Shemaroo Entertainment Limited (SHEMAROO) Earnings Call Transcript & Summary

Thank you, Yogesh. Good afternoon, everyone, and thanks for joining the company's earnings conference call to discuss 2 quarter results, which is Q4 FY '20 and Q1 FY '21 as well as the financial year ended March 2020. Before starting, I hope everyone and their families are keeping safe and healthy. Let me begin by giving a brief overview on the financial performance for the quarter under review. For the fourth quarter ended financial year 2020, the operational income was INR 123 crores with an EBITDA loss of around INR 3 crores. The expenses made on new initiatives, net of revenue for the quarter, were INR 11 crores. The EBITDA of existing operations, including the investment in new initiatives, were INR 7.6 crores. The company reported a net loss of INR 14 crores for the quarter. For the financial year ended 2020, the company reported an operational income of INR 513 crores. EBITDA stood at INR 77 crores with EBITDA margins of around 15%. The expenses made on the new initiatives, net of revenue for the financial year, were INR 26 crores. And the EBITDA of existing operations, excluding the investments in new initiatives, were INR 103 crores. So profit after-tax for financial year was INR 30 crores. For the first quarter ended June 30, 2021, the operational income was INR 86 crores with an EBITDA loss of INR 5 crores. The expenses made on new initiatives, net of revenue for the quarter, were INR 14 crores. The EBITDA of existing operations, excluding investments in new initiatives, was INR 9.1 crore. The net loss for the quarter was at INR 13 crores. Now coming to the digital media segment, performance for the quarter is under review. For Q4 FY '20, digital media revenue grew marginally by 2.4% Y-o-Y to around INR 46 crore. And for FY '20, digital media revenue grew by 15% Y-o-Y to about INR 198 crore. For Q1 FY '21, the digital media revenue declined by 30% Y-o-Y to around INR 34 crore. For traditional media segment performance, in Q1 -- Q4 FY '20, the revenues declined by 13% Y-o-Y to around INR 77 crore. For FY '20, traditional media revenue declined by about 20% Y-o-Y to INR 315 crore. While for Q1 FY '21, traditional media revenue declined by 45% to INR 52 crores. Overall, as you are aware, the nationwide lockdown due to COVID-19, coupled with the overall sluggishness in the Indian economy, impacted consumption and, hence, advertising spend. During the quarter, deals were either deferred or renegotiated, which had an impact on the margins and cash flow. Since Shemaroo had already undertaken cost rationalization measures even before the lockdown, it had helped the company to tide over this pandemic operationally. However, the company is cognizant of the external environment and has thereby undertaken several measures to optimize the operations and rationalize those businesses that have been severely impacted. The company, as you know, has been investing in strategic B2C initiatives to fuel its growth, which has impacted the margins in the investment period. During the quarter, we forayed into broadcasting space with the launch of 2 new FTA channels. Since broadcasting is a CapEx-heavy investment, there was pressure on the bottom line and balance sheet of the company. But we see this investment in broadcasting as laying the foundation for a much stronger and sustainable future. Shemaroo launched its first satellite FTA channel named Shemaroo MarathiBana in December '19, targeting to be a prominent leader in the Marathi movie genre. The channel aims to be a one-stop destination for Marathi movies and theater plays. The channel will entirely focus on Marathi audiences across Maharashtra and Goa. It became the #4 channel in the Marathi genre within 3 months of launch and has been in the top 5 consistently since then. Over the years, the company has built a strong library in the regional space. And with the launch of this new channel, it plans to strategically capture a vacuum in the Marathi movie genre. The Marathi regional TV ad market is estimated to be an annual revenue of around INR 800 crores to INR 1,000 crores. We also launched our first satellite Hindi General Entertainment Channel, which is a free-to-air channel named Shemaroo TV, in May 2020, a channel to target the Hindi-speaking markets of India with a tag line of "Badalte Aaj Ke Liye", which has been made available on DD Free Dish and leading DTH and cable operators. With Shemaroo TV, we aim to connect and offer complete family entertainment at a single destination. The channel will showcase a perfect mix of original and iconic shows combined, which will be consumed for first time by a large set of free-to-air audience. As you are aware, that the television industry continues to be the largest source of media consumption, including in the lockdown. With close to 38 million Free Dish subscribers, FTA channels have seen a robust growth in recent times in terms of viewership. Talking about some other operational highlights. On the digital side, our performance on YouTube continues to grow well. Shemaroo Filmi Gaane was the 31st most subscribed channel in the world, and we crossed 38 million subscribers on that channel. Three animation series, Bal Ganesh, Akbar Birbal and TreeHouse Tales, which were produced by Shemaroo, began streaming on Netflix. Enhancing our overall digital presence, we launched ShemarooMe at the end of the last financial year, which is FY '19, which is a subscription-based OTT platform working primarily on a B2B2C partnership model. During the quarter under review, we entered into distribution deals with Airtel Xstream and Tata Sky Binge. It was also made available on OnePlus TV and Huawei smartphone and also to Airtel Africa users across 13 countries in Africa. We also partnered with Mediacorp's meWATCH in Singapore; Celcom, Malaysia; Dhiraagu in Maldives, 3 different telecom operators across the region. On the traditional media front, the company also launched a new service on DTH, Adbhut Kahaniyan, on Tata Sky in March 2020. As you know, our core strength is in maximizing monetization of intellectual property rights. All these new initiatives have been strategically launched by the company to diversify, derisk and enhance the long-term growth potential of the company. Unfortunately, due to the pandemic and economic crisis, not only did the existing business verticals suffer, the nascency of the investments in the new initiatives impacted our financial performance. But we remain extremely confident that in the long run the company will be in a far better and stronger position than before. Now I open the floor for questions.

