Shemaroo Entertainment

What’s a better learning strategy: covering a subject in full detail from top-to-bottom or progressