By Gaurav Mathur

India Ratings and Research (Ind-Ra) has affirmed Shemaroo Entertainment Limited’s (Shemaroo) Long-Term Issuer Rating at ‘IND A’. The Outlook is Stable. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

Fund based working capital limits

-

-

-

INR1,250

IND A/Stable

Affirmed

Term loan

-

-

April 2019-March 2020

INR229.5 (increased from INR225.0)

IND A/Stable

Affirmed

KEY RATING DRIVERS

New Media Segment Continues to Drive Growth: Shemaroo reported a 41.0% yoy rise in revenue from the new media segment to INR1,305 million in FY18. The segment’s contribution to the overall revenue rose to 27.0% in FY18 from 22.0% in FY17, driven by a rising internet, smartphone and 4G penetration, an improving high-speed bandwidth and new video-on-demand platform launches such as Voot and Netflix. On the other hand, the contribution of the traditional media segment to the overall revenue fell to 73.0% in FY18 from 78.0% in FY17. The overall revenue rose 14.8% yoy to INR4.88 billion in FY18.

Furthermore, Shemaroo’s EBITDA margin for FY18 remained range-bound and declined 90bp to 29.1% in FY18 from 30.0% in FY17 owing to a rise in employee cost (up 80bp yoy). There were minor disruptions during 3QFY18, where some corporates pulled their advertisements from YouTube, which accounted for 35.0%-40.0% of digital revenue in FY18. The emergence of alternative media channels and a shift in consumer preferences could affect the business in the medium to long term.


Conservative Business Model: Theatrical, television and overseas release account for 90.0%-95.0% of a film’s revenue in the first cycle of launch. Shemaroo is mainly present in the second and subsequent cycles of film monetisation, which accounted for 73.0% of the company’s overall revenue in FY18 under the traditional media segment. Therefore, Shemaroo’s presence in the second and subsequent cycles minimises risk, as content performance is visible in the first cycle, allowing the company to calculate content value against desired return on investment from the content.

Furthermore, the subsequent cycles of film monetisation have been typically growing on account of increasing advertisement spending, digitisation, growth in niche movie channels and others. Shemaroo caters to diversified distribution platforms of television, digital and new media, home entertainment and other media. This reduces the overall business risk. The company’s ability to build new inventory on an ongoing basis would be a key monitorable.

Strong Customer Profile: The top five customers of Shemaroo (Zee Entertainment Enterprises Ltd, Viacom 18 Media Pvt. Limited, Disney Broadcasting (India) Limited, Google LLC and Star India Private Limited) contributed 50% to its overall revenue in FY18. Considering all the customers are experiencing higher advertisement spending and expansion, this provides Shemaroo an opportunity to grow in line with customer content requirements.

Comfortable Credit Metrics; Deleveraging: To ramp up inventory, Shemaroo increased its debt by nearly INR1.6 billion during FY16-FY17. However, during FY18, the company deleveraged its balance sheet by repaying INR946 million of its debt. Subsequently, with a rise in operating profitability, its net adjusted leverage (net debt/adjusted EBITDA) improved to 1.4x in FY18 from 2.3x in FY17. Furthermore, Shemaroo’s adjusted interest cover (operating EBITDAR/gross interest expense + rents) improved to 4.6x in FY18 from 3.9x in FY17, primarily driven by the rise in operating profitability.

Ind-Ra expects Shemaroo’s credit metrics to stay comfortable in the medium term on account of an increasing contribution from the new media segment and the company’s focus on monetising current inventory and remaining cautious for additional inventory purchase, thus limiting additional requirement for funds for acquiring content.


Improved, Albeit Stretched, Working Capital Cycle: With an enhanced focus to monetise existing inventory and a low reliance on new acquisitions, Shemaroo was specific to acquire rights and build up inventory during FY18. This led to a fall in inventory days to 694 days in FY18 from 743 days in FY17, thereby leading to an INR293 million increase in net inventory in FY18 compared with an INR1,128 million rise in FY17. Meanwhile, receivables days returned to the 100-105-day range in FY18 after the one-time event of demonetisation led to a rise in receivable days to 160 in FY17. Thus, Shemaroo’s working capital cycle improved to 780 days in FY18 from 880 days in FY17.

Ind-Ra expects the cycle to ease during the next one or two years in view of the management’s plan to reduce gross working capital.


Shemaroo’s liquidity position was comfortable, indicated
by an average working capital limit utilisation of 91% for the 12 months May 2018. Moreover, it had a cash balance of INR13 million at FYE18.


RATING SENSITIVITIES

Positive: The monetisation of content inventory, exemplified by revenue growth, while maintaining healthy investments into content and maintaining the credit metrics and free cash flows, on a sustained basis, may lead to an upgrade.

Negative: The emergence of alternative content ownership/distribution models, leading to competitive pressure and, in turn, deterioration in the business and credit profiles (net adjusted leverage exceeding 3.0x), on a sustained basis, will lead to a downgrade.


COMPANY PROFILE

Shemaroo is engaged in content acquisition, value addition to content and content distribution for satellite channels, physical formats and emerging digital technologies such as the mobile, internet, broadband, IPTV and DTH.

FINANCIAL SUMMARY

Particulars

FY18

FY17

Revenue (INR million)

4,886

4,255

EBITDA (INR million)

1,421

1,276

Interest expense (INR million)

307

323

EBITDA margin (%)

29

30

Debt (INR million)

2,015

2,961

Cash & equivalents (INR million)

13

19

Source: Shemaroo

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

10 April 2017

23 March 2016

Issuer rating

Long-term

-

IND A/Stable

IND A/Stable

IND A/Stable

Fund-based working capital limits

Long-term

INR1,250

IND A/Stable

IND A/Stable

IND A/Stable

Term loan

Long-term

INR229.5

INDA/Stable

IND A/Stable

IND A/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Gaurav Mathur

    Senior Analyst
    India Ratings and Research Pvt Ltd Unit 614 - 616, 6th Floor, B Wing Mittal Tower, M G Road Bengaluru - 560 001
    +91 80 46666802

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121