[Operator Instructions] We have first question from Mr. [ Prasana ], individual investor.

Sir, the primary concern on the -- on many of the stock investors' minds, is whether the company can survive for the next 2 years or not. We all understand it's a cyclical turn, but we're reporting such large losses. Given all of this, and our debt is increasing, whatever cash we are producing is getting stuck in inventory. So I just wanted to kind of understand that a little bit more. From my understanding, based on FY '20, you said that the total cost of media consumed for FY '20 is INR 300 crores, which was -- which should have decreased inventory. But the inventory actually increased by INR 110 crores, which means we bought -- we made purchases for close to INR 400 crores. Now INR 400 crores is actually worth 3 Shemaroos. Shemaroo Entertainment market cap is only INR 180 crores today. So you could buy like 3x Shemaroo instead of buying INR 400 crores of inventory. So that's -- I just wanted to get your thoughts on how will that -- will the company survive? And like why are we buying so much inventory?

So as I discussed, so even in my opening remarks, I think we are in the process of several new initiatives and investments. And what we are seeing here is a culmination of the entire year's set of activities, which included the preparation for some of our new initiatives also. So there is a combination of investment on the existing business as well as on some of the new initiatives that we have been working on. And to answer -- I mean, so that's on the inventory. But I think the question on whether we will survive the next 2 years or not, obviously, the jury is out there. But I think we are in an extremely strong position operationally because today's -- profile customers, the clients with which we deal with, they are all the top players in the industry. And we have a steady revenue cash flow stream coming from them. And we don't really see any operational challenge from that point of view. Yes, there is an investment happening for a much bigger opportunity that we have identified and have decided to foray into. But that is, finally, for a far better -- relaying the foundation for a far better and stronger future of the company.

Got it, sir. That's helpful. So will this be funded by debt? Like if all the cash we produce is getting stuck in inventory and we're also loss-making quarter-on-quarter, where is the fund is going to come from?

Yes. So in the short term, yes, it will be funded with debt. Obviously, at these prices, it doesn't make sense to raise equity at this kind of valuation. So we will be funding it by debt. And in a way, I would say we are probably, fairly, I would say, nearing the -- if I have to put it in a different way, I think in the next 3 to 4 months, maybe 6 months, 2 quarters, we should be reaching the peak requirement of the CapEx of these projects.

Got it. Do we expect to see profits then? Like when will these losses sort of end? Like how much room to expand debt do we have before bankers don't lend anymore and we are struggling with interest coverage?

So I would say that we have a very strong asset base in terms of the content and the idea. So in that sense, I really don't see that as a challenge. Our current debt equity stands at below 0.5. So in that sense, I don't see a challenge on that front. And I don't see the debt equity going significantly higher than this because the overall requirement is not -- from here onwards, as I said, we hope to peak the investment over the next 2 quarters.

Got it. This is super helpful, sir. And do we sort of feel within the next 2 quarters we should sort of shift back into at least not making losses?

