Shemaroo Entertainment Limited (SHEMAROO) Earnings Call Transcript & Summary

We at Batlivala & Karani Securities are pleased to host this earnings call for Shemaroo Entertainment. To discuss the results and the business outlook, we have the senior management of the company, represented by Mr. Hiren Gada, CEO and CFO; and Ms. Kranti Gada, Chief Operating Officer. I will now hand over the call to Mr. Gada for his opening remarks, which will be followed by question-and-answer session. So over to you, sir.

Thank you, Yogesh. Hello. Good afternoon, everyone, and thanks for joining our H1/Q2 FY '21 earnings conference call. Before starting, I hope everyone is keeping safe and healthy, and I wish the best for you and your family. Let me start by giving you the key highlights for the quarter and for the first half year ended September 30, 2020. For the second quarter ended, for financial year 2021, operational income was INR 59 crores. EBITDA for the quarter was negative INR 72 lakhs. And we had a loss after tax of INR 9 crores. For the first half of the financial year ended September 2020 -- September '20, operational income was INR 146 crores. There was an EBITDA loss of INR 6 crores and a loss after tax of INR 22 crores. As most of you are aware, the company has been in an investment mode in the -- in various new initiatives, which are yet to mature and add to the financial performance of the company. Hence it is important to note the expenses made on these new initiatives, net of revenue for the period's under review. For Q2 FY '21, it was INR 15 crores. And for H1 FY '21, it was INR 29 crores. If you were to exclude these investments in new initiatives, the EBITDA from existing operations was actually positive INR 14 crores for Q2 and positive INR 23 crores for H1 FY '21. For the second quarter, digital media revenue stood at around INR 39 crores and has declined by about 30% on a year-on-year basis. And for the half year ended, digital media revenue stood at INR 73 crore, which has declined by around 30% on a year-on-year basis. Traditional media, which has borne the maximum brunt of the COVID lockdown, for this quarter stood at INR 21 crores, which is a decline of 79% on a year-on-year basis. And for the half year ended, it stood at INR 73 crores, which is a decline of 62% on a year-on-year basis. With consumption showing some green shoots, advertising spends have started picking up. Major events like IPL and with the festive season around, advertising spends are expected to come back to pre-COVID levels in the coming period. In the traditional media business, some deferred acquisition, content acquisition deals continue to put pressure on the top line. However, continued cost rationalization efforts in the last 4 quarters began to start contributing to the company's operational margins and cash flows. We continue to strategically, yet cautiously, invest in our future as we remain confident of our business model. We are trying to transition and evolve from a B2B company to a B2C operating model, and we are currently building our investments, which are going to be the foundations for an accelerated growth for our future. During the quarter, the company continued its focus on its 2 broadcasting channels, namely Shemaroo TV and Shemaroo MarathiBana, to strengthen their viewership and reach -- sorry, to strengthen their viewership and reach. Shemaroo MarathiBana was consistently among the top 6 Marathi channels, and we began monetization of this channel through advertisements during the last quarter. Marathi category -- just to remind everyone, Marathi category enjoys an estimated ad revenue pie annually of around INR 800 crores. In case of Shemaroo TV, we focused on increasing its reach by closing on key distribution partnerships to strengthen the viewership and reach, both. Again, to remind everyone, the overall Hindi general entertainment category enjoys an estimated ad revenue pie of around INR 7,000 crores to INR 8,000 crores and we plan to capture a small part of that existing pie. The broadcasting business -- this broadcasting business initiative shall reap benefit with the existing companies -- with our existing strength, basically. This is one of our efforts to come closer to the Indian audiences and the proposition to vertically integrate our business model. On the digital side, our performance on YouTube continues to grow well. Shemaroo Filmi Gaane has crossed 40 million subscribers during the last quarter. Enhancing our overall digital presence, we had launched ShemarooMe in February 2019, which is our subscription-based OTT digital platform, working primarily on a B2B2C partnership-based model. In the current quarter ended September 2020, we have entered into partnership with JioTV Plus app and at -- ShemarooMe is now available on the JioFiber network as well as on JioTV -- sorry, JioCinema for the mobile users. In addition to that, ShemarooMe app has been made available on Sony Bravia television. And we've also partnered with Telkom Indonesia to tap into their subscriber base. The traction on this platform so far has been encouraging. ShemarooMe has been made available across 150 countries. We also launched a feature called ShemarooMe Box Office, where new small budget movies can be watched by buying tickets through ticket aggregating platform, BookMyShow. This is more a transaction video-on-demand model. As you know, our core strength is in enhancing monetization of our intellectual property rights. All these new initiatives like broadcasting business and ShemarooMe have the sole proposition of generating new and stronger means for monetizing the content. Lastly, in conclusion, we are definitely seeing a revival in the ad spends in the sector and hope that the momentum continues in the festival season and beyond as the lockdown gets lifted slowly. Our cost optimization efforts have borne fruit this quarter. And let me assure you that everyone in the company is working diligently to boost the business. And we are confident that in the long run, our overall strategic initiatives will bear fruitful outcome. Now I open the floor for questions.

