Monday, June 6, 2011

Saregama India Ltd- will this tune ever become melodious ?


Saregama India Ltd. is an enigma. It is the custodian of nearly half of all the music ever recorded in India. This makes the company  the premier Music destination for Indian Music and the most authoritative source of the region's musical heritage. Saregama has the largest music archive - and catalogue - in India. Yet, the company continues to flounder time and again and continues to be an eyesore.

The company owns over 3 lakh tracks-one of the largest musical archives owned by any company in the world. This archive covers 13 languages over 8 music categories ( e.g: classical, devotional, ghazal, old hindi film etc)

Going ahead ,Publishing segment holds the key to the fortunes of Saregama. In this,for usage of music content owned by Saregama, 3rd parties pay licensing fees to the company. Similarly music societies like PPL, IPRS in India and MCS, PRS & BMG overseas receive publishing income from radio stations, tv, restaurants etc which they distribute amongst the music companies based on the usage of content owned by the companies.

Financials:
Equity : Rs.17.40 cr
Consolidated Debt : Rs.51.7 cr
Consolidated Revenue ( 2009-10) : Rs.118 cr
Consolidated Loss ( 2009-10): Rs.20 cr
Value of freehold land on books: Rs.65 cr
Investments: 15.45 lakh shares of CESC ( approx market price Rs.45 cr)
Current Market price: Rs.63
Market Cap: Rs.110 cr
EV: Rs.116 cr

Company History:
The proud history of Saregama stretches back over a century to 1901. Formerly known as The Gramophone Company of India Ltd. and more popularly as HMV (His Master's Voice), Saregama was established as the first overseas Indian Branch of Electrical & Musical Industries Limited (EMI), London. From producing the first song recorded in India in 1902 by the star of yesteryears, Gauhar Jan, having first taken root as an overseas branch of Electrical and Musical Industries Ltd (EMI), London. It subsequently metamorphosed into The Gramophone Company of  India  but was better known by its brand name HMV (His Master's Voice). The RPG group acquired the controlling stake in GCI in 1985 from EMI, and later lost the trade mark right to HMV after EMI pulled out of the company completely in 2000. It adopted its present avatar in 2000.
Corporate Set up:
The Company has its corporate office in Kolkata, and Business Units located in the four main metros, Kolkata, Delhi, Mumbai and Chennai. This keeps them close to the consumer, giving their  products a local relevance rooted in 27 languages and also gives Saregama the best sales and distribution network in the Indian market.
Saregama has a significant international presence as well, with offices located in the US, UK, UAE and Malaysia. In addition, we have sub-publishers representing our interests in a number of countries all over the world
Saregama's content is marketed overseas through two subsidiaries, RPG Global Music and Saregama Plc. Saregama Plc. focuses on the UK, USA, Europe, Canada, the Caribbean Islands and South Africa. RPG Global Music concentrates on the Middle East, South East Asia, Australia, and New Zealand.

Digital Expansion & other initiatives to broad-base business
Saregama pioneered expansion into the Digital domain. As far back as 2004, music from their catalogue was made available for digital download on global sites like iTunes, MSN Music, Napster, Real Networks, Musicmatch, Virgin Digital, eMusic Sound Buzz, etc. Saregama's music is also available on domestic digital stores like Indiatimes, Sify, VSNL and Bharti telecom.
Hamara CD is an innovative venture, a CD purchase site where you can compile your own customized song list on CD from Saregama's extensive catalogue, and have it delivered anywhere in the world.
Saregama now offers its consumer the opportunity to purchase albums online.
Film production, television software and children's edutainment are initiatives which promise new avenues of growth and expansion.
Saregama India Ltd is rapidly transforming itself from a music company into an entertainment company. While it has been intimately associated with the development of Indian music from its very inception and has a library of over 300,000 songs, it is now an emerging player in TV software, radio content, events, digital exploitation, and has recently signed mainstream films with leading directors..
The move makes sense as the music industry has been one of the worst casualties of the rapid technology advances, with its turnover declining at over 20 per cent per annum from Rs 1,200 crore 10 years ago to Rs 500 crore now. Churamani, however, says HMV’s revenues have been constant at Rs 125 crore for the past few years as it diversified into the digital format, started publishing, concerts and artist management.
Currently, Saregama’s revenue contribution from the physical format is 40 per cent. That is expected to go down to just about 10 per cent over the next five years as Publishing revenues increase .
Saregama plans to sell  music on memory cards and pen drives used in mobile handsets and computers. The target market is huge as nine out of every 10 cellphones sold in the country have a slot for memory card that support music uploads.