It's difficult for me to comment for 2 reasons. One is, of course, it's a forward-looking guidance, and we don't really give guidance. But if I have to talk of -- and, of course, the second challenge is how this whole COVID impact plays out on the economy is still an unknown. But I mean, see, one of the biggest challenges that we faced in the last 4 to 5 months of the lockdown is that the -- everything that was linked to advertising. That kind of came really crashing down by more than 50%, in some cases even more than 70%. And as and when the revival over there happens, I think things should be kind of back to normal on that aspect, on the operational front. As I said, we -- considering the fact that we have already some very good business and deals and consumption in place with -- across the key players of the segment, I think that is something that we believe that, operationally, we should not have any major issue. And in -- for example, while we -- the investment requirement primarily has been for the new initiatives. I mean on the operational front, we've -- we serviced all our debt obligations absolutely on a timely basis. We've not availed of any moratorium. We've serviced all our -- we've paid all our salaries on time, et cetera. So all that operational expense has obviously been met out of operational cash flows, so we don't see any major challenge on that front.

Got it. So you also mentioned that the investment on new inventory is INR 26 crores -- new initiatives is INR 26 crores. But you also spent INR 400 crores on inventory, so that has an impact.

No, no. Yes, so that is what has come into the balance sheet -- sorry, into P&L. So 2 things, as I said. So the investment on inventory, it includes regular business content at acquisition that we would have also done on a regular basis and the investment on the new initiatives in terms of content. So it's both combination that we have spent. So you cannot -- INR 400 crores is a aggregate number. It's not one or the other. It's both.

Got it. Got it. So for the new initiative...

Sorry to interrupt you, [ Mr. Prasana ]. For any further questions, please come back in the queue. We have next question from Mr. [ Detenda Sinhala ], individual investor.

Yes. So my first question is like, basically Q4 FY '20 in traditional business, we saw an uptake as compared to Q3 FY '20. And because of COVID, this quarter we didn't see that uptick. What do you see, like, we will see a demand in traditional business in next Q2 and Q3 this year?

So Q2 outlook at this point definitely is not -- I mean, again, we -- I just repeat the whole thing. In traditional media, the business is primarily linked to advertising revenue of the broadcasters, right. So we sell to broadcasters. And their key source of income, in most cases, more than 60% of their income is coming from advertising. Now as we know and as we discussed earlier also that due to this whole lockdown scenario, advertising spend has come off in a very significant win, anywhere between 50% to 80% actually that come off. Now there is a slow limping back happening. We still are so far, far away from anything near normalcy. So I believe that at least Q2 as of now on the traditional media, we'll have a challenge on the revenue front. Q3, right now, frankly, if you ask me, I would like to believe that we should at least see a certain revival. But we will have to monitor the situation on COVID and -- the whole economic impact and the advertising scenario. So given the nature of this pandemic, we'll literally have to take a week at a time kind of a thing.

Okay. Okay, makes sense, sir. Sir, regarding digital revenue, we saw that our YouTube subscriber and user are growing, and we can see that reflection in the last quarter, FY '20 or FY '20 Q4. But in Q1 FY '21, we saw there's a decline in digital business. Was that -- like what was the reason for the decline in digital business?

So again, I'll repeat what I said earlier also that everything that was linked to advertising, whether it was on digital or traditional, everything came crashing down. So on a similar mode, so what happened, it was an irony that consumption was booming. So television, for example, ad peaks overall. The TV industry ad peaks more than 40% growth in consumption. Digital saw a huge surge in consumption. But, for example, if you see, say, YouTube. All the platforms that are linked to advertising, all of them saw huge cutback on their ad revenues on the back of massive spend cuts from the advertisers. So that is what has led to such a sharp drop in the digital media.

So basically, even though our viewers have increased in YouTube, like there is advertising cut.

Yes. Unfortunately, yes.

Sir, like, if may I ask, what is happening on our [ MBS ] side? Like we saw earlier, like, 1 quarter that this business was not growing. What was the impact on that business?

On the MBS side, in fact, a certain de-growth continued. Now I think maybe not 1 -- or maybe 2 more quarters, I think we'll probably trough out because now the ShemarooMe integration that we've done. Because -- so we did Airtel Xstream in the previous quarter and also those revenues have at least started kicking in to that extent. So I think maybe 1 or maybe 2 quarters, so I think we'll probably trough out on that front.

Okay. Sir, I have seen like great work on MarathiBana channel. Like we can see it's always on -- free-to-air channel. It's always #1 reaching onward data. How do we feel about monetizing itself? Like because now we have got like #1 channel space in that space.

Sure. So we've -- actually, we've already started getting advertisement. But as I said, the -- given the pandemic right now, the spends are still limping back overall. It will be linked to spend coming back because, as you said and we also discussed earlier, that the numbers have been consistent and fairly encouraging. And we are -- I think the net outcome is extremely satisfying, I would say, from where we started. It helped us establish the channel in the consumer's mind. It's helped us establish the overall relationships and many other things in this space. And I think where we started it, in a way it kind of has the hypothesis with which we started, that there is space for 1 more player or there is a vacuum in this Marathi movie genre, has kind of played out very well and quite satisfying for us, I would say. So we already have started. So advertisements have already started trickling in. I mean we have all the key brands in terms of advertisers, are present on Shemaroo MarathiBana already. But obviously, since the spends right now are very low key, we are yet to see any significant translation of the ratings into revenues.

Sir, if may ask, what is like 10-second rate we are charging?

Sorry, but I'm not in a position to -- yes.

Last question from my side. So first, Marathi was the #1, which we replaced with free-to-air. Like any idea, like what kind of revenue those guys were making? And is it really expendable for you to replace them?

As I said earlier, that the overall Marathi space is INR 800 crores to INR 1,000 crores annual space in terms of advertising. And so that's the kind of space that is available on this. Obviously, this is a normal-time number, not a COVID-era number. So I would not like to comment on what our estimates. So the -- obviously, Marathi is not a listed company. We have some internal estimates, but it would be imprudent of me to actually share that number.

We have next question from Mr. Ayaz Motiwala from Nivalis Partners Ltd.

I have a couple of questions on something that you've done in the past year. So you shut down the 2 international operation in the U.A.E. you announced through this quarter, right?

U.K. and U.S.

U.K. and U.S., you have shut down already in the prior quarters as you quote. And U.A.E., you have shut down in this quarter or maybe the fourth quarter. I'm getting confused under which quarter you shut it down. So the question related to that is, one, what is the amount of cost saving which is possible? And are growth -- part of growth initiatives. So would they affect the growth prospects or maybe you service those markets from India?

Sure. So I just want to clarify a couple of things here. So U.S., we had 2 subsidiaries. We shut down 1 of them. This was a subsidiary which was set up earlier during the DVD time. It was more like a DVD distribution kind of set up at that time. DVD and the international America servicing, what we were doing from that time. So this subsidiary was -- it was set up in probably, if I'm not wrong, more than 12 years back. And for the last 2 couple of years since we set up our new subsidiary for -- to set up our new business, this was in effect in operational. The U.S. business absolutely continues, and there's some great work happening over there. So it's just that since we had 2 subsidiaries, we kind of shut down 1. On U.K., yes. So U.K. and U.A.E. So U.K. was, again, set up in a similar era and with a similar objective. U.K., we were anywhere servicing for as far as digital and other activities are concerned from India itself. So this would be annual cost saving of somewhere in the range of around INR 50 lakhs to INR 1 crore. U.A.E. was a new initiative and it was definitely -- we were looking forward to the growth aspect of it. However, with the whole pandemic that came up and we -- in fact, we saw 2 or 3 structural changes potentially over the next 2 or 3 years as far as that market is concerned in terms of affordability and many other things. So we thought that, at least for now, let's roll it back. And if need be, we can again go back there at a future date. But for now, it would help us saving costs. And, of course, one great thing that happened is the -- I mean, I won't say great or whatever, but the pandemic taught everyone this will work from home and video-conferencing ability. So in that sense, for us, we could easily service and manage those relationships, and everything from here is what our team kind of observed. So then we thought if that would be the case, then try to carry the cost of international operation rather we roll it back so.

So as an aggregate, I mean, a lot of companies through the last quarter and this one, which you are doing a combined sort of call, have been talking a lot about cost control, fixed cost control, variablizing a lot of the other costs, et cetera. So there are 3 parts to your business, as we know it. One is the traditional business, as you call out. One is the digital one. And let's call the other one as new initiatives, largely the cable and satellite channels, which you've done, and maybe some initiatives in America, et cetera, which is part of the new initiatives. Now --

Also, ShemarooMe is part of that and...

The OTT ShemarooMe as well, yes.

ShemarooMe is part of that. And devices is part of that, yes.

Yes. Right. So if you can call out in each of these areas, what are the cost savings that you have already achieved? And what is your plan?