[Operator Instructions] We have a question from Prasanna from Rippling.

So if you look at the inventory, sir, in the last conference call as well shareholders asked basically, the inventory is working less and less. If you look at not the COVID trend, but the 7-year trend, revenue per unit of inventory or like profit per unit of inventory, gross profit per unit of inventory has been declining for a while. And this quarter, it sort of comes to the fore. Like, for example, the biggest cost, which is the cost of materials consumed, has fallen a lot. Even though we are carrying the same inventory, obviously, we expense it only when the inventory gets sold, and therefore, if there is no sales, then we don't expense it against the revenue. But it looks like a lot of inventory is just getting accumulated. And I know that we used to have like an 18-month inventory write-off policy. So when do we actually sort of -- like right now, our inventory is holding, say, something ridiculous like INR 750 crores or something, which is clearly not really market value. So when do we think the accounting entries will sort of coincide with market value, and we would actually take the real write-offs.

Actually, the question on what is the market value is an open question. And given the strength of the underlying content, of course, the jury is out there, but I would believe that actually the inventory has substantial value in it. And the challenge has been, obviously, that because of COVID purchases of movie channels have kind of been put on hold for almost 3 quarters now or a little bit more than that actually. So -- and that's really what has been the challenge. It doesn't mean that the value of that inventory has gone down. It's just that because right now, the cash flows have been tapered. So unless and until we really don't restart on the sales side, it's difficult to today say where the pricing would settle. But all I can say is that definitely, the inventory has a substantial value to it. So I think we will continue to follow the policy that we've been following. And for any rights that have commenced, for 18 months if it is not sold, it would get charged off.

Got it, sir. So the 18-month write-off thing seems a little peculiar, given that -- given that the inventory has been -- has not really been working as hard over the years. We brought it up in the last shareholders' meeting as well. And you mentioned that like if you take 1 year forward, or something because you hold the inventory for a while, things might normalize, but it doesn't actually. So I don't know if you have any comments on that, like my understanding is, basically, there is a significant portion of the inventory.

I actually don't agree with that. Two things I want to say, actually, if you see the GP margin, okay, of -- even for the current quarter, it is very healthy. Because if you -- in fact, if we net off the investment that has been made, the GP margin -- the EBITDA margin itself is at around 23%. So there is a healthy GP margin, which kind of indicates that the realizations on whatever revenues have happened is held on and is decent.

That's true.

Sorry?

Yes, that's true. So the GP margin trend has been upwards over the years.

So, therefore, what I'm saying is that we are in an extraordinary situation where the overall ad revenue for the media industry has taken a severe beating for the last almost 8 to 10 months. And as a result of which the content investment impact has happened, which in a way doesn't really mean that when the investment restarts, I -- at this point, we don't know whether at all, it will have any impact on pricing. And secondly, on how much impact it would have on pricing. The reason being -- and something which I said last time also is that what is happening in the interim is that the channel -- see, the channel needs content, right? And it is consuming period right now, but it's not investing in -- in fresh content. So at some point, their library starts expiring and the content availability keeps -- starts reducing for the broadcasters. And that is the time they obviously need to replenish. So that need for replenishment is on a continuous basis. It's because of an extraordinary year that this is the case. But otherwise, we've been able to generate the IRR on an impact if you actually see the numbers for last several years, the IRR has actually been generated on EBITDA level based on the investments. So that is not an issue at all.