Developments in the Indian Music Industry over the last decade:

Indian Music industry has been one of the worst casualties of the rapid technology advances, with its turnover declining at over 20 per cent per annum from Rs 1,200 crore 10 years ago to Rs 500 crore now. Saregama’s revenues have been between  Rs110-150 crore for the past few years.
Currently, Saregama’s revenue contribution from the physical format is 40 per cent. That will go down to just about 10 per cent over the next five years.
FM radio broadcasters have been contesting Phonographic Performance Ltd (PPL) since 2002 on the issue of royalty. PPL is the largest aggregator of music in the country, administering the broadcasting, telecasting and public performance rights on behalf of music companies. Its members include Saregama India, Universal Music India, Venus Records and Tapes Private Limited, Virgin Records, Times Music, Sony Music Entertainment India and Tips Industries, among others.
Indian telecom giant Bharti Airtel has now become the country's biggest music company, overtaking the industry leader Saregama, on the back of its music-related value-added mobile services, a top executive has said.     
Music Bharti, a couple of years back has become the largest music company in India, overtaking Saregama India Ltd by a huge margin in terms of revenue.Music Bharti,  provides music services like hello tunes, call-back tunes and music on demand to its huge subscriber base.
I do not have exact industry figures. However on the basis of extrapolation of past data and factoring in the current developments, my sense is that Music related Value added Services (VAS)  generate close to Rs.4500-5000 crore per year. This includes Ring back tones (RBT) and Internal Voice recording service (IVRS).
Much like other telecom operators, Airtel does not produce music, but earns revenues from music distribution via caller ringback tones, mobile radio and music on demand. Along with SMS, Mobile Music is the largest contributor to Airtel’s Value Added Services Revenue.If one assumes, that Music accounts for about 40-50% of Airtel’s Non-SMS VAS revenues, Airtel’s revenues from music related VAS services from the Indian operations should be approx Rs.900-1000 cr for the year ended March 2011.

Some recent global developments:
1)      Apple has last week agreed  to pay US$150 million in advance royalties to the four major labels for iCloud music rights.Apple, the maker of iTunes has agreed to pay each of the top record companies between US$25 million and US$50 million each in advance royalties. The iCloud is expected to offer users a means to store their iTunes-purchased music on the company's servers and then access those tunes from Web-connected devices.
2)      Google is also supposed to be at an advanced stage of negotiations with Music companies / labels  and it is widely speculated that the search company too could launch a licensed service by September.
3)      In another development about a month back,Warner Music Group Corp and Access Industries, the U.S.-based industrial group,  announced the execution of a definitive merger agreement under which Access Industries will acquire WMG in an all-cash transaction valued at USD 3.3 billion ( approx Rs.15,000 cr). The purchase includes WMG's entire recorded music and music publishing businesses. The purchase price of USD 8.25 per share represents a 34.4% premium over the volume-weighted average share price of USD 6.14 over the previous six months.

Negatives:
1)      Poor management with a uninspiring track record on all fronts ranging from corporate governance to profit delivery.
2)      Loss making subsidiaries- with the latest addition OPEN Media Networks losing close to Rs.20.7 cr last year.
3)      New copyright act proposed by Govt of India.
Positives :
1)      Saregama’s music library of 3 lakh plus songs  is an asset which can never be replicated.In the hands of the right management, monetization opportunities are huge.
2)      The key factor is demand generation and quick delivery of content (music library) in a profitable manner. This is underlined by the huge scale up in Music related VAS revenues of telecom service providers.
3)      The list of possible suitors ( this is pure speculation and the company may never change hands) is an interesting one - Telecom companies ( Airtel etc), Indian Music companies ( T-series),Global Music companies ( Warner), Integrated Media houses ( Bennett Coleman).
4)      As highlighted in Some global developments ( above )there seems to be a small shift for the better in the global environment for music companies.
5)      Promoter-Sanjiv Goenka seems to have his hands full with large capacity addition for CESC & Phillip Carbon Black which entail large investments. Moreover besides Saregama , the group does not have any presence in Media related businesses, so there does theoretically lie some possibility of a stake sale by promoters.
Valuation :
On the basis of a back of the envelope calculation, Saregama is currently trading at an EV of  about Rs.117 cr. If one figures in the free hold land even at  balance sheet valuations, the EV works out to just about Rs.50 cr. A management change ( if it ever happens), should happen at an EV of about Rs.350-450 cr, which should translate into a share price of around Rs.200 -250 per share. As mentioned above, management change may never happen in which case the scrip may be range bound with a negative bias unless there are some positive developments on the operating front or the music environment front.
At the current price of Rs.63, Saregama is a High risk investment, with some possibility of large returns.
 At the time of writing this report, the author /his family have an investment interest in the stock mentioned above. Under no circumstance does the information in this report represent a recommendation to buy or sell the above-mentioned stock.  This report has been prepared and issued on the basis of publicly available information, internally developed data & other sources believed to be reliable. This is just a suggestion solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Readers using the information contained herein are solely responsible for their actions and are advised to satisfy themselves before making any investments.

3 comments:

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