So okay, I'll give a broad direction. I think so one is, as I said, we -- the structural changes that we did would easily, on an annual basis, save for us anywhere between INR 2 crores to INR 3 crores with these structural changes. On the devices front, to give you an example is that we saw that very early in the lockdown, we kind of assessed the situation, and we saw that footfalls in shops is going to be a challenge. And therefore, the off-line, retail-based sales will come under pressure. So we significantly wound down that team and shifted the whole focus on to digital and online sales. So we've had -- we have tied up with a whole bunch of online players across the board and actually using those channels now, and we are seeing decent results in the initial part. And so that whole cost structure, we've significantly wound down. So we led -- we were -- unfortunately, we had to let go of a few set of -- I mean, quite a few set of people on that front, actually. But there was no choice as far as that business is concerned because there was a structural shift happening on that front. On the TV side, actually, we've done a whole bunch of cost-saving measures. Like, for example, we earlier had looked at a certain amount of fresh creation kind of a thing. We moved to a much more license -- more licensed-content model. So we licensed content from the likes of Star TV, et cetera, in addition to, of course, using our own library and content and everything. But we were earlier looking at doing some fresh creation. But that whole investment, we kind of deferred completely to a point where we know that the channel is on its way to recouping its investment, and that's a point when we would look at those kind of investments. So there are -- I mean in every area, I can -- I mean, these are -- as I said, without giving numbers, but these are a whole bunch of things. So I'll actually use this opportunity to -- actually, at a larger level, what we did is we created an internal COVID impact analysis framework. And every business, every revenue stream, every divisional P&L had to kind of go through that. They all went through it. And accordingly, based on what is the level of impact, the changes have been incorporated. Because let's not forget one thing: that while revenue was under pressure, consumption was booming. So we could not afford to -- I mean, we had to keep the kitchen lights. We had to keep the kitchen working and the consumer happy. Otherwise, that would have been a bigger challenge as far as the brand is concerned. So we had to balance out all of that. But yes, I mean, we -- I'm actually -- if you ask me, I mean given the ferocity of the whole lockdown impact and everything, I would think that we've actually managed in a pretty nice way the whole thing. And we've kind of made, based on each business' own requirement, we made structural changes on -- at people level, on structure level, on many other fronts, I mean. So I'm just giving you broad directional -- the thing and the whole manner in which we've gone about it, I did a few town halls with our whole team on video conference. And so all of this we had to do, with at the same time keep the team in good spirits and actually eager to -- which, believe me, on a work-from-home basis, it's not very easy to do. Sorry for the long answer, but I thought I should. One thing I'll just add, which I will repeat actually, which I said earlier, is that anyway in the October to March time frame, and we had a challenging Q4 -- Q3, which due to the overall economic slowdown. So that was the time when already we had initiated a whole lot of cost rationalization activities, which, in a way, helped us. We had -- there were a certain level of leanness that we had already achieved, and that kind of helped us out pretty nicely in the -- to tide over the deep challenge.

Right. I have a few other questions. I'll come back. But just one other pressing question right away, which is the other initiative, the smaller initiative that you've taken from restaurant, apparel, the devices and then the devotional write-off that you've taken. If you look at this on an aggregate basis, is this some -- has there been some sort of distraction to the management to the core purpose of building what you're trying to do now, which is really big traditional cable and satellite channels on the free mode and lots of advertising, which can prospectively come in an INR 800 crore Marathi market? You can probably get a INR 50 crores, INR 80 crores market share easily, it looks like. So how would you comment on that in terms of your assessment of those situations in the past? We've obviously had a loss. I think there was a minus INR 4 crores that you carried and INR 6 crores you've written off. So you have a -- this sounds like a total loss of INR 10 crores. So can you please explain that?