Yes, sir. So the peculiar thing is the GP margin has been increasing, as you're mentioning, over the last years, last few years, except for the COVID 2019/2020. So that's not a concern. The only issue is the portion of the inventory that is being expensed in the P&L keeps reducing. So there is more and more and more of inventory. And the portion of that that's actually been ...

No, no. No, I don't agree with that. Basically, what has been happening till now is that we've been buying -- we've been buying more than we have been selling, which is an overall library buildup and inventory, and that was -- that has been a conscious investment. Secondly, for the last year or so, whatever -- some of the investment or some of the addition that you're seeing is also on account of the broadcast business. So there is a certain amount of inventory that has been built or even retained. So some movies, et cetera, we've not sold because we wanted to keep it exclusively for our channel. So that kind of issue has also been there. But if you take that off, then this -- as for our quality, whatever we've been selling, we've been expensing out. It's just that we've -- see, let's understand one thing that the digital and overall media industry is on the threshold of a growth period. And notwithstanding the COVID impact, which has been very unfortunate for our industry. But otherwise, for an economy like India, which is a largely consumption-based economy, media actually grows faster than the GDP growth because there is a large spend on marketing advertising by various consumer brands that need to make awareness of their product. And that has been the driver for media industry for years, and that will continue to be because new and new products and categories get -- so with that in mind, the investment that has been made over the last few years has been with that. So I don't see that as a challenge right now.

Got it. What is your expensing policy on that front? Like the media that you would -- you yourself consume and don't ever sell, would you like -- when would you expense that?

Actually, it's there on our website, you can refer to it on our presentation because I hope you can understand that the current call is related to the quarter and half year performance. We can have a separate discussion on this or our team can explain to you the expense policy. There's no issue at all on that.

[Operator Instructions] We have a question from [ Deependra Singla ], an individual investor.

Sir, my first question is like on YouTube subscription and the views, we're still seeing healthy growth. So if you can tell me like what percentage of revenue comes from the YouTube this quarter?

Yes. I'll tell you, one second. So roughly, YouTube has -- overall YouTube used to be, in fact, at some point, less than 25%. But now YouTube share has gone up. And telecom, which used to be upwards of 50% has now gone below 20%. In fact, this quarter, it's actually below 10% of the total because the telecom business has seen a severe beating. Or -- I won't call it a severe beating, it's a shift from the business model of traditional VAS, which was a feature phone product to smartphone product, which is ShemarooMe OTT kind of thing. And this is -- I'm saying the percentage of breakup of the revenue. So YouTube is now probably in the range of around -- between 40% and 50% of the digital revenue, and telecom is about 10%, and the rest is a combination of syndication and ShemarooMe.

Got it. Got it. And sir, digital revenue is like 60%, 70% of current revenue, total revenue this quarter?

For as far as this quarter is concerned. But I would take this quarter as an aberration because the major impact of the COVID has been on TV advertising on -- et cetera, which has caused the traditional media revenue to actually come off. I don't see that still as a long-term trend. My own sense is that digital would probably remain -- or at this -- on a normalized basis, if we were to think, digital should be between 30% and 40% of the total revenue on a steady state kind of a basis.

Sir, what is our -- basically, as we -- like as we see -- we can see on the presentation, we have started generating some revenue from our Marathi channel.

Yes.

Like what kind of numbers are we seeing there? Like I know this is just the start and -- of a channel, we will grow more?

Actually, I'm not in a position to share that. But all I can say is that it's a decent beginning. We are, I would say, fairly in line with our internal projections. And...

Sir, maybe you can tell me the growth you are seeing, like maybe monthly or quarterly, like because you have already now...

Let me say it in a different way. There are 2 new initiatives that we are currently investing in. The overall top line of those initiatives is probably in the range of about 10% of our overall total top line.

Okay. Okay. And this includes like partnering with Jio and all those things also?

No. Not...

Okay. This is just TV channel?

TV and -- so there are 3, 4 new initiatives. TV is obviously the largest part within that.

Got it. Sir, we -- like in your -- basically, the start of your presentation, you talked about, we partnered with JioCinema and JioTV and doing this thing with BookMyShow. So all these models are basically -- these companies pay us something upfront or like this is more like the viewers get to subscribe our channel and then only we get paid?

So I am not in a position to talk about specific transactions, but in general, there are...

Sir, maybe with Jio...

