyrights for ringtones, merchandise, gaming content based on films, in-film advertisements and the newly discovered copyright to film content to be used at events or stage shows.

Going forward, as the consumer base for mobile phones, direct-to-home and conditional access system increases, these sources too, would contribute more to the film producers' revenues. To address and curb revenue leakage from piracy, film-makers are launching home videos of new launches within 3-5 weeks of a new release at price points matching the pirates' offering.

Forthcoming releases

While the macroeconomic landscape is more than encouraging for the Indian entertainment industry, companies too are working toward employing better methodologies to achieve efficiency in film-making as well as improving the quality of content. Further, newer ways of marketing films are being sought and explored continually by film-makers.

Last year, the Hindi film industry saw blockbuster releases such as Partner, Chak De India, Om Shanti Om, Welcome, Heyy Babyy, Bhool Bhulaiyaa, Jab We Met and Taare Zameen Par, which kept the box office buzzing, not to forget blockbusters from the south such as, Sivaji, The Boss.

In 2008, this supply does not seem to be stopping, with scheduled releases such as Rakeysh Mehra's Dilli 6, UTV's Jodhaa Akbar starring Hrithik Roshan and Aishwarya Rai, Balaji Telefilms' Mission Istanbul, Race and Tashan among others. Going by all this, in spite of the run up that the entertainment counters have witnessed in the past year, it appears that for the coming year too, picture abhi baaki hai!

Badshahs of Bollywood

Although the entire entertainment sector is likely to look upward during the coming year, among the Bollywood pack, there are a few strong contenders to being the frontrunners of growth in the sector. Again, while most businesses are trying to gain a grip on the entire Bollywood value chain, including production, distribution and exhibition, some companies have made a dominant presence in a selected niche segment in just one stage of the value chain and have an invariable competitive advantage, which bars the entry of more players.

Prime Focus, which is into post-production and special effects, makes a good example. However, our focus is on film content production companies, which have a dominating presence in at least one of the stages in the value chain. Here are a few promising picks in the sector.   TOP GROSSERS   Current market price (Rs) Market cap (Rs crore) Net Sales Net Profit P/E (x) (Rs crore, TTM) y-o-y chg (%) (Rs crore, TTM) y-o-y chg (%) FY08E FY09E Adlabs Films* 1447.0 6471.4 426.1 129.0 75.3 57.5 57.9 45.2 Balaji Telefilms 299.9 1955.4 331.9 6.2 87.8 31.4 25.0 17.6 Mukta Arts# 182.6 415.6 95.4 20.1 17.9 178.0 40.6 28.1 Pyramid Saimira Theatre# 454.8 1286.2 380.5 NA 42.1 NA 18.2 11.4 PVR 287.5 663.8 196.6 48.5 16.1 94.0 28.8 19.2 Saregama India 264.3 387.7 123.8 -4.0 13.5 32.4 20.0 14.6 Shree Ashtavinayak Cine Vision 459.8 461.2 78.5 NA 15.4 NA 17.7 13.1 UTV Software 911.3 2086.0 200.6 13.0 18.3 183.0 60.8 36.5 *Year ending June, TTM - trailing twelve months, ending September 2007, #12-months ending December 2007

All rounder

With almost half a dozen businesses into various stages of maturity and all doing reasonably well, Adlabs is clearly slated to benefit from its presence in every stage of the entertainment industry value chain. The company has seven strategic units: film processing and services, film production, distribution – both in India and overseas, television content production, film exhibition through multiplexes, a recent foray into publishing of home videos, and a FM radio subsidiary.

In the film processing and multiplex sectors, it is a dominant player in the country, while its film production division has delivered hits such as Johnny Gaddaar and Namastey London, last year. In order to keep the risks in production and distribution low, Adlabs has consciously not taken up many mega-budget projects. It is the largest multiplex player in India with nearly 120 screens and plans to take the number of screens to 400 by FY09. Its radio business too, offers a good value unlocking opportunity, going forward.

The stock has returned over 200 per cent in one year and at Rs 1,447, it trades at 45 times estimated FY09 earnings. This is reasonable, considering the company has signed up directors like Vipul Shah and has some significant home production slates like Singhh is Kinng and the animated flick Sultan The Warrior coming up during the year. Add to this, it has tied up with Ashok Amritraj's Hyde Park Entertainment to produce and distribute mainstream Hollywood films.

Seasoned kontender

Besides being the market leader in television content with around 70 per cent share of the Hindi general entertainment content market, Balaji Telefilms is now focusing on injecting life to its film production business. Its subsidiary, Balaji Motion Pictures, has an investment plan of Rs 30 crore to enhance its focus on producing film content. This subsidiary is expected to clock in revenues in excess of 90 crore in FY08, and double it the next fiscal.