Yes, sure. So the devotional thing is actually more a structural change, if I have to put it. We remain extremely well entrenched in the devotional business. And actually, over the last the 3 years, the business has grown very nicely. It's extremely profitable. What has happened is that -- so this was digital media. It was an entity in which we've invested in way back in 2010 -- 2010 or '11, I don't remember the year, '11. So 2011 was when we invested in it. And that -- investors originally, I mean investors owned and produced and owned a whole lot of devotional content, including they carried live version, nonlive footage and whole bunch of content. It had owned probably -- arguably would have been one of the largest devotional content owners at that time. And we -- well strategically diversion was an important business to be in. And that's how we took up a 50% stake. Now over a period, what happened is that the investment need for that business kept growing. And at some point, we decided that we will build the business more in Shemaroo than in Vistas, which gives us 100% access to the whole content as well as to the revenue and the flexibility to run the business the way we want it. And so that is what we did and which is why we kind of had -- when we saw that all the assets of Vistas also are now, in a way, significantly repurposed or rebuilt in Shemaroo. So then what we needed to do, therefore, is, since this was a balance sheet item, it need -- we needed to charge it off. But to give you a sense, I mean, the devotional business is very much alive and kicking. And we are doing -- I mean, today, our Shemaroo Marathi channel on YouTube has more than 5.7 million subscribers. We run devotional service, both Hindu and Islamic on Tata Sky, Dish TV, videocon and on Airtel DTH. We have our Shemaroo app which is now nearing 0.5 million downloads, et cetera. During the lockdown, we did this whole live version thing because the temples were shut. So we did this stay-at-home pray-at-home kind of devotional and which helped gain very good traction on all our platforms. So devotional business is very much integral part of our content offering. In fact, just to give you a sense, even on Shemaroo MarathiBana, there is a morning devotional segment, which, again, we are significantly been working on that front also. So there is an outlet and a need and a capability. All of that is in-house there. So this is more or less just a structure change to signify the fact that we now are -- which earlier was not 100% interest on devotional as far as the company is concerned, is now 100% in-house and owned by us completely. So that's on the Vistas part. On the other things, I don't know whether you would call them distractions or whether you'd call them innovation. Because at some point, even YouTube was an innovation. When we started business with YouTube, when we started something, say, on the DTH front or all of that, these are all innovations. You have to keep trying many things. Some work, some don't work. And obviously, what doesn't work, you have to review and shut it on a timely basis. With -- what we are doing is, so our thought process is a combination of a couple of things. One is that we are -- we believe that the Bollywood association on a whole lot of things is still -- there's a lot of scope to actually work on that. And there are a whole lot of proof of concepts, et cetera, that need to kind of be done for that. Secondly, unless and until we don't try out new things. The whole idea being, yes, keep the investment and the management involvement at a very low level, so that you can incubate something new and different while rest of the business continues to grow. So that is a philosophy that we have followed from years. I mean, prior to, say, YouTube coming, we were a DVD company, right? We were -- but when it helped us put the whole digital piece in place. And that time, it was a question mark that how can you show free when you are selling DVDs for INR 200 or INR 350 or INR 500 and someone is showing it for free. Now -- and there were no revenues for maybe 2 years, 2.5 years, 3 years. There are checks were below $1,000 monthly, which is completely insignificant compared to a multi-crore DVD business. But we believe that this is our future, and this is the way to go. What I'm just trying to highlight to you is that there are many things that one has to keep trying. And some work, some don't work. And we have -- what we have done, I mean for us, reinventing has been an integral part of the whole thing. I mean, otherwise, from video cassettes to all technology changes, I mean, we've managed -- and actually, we've been ahead of the curve at every major inflection point as far as the industry is concerned, if you go back in our whole history, which kind of the reason for that is that we've always attempted to reinvent ourselves. I mean that's the backdrop. And secondly, the question on TV part, which I think our TV opportunity is a very new opportunity, which came up, literally, I would say, towards the middle of FY '20. So prior to that, there were already quite a few initiatives which were in place, but we scaled back the investment significantly because we had to focus the capital and the resources and the bandwidth everything for the TV business. And that's what we managed to do, I mean, which reflects in the major cost-cutting initiatives as well as many of these things which we discussed about shutting, say, 1 subsidiary -- I mean, multiple subsidiaries, et cetera.

[Operator Instructions] We have next question from Mr. [ Ayu Shavival ] from AGA Capital.

I want to stay away from COVID right now and just go back, like, what we have done in the last 5, 7 years. So when I look at our sales-to-inventory ratio, since FY '14, that has been falling from 1.7 to 1.5 to 1.3 and now stand at 0.8. And the -- business inventory at the beginning of the year, not at the end of the year. So our sales-to-inventory ratio has gone down substantially. That's almost half in the last 6 years, right? While our gross margin has climbed up in the same period from 31% to 45% in FY '19. And you saw some dip in FY '20 for, for COVID reasons. So had COVID not been there, I mean, I would expect our gross margins to be around 40%, 45%. So I mean, what I'm trying to understand here is how are these 2 possible? Like why the sales-to-inventory ratio was falling consistently and our gross margin is going up? Is there something that I'm missing? Or I would like to understand your point of view.