Yes, in general, there are -- I mean, if you really break it up, there are essentially 3 types of models. There is a fixed stream model on one end of the spectrum. And on the other end of the spectrum, there's a pure revenue share or a variable model. And then in between, there would be a minimum guarantee and a profit-sharing or a revenue upside sharing kind of model. And each -- I mean, unfortunately, I'm -- due to confidentiality issues, I'm not able to discuss specific deals. But what I can say is that we -- I mean, depending on platform to platform, we have different kind of models.

We have a question from Shikha Mehta from Equitree Capital.

Sir, I just had a couple of questions. What approximately would be the payback period for our new initiative?

We are hoping that television business payback should be within about 3 years, end-to-end. And each -- I mean, each business -- in fact, on a continued basis, the internal target, obviously, is that it should be generating an IRR, which is higher than what our overall target IRR is. And the other businesses each have their own trajectory, but this being a large initiative and investment, I think this could be. Yes.

And sir, in a related party transactions that we've shared on the exchange, there are almost INR 50 crore of loans which the promoters have given to the company. So are we looking at equity infusion or something of that sort anytime going forward?

At this point, I'm not in a position to comment on whether the promoters will be putting in equity contribution or not. But the promoters probably believe in this business, they are backing the business completely. So they have infused debt into the company. In fact, as a promoter group has not sold or pledged any shares of the company at all in its entire listing history. So that's something that the promoters are strongly committed and believe in the future and business model of the company.

Right. Sir, on Marathi channel, it's part of the top 6 Marathi channels. So can you give us some sort of idea on like what percentage of ad spend would Shemaroo get out of the total Marathi ad spend?

See, which is why, as I said even on the previous question, that I'm not able to give individual numbers right now, but the 2 [Technical Difficulty] that I gave, one is that the Marathi category is estimated at around INR 800-odd crores in terms of the ad spend, ad revenue. And within that, essentially, there are -- at a broad level, 3 categories. There's a general entertainment channel, there are the film channel, and then there are news channels. So obviously, the general entertainment category takes in -- has a higher viewership and takes in a larger part of the revenue. But being in the top 6 in the entertainment category overall, obviously, has its own revenue implication. And we, I think, are moving towards getting our fair share of revenue. Not yet there, but hopefully, in the next few months, we should get -- we should be there.

Sir, would, let's say, 10%, 15% be a plausible target? Or is it going to be lower than that or higher than that?

At #6 -- a big -- in 6th rank having 10%, 15% is not possible. I mean, 15%, definitely not. We -- yes, I mean, right now, it's very difficult to put a number, but 15% definitely for #6 is...

We have a question from Mr. Yogesh Shah from YBS Capital Advisors.

My question is any probability -- since we are also on the OTT platform, any probability for any merger or some kind of transactions or some JV or partnership with other media houses or international media houses?

I cannot comment on that. All I can say is that at this point, there is no such conversation. If there is something we will inform everyone.

[Operator Instructions] We have a question from Mr. Prasanna from Rippling.

Sir, so in the Marathi channel, it looks like the weekly impressions when we launched in March was like 1 lakh. And then recently, in October, it has fallen to like around 30,000. So it looks like we've been continually losing market share. Any color on why that's the case and perhaps the future health of the channel?

Sure. So yes, it has fallen, but there are 2 reasons for that. When we launched, the general entertainment channels had -- they had stopped fresh programming. So the viewership shifted to the movie category at that time. And also, there was the whole lockdown impact where staying at home people had additional -- so TV consumption during lockdown had gone up by more 40% during the lockdown stage. And if you add to that, the fact that general entertainment channels were not producing fresh content, the audience shifted significantly to movie category, where at least there was a rotation of content happening. And that was reflected in the numbers at that time also. In fact, at that point, we've -- in some period, we were probably doing more GRPs than channels like, say, Star Pravah or those kind of channels also, which today Star Pravah is the leading channel in the category. So if we -- so once the fresh programming started, this correction kind of came back. Plus, we now have a decent unlock happening, and also third factor of IPL. So we are hoping that once IPL is -- so IPL takes away a lot of prime time viewership. So we are hoping that today being the last day of IPL, once IPL is done, there will be a marginal increase in that. So net-net, I think we were, I would say, at that point, probably a beneficiary of the whole lockdown this thing. But as the things settle down, I think things have kind of come in into a normalized trajectory.

Got it. And then long tail channels, like if you're really low in the popularity list. My understanding is it's very hard to be profitable in TV. Till how -- like how much consolidation sort of do you see in this sector? And like beyond what position is the breakeven just like really hard?

So see, we need to see there are 2 or 3 -- fundamentally, there are 2 or 3 categories, which are mass popular category. So general entertainment is one, movies is another one. They are 2 mass popular categories. So they will always have a certain viewership and a certain advertising revenue. There are certain niche categories. I won't call it long tail, but I would call niche categories, which probably have a challenge on the advertising side. Like to give you an example, recently Warner Brothers, Warner Media has announced that they will be shutting 2 English channels. English is a category which has been challenged by viewership and advertising. And those are the kind of categories or the things. So it more probably at this point would go with their category level kind of a thing. Within a category, I think the top couple of players always have an opportunity to take up viewership and therefore, revenue.

Got it. Does it mean like after 4 or 5, it's very hard to sort of be profitable and stick around for the long term?

I don't think so. I mean, for the longest time, we've had -- if you see general entertainment category, there are just about 14, 15 channels and all have been around for years and years. If you see the movie category, in fact, movie category has seen a huge influx of many newer channels. But typically, if you see the larger broadcasting houses, broadcast networks, they have -- no one has shut their channel. So there are at least about 15 to 18 prominent movie channels. And unless they are making money, they would not be sustaining for such a long period, right? So as I said, again, general entertainment and movie categories are fairly mass categories. The revenue -- the viewership as well as the revenue pie for both of these are significant.

[Operator Instructions] We have a question from [ Mr. Deependra ].

My first question is like we are doing a lot of new initiative right now, basically. When do you see like world is coming to a new normal? You can see like vaccines and all are coming. When do you see company will start reporting a healthy PAT of again, INR 19 crore to INR 20 crore, and then like in how many quarters or maybe months, a rough estimate?

See, I'm unable to give you a forward-looking or a guidance on that. All I can say is that we've started the monetization path for the -- see television is a slightly long gestation period. Obviously, the challenge of COVID added to the overall challenge. But I think we've started monetization, and I'm confident that this project should be contributing -- start to contribute pretty well over the next couple of quarters. And once that is done, I think we should be okay because if you net it off, the rest of the operational businesses are doing -- are doing okay. One, unknown -- as of now, still, I would add here is the whole television syndication because as we saw that almost for the last 3 quarters, television channels buying has been low. I'm hopeful that next calendar year. I mean, so a lot will depend on how this advertising season goes for the festival and all of that. But next calendar year, we should start seeing at least some revival and hopefully, next financial year should be a better trend for that part. So overall, I'm not able to give a guidance on the company, but these are segment-wise or revenue-wise, I have kind of shared. Digital has seen very good consumption growth. Again, had a challenge of advertising, but digital advertising is something we have already seen the revival, and there is a decent outlook for digital advertising for the next few quarters.

Got it. Sir, so like are we thinking to take more debt to basically sustain ourselves as we move forward?

The intent is obviously not that, and we've been managing and in fact, last quarter also, I have shared that. So our -- our current debt equity for the current period is 0.47. And my own sense is, I -- we really don't have the intent to take it significantly higher. Some amount of investment that we still may need to put in for the new initiatives may get it. But there has been a healthy cash flow generation from the operational businesses. In fact, we've like not availed of any moratorium. Every -- all are servicing on banks, et cetera, has been completely on track. All our other, like, so for example, salaries, et cetera, we've not actually -- so while we, in the past have reduced our headcount, but we've not actually reduced salaries of our staff. So -- and all of that has been completely been paid as for the regular timings and cycle. So in that sense, there is a healthy cash flow generation that is happening. Yes, there is an investment and it may need a certain amount of debt funding. But as I said, I don't see that gearing to go beyond 0.6 debt to equity. In fact, I don't think that much should be needed also. We are -- I would say we are slowly nearing the end of this investment on the -- particularly on the television side.

Got it. Got it. Sir, like I'm just basically thinking from a long-term shareholder of the company, like will not promoter buying some shares introduce confiding measure in the market, share has taken a lot of beating right now?

Well, I'm not able to comment on behalf of the promoters in terms of what is their intent to buy. So sorry, I'm not able to reply on that one.