To achieve this, Balaji has signed up four directors – Abbas-Mastan, Apoorva Lakhia, Rohit Shetty and Tigmanshu Dhulia for its forthcoming production slates. Going forward, this high-margin business unit could well pose an unlocking opportunity. At 18 times estimated FY09 earnings, the stock appears to have a lot of steam left, as it trades at a significant discount to its peers. Look out for releases like Kya kool hai hum 2, C Company and Mission Istanbul this year.

Golden oldie

Mukta Arts is making a comeback bid of sorts, after taking a backseat for the past few years, when its productions like Joggers' Park and Kisna failed to work wonders at the box office. Last month, Mukta Arts released Bombay to Bangkok (directed by Nagesh Kukunoor), and has Black and White lined up for release this year.

Investors seem to have already sensed better times ahead, and the stock has moved up from Rs 90 to Rs 190 in the past three months. Though at over 40 times and 28 times estimated FY08 and FY09 earnings, respectively, it may appear a tad expensive going by the number of releases over the past couple of years, one may bet on this counter at dips. However, Mukta's failure to bring on any blockbuster hit in the recent past spurs scepticism on its ability to accelerate the creation of a stronger pipeline.

Spreading wings

From acquiring single screen theatres in India, setting up an exhibition network aimed at achieving a volume-driven business model, to buying out global theatre chains and venturing into film production and distribution, Pyramid Saimira has attempted to bring economies of scale to this rather unconventional business. It recently acquired a theatre chain in the US, thus adding to its international presence in Malaysia and Singapore.

This year, Halla Bol, its co-production with Rajkumar Santoshi, was released and has done reasonably well. At Rs 455, the stock is valued at estimated 18 times FY08 earnings and 11 times estimated FY09 earnings. If the company maintains its current pace of execution, the stock price may deliver dramatic returns hereon as well.

Here we are

PVR has made its production debut with Taare Zameen Par, co-produced with Aamir Khan, which has turned out to be a hit. One has more to look forward to, as PVR, already the second largest domestic exhibitor, plans to gain a greater foothold in the exhibition business by adding 250 screens in the next three years, which in turn would give it a better position to negotiate distribution deals with producers. At 19 times estimated FY09 earnings, the stock appears reasonably priced. Since PVR has recently forayed into production, its course over the coming years will be determined by the quality of content it brings to the table.

A good record

The music publishing veteran, Saregama, was one of the pioneers of corporatisation in this industry. It produces films and publishes content, which enables it to hold a large library of copyrights to content. This in turn will help Saregama reap fortunes from the newer revenue streams such as internet streaming, mobile ringtones and the like, by exploiting these copyrights.

Further, in the new distribution model, royalty revenues are proportionate with the volume of usage of content – in terms of the number of users accessing it. Therefore, Saregama's profits are likely to rise in greater proportion compared to its incremental costs, thus widening its margins. At Rs 264, valued 20 times estimated FY08 and 15 times estimated FY09 earnings, this one looks like a catch.

Mass appeal

With runaway hits like Partner and Jab We Met last year, Shree Ashtavinayak Cine Vision has grabbed investors' attention. It has been working with directors like Abbas-Mastan, David Dhawan, Priyadarshan and Rohit Shetty, and slates focusing on themes which would appeal to the mass audiences.

Besides production and distribution, it is also present in the exhibition segment with over 30 single-screen theatres in the Mumbai territory, which contributes almost 40 per cent to the total domestic box office revenues. The stock has been rising consistently, and at 13 times estimated FY09 earnings, there is not much to lose. However, the company needs to maintain, and better its performance of the last year, as it has not been around for too long, compared to its peers.

Class appeal

UTV Software could not repeat the Rang De Basanti magic this year, as The Namesake, Life in a Metro and Dhan Dhana Dhan Goal failed to give superhit box office performances, but just scored above average. However, its television content business has been on track, while the company is working on maturing its broadcasting venture after the launch of youth channel Bindass in 2007. Its games foray too, is likely to gain pace in the coming year.

The proven outperformer on the bourses, UTV has kept up its tempo and has managed to command high valuations. This does not seem to be tempering in the coming year, as UTV has releases like the mega-star-cast Jodhaa Akbar and multi-starrer Race coming up this year.

Besides, the company has a pool of talent signed up, including directors like Rakesyh Mehra, David Dhawan, Vishal Bhardwaj and Madhur Bhandarkar, and actors like Hrithik Roshan, Aishwarya Rai and John Abraham to keep the quality content flowing in. There is a potential of further upside if the company attempts at unlocking value by spinning off some of its business units such as broadcasting and gaming into separate entities—which appears to be a logical extension to the business.