Sure. So see, net -- in a way -- so there are 2 different aspects or 2 different factors that play here. First is the fact that the way the business works and the practice in the industry, typically, how it works is that rights are typically bought on a forward basis, okay. So we add -- to give you an example, today, if we are dealing in some movie rights, their commencement would be in 2022, '23, '24 kind of year. The reason, typically, again, let's leave aside the current COVID situation, but always the broadcasters have been short of supply on the content side. And that's the reason why they always want to secure their content pipeline. And the trade industry works on a forward-rate basis. So we also have acquired a whole lot of copyright, which has a future commencement date kind of a thing. Now what we sell, at any point in time, is -- so what you're seeing, say, margin, for example, are we -- for us, we look at more in terms of IRR, and this I've explained earlier also that, for us, IRR is our key driver. Now that is on a specific piece of movie. It's not a general thing. It's not -- so the biggest -- so if I have to, in a nutshell, give you an explanation is that it's not homogeneous inventory. It's not 1 commodity that we are dealing with. It's all -- each specific content has its own economics, its own cost structure, its own revenue structure and its own economics kind of a thing. So that is -- I mean, in a nutshell, the explanation for what you're seeing.

What's the -- doesn't this indicate that if our gross margins are rising and our sales-to-inventory ratio is consistently falling, does it not mean that a lot of inventory is not going through our P&L like we have mentioned in our previous conference that we have a inventory right of policy of 18 months? But I don't see that happening. I mean I would like to -- like you to give me a number of like what kind of inventory write-downs we have taken over the last 5, 7 years. Is there a number to that?

I don't have it off hand, but I can say one thing that it's definitely not significant for 2 reasons. Again, there's a lot of inventory out of what we have, has a future commencement date to it. So it's not even right now in a sales cycle of its own. It will come up for sales at some point in time, and we will at that point put it -- I mean, we will -- once we have that revenue, it will go into the cost will -- first, whatever is the relevant charge-off will go into the P&L.

Can this also mean that you are carrying a risk of that inventory with us?

Theoretically, yes. But practically, what we do is we look at our stock. And so see, there are 2 ways in which we -- so the core way to charge off inventory for us is that essentially, it's back with revenue, right? So whenever we are charging revenue to a -- I mean, sorry, whenever we are earning revenue on that, we kind of charge it off to the P&L based on which rights is being dealt with. Okay. Secondly, if the -- so if the main rights is, say, television in terms of value. Now if that -- for a movie after commencement, if it's not been sold for 18 months period, then we charge it off. And we've almost not had any such occasion in the last 4, 5 years. Hardly something would have been there. It would have been insignificant, probably less than 1% of the overall cost.

Okay. So I mean, since you were talking about -- you mentioned that you look in terms of IRR of your inventory. So I suppose you bought an inventory this year. And like you said, the commencement date will be sometime in the future. Let's say, we purchased around INR 380 crores, INR 400-odd crore of inventory this year, and an average commencement date would be like in the next 1, 1.5, 2 years, right? What kind of IRR are we actually generating? Because this 2-year period, our inventory is just lying there without earning anything. Are we making enough money back on the inventory to cover the cost, opportunity cost of 2 years lost where the inventory is just lying around on our book?

So at that -- normally, at the time of how we do it is that at the time of purchase, we estimate the sale time frame and the value potentially. And therefore, we discount that back at an 18% IRR and arrive at what we should be paying to buy it. By and large, we have been managing to get that IRR at least until now. And it's definitely something that has -- I mean, if I had to put it in a different way, it's a lot of consolidation of the industry that has happened, and it's a very valuable library. If you look at, say, on digital media, on television, et cetera, you will typically see this content being played out significantly and on and around that. So in terms of -- till now at least, the monetization, we have been -- definitely, we have been generating.

Okay. But I mean, again, so, so far, like it's INR 700 crores of inventory, and that is 100% -- 18% IRR is expecting this INR 100 crores EBITDA per year. Have we been generating this year-on-year? Or has our IRR gone down? Because inventory by sales ratio is trending lower, right?

So if you see it till last year, our EBITDA was upwards of INR 100 crores till FY '19. Even FY '20 itself, if you take off the new investment amount, as I shared earlier, it's above INR 100 crores EBITDA, even for FY '20. And that is after a horrible Q4. In fact, we had a challenge even in Q3, which at that time also we had shared that. So I'm saying there is a certain amount of generation that is already happening at this point in time or has been happening for this.

Just one final question, sir. Just one question, this is a follow-up on your -- this is a follow-up on your comment. It is all make sense, quarter 3 right now, sir. But my only concern is that in the last 7 years in the same period that I mentioned earlier, our working -- our cash flow before working capital was INR 775-odd crores. And most of it has gone to inventory around INR 560-odd crores and the rest have gone into taxes. And we have only been able to produce like INR 25-odd crores of cash flow, net cash flow on sales of INR 2,800 crores in the last 7 years. Can we see some positivity on that by that we start -- we actually start monetizing our inventory, and our inventory purchase will -- I mean, our cash flow generation will far exceed our inventory purchase in the coming years?

So 2 parts to this question. One is I need to reiterate the context for the buildup of the library. I think in the last about 5 years, 7 years, and this is something that literally every quarter every year we have been discussing and reiterating, the fact that we have been in a growth phase, as far as our sector is concerned in consumption on -- particularly on the digital front, and which is reflected from our own revenues on the digital side. Now this was something we had anticipated over the last 5, 7 years back, even pre-geo launch kind of. And the whole investment was to build up strategically the library to a certain level so that when the -- actually, when the business grows and matures and reaches a certain level, we are in a good position as far as content library is concerned. And today, we are -- definitely, we have built a formidable library. So it's a strategic part. I mean, yes, you can look at the aggregate numbers in that way. But the fact is that there has been a strategic investment in the library front. I mean we did our IPO exactly for that. Otherwise, we didn't need to do an IPO if we would not have an investment need on the content side. And that's something that we have done. Now to answer the question on when we can see the cash flow generation. I think if you even go through the last 2 or 3 quarters of just the kind of initiatives we've done on the distribution side, whether it's ShemarooMe, if you see being distributed on so many international platforms on India, on Vodafone, Airtel, et cetera, Tata Sky Binge, et cetera, or if you see the whole TV foray, which is, again, one more distribution initiative where we strategically said that we needed to have a larger play on the whole advertising revenue itself than what we were currently having or more direct play on the advertising revenue than we were currently having. So everything, if you see every initiative of the thought process, it's built in that exact direction. And I'm very confident that once this current investment phase of the broadcast is kind of -- has kind of peaked out, we definitely would be in a cash flow generation kind of situation. I have -- I mean, that's really the core focus and the effort that we have built this with. Hello?

We have next in queue, Ms. Shikha Mehta from Equitree Capital.

Sir, I just have a couple of questions. Our cash flows from operations and free cash flows for FY '20 were negative. So is this the right time for us to be aggressively investing in these new initiatives? And do we have any idea about the payback period for these new initiatives?

So I think if you ask me, market opportunities come up -- do not come up regularly. Some good opportunity, if you -- TV is a very large and scaled business. And when the opportunity comes, one has to really look at it in that point of view. Secondly, we were already significantly committed into this business prior to the COVID lockdown situation. I mean so our MarathiBana channel launched actually in December, January are -- even the Shemaroo TV GEC channel, the test signals had actually launched in March, and we had secured a plot on the DD Free Dish platform and a whole lot of content. And a whole lot of other preparation was already significantly in place. So we -- the best way for us to take it forward was to really see how more innovatively we can work on the cost, on the content and the overall initiative, the economics of the whole business rather than say that should we be rolling it back or should we be pausing it. I would, in fact, say that this was, in a different way, a good time to launch because considering the fact that fresh content production was limited, the opportunity to actually reach out and get audiences to consume and sample was far better because normally, otherwise, people may be linked to or hooked to their existing shows or channels and all of that here. Actually, there was a genuine disruption. So in hindsight, we actually feel that it wasn't a bad time to actually be launching. Now to answer your question, what is the time frame for payback? So let me put it that way, that at this point our -- the IRR expectation actually is significantly -- actually, higher than our overall content monetization expectation. And we are -- yes, we've gotten delayed on the advertising revenue side. But I think the visibility on the overall project continues to remain very strong.

Right. So when we say this remain north of 18% IRR generation, is what we're expecting...

That is what is the expectation.

And so we mentioned that this year, we spent about INR 26 crore on new initiatives. And you said going forward, in a couple of months, it will peak out.

Couple of quarters.

Couple of quarters it will peak. So what is -- what CapEx do we expect at the peak level?

Too early to say that, but I would think so -- I'll -- okay, let me put it that way. The CapEx is higher than INR 26 crores. INR 26 crores is the operating expense that has gone into the P&L. There is also the -- expense, et cetera, which is there. So part of this inventory buildup that is being discussed is already sitting in the -- or within part of this project. I mean when you're launching a channel, you need your bank of -- films, for example, you need bank of...

Apart from inventory, is there any other CapEx that we're capitalizing to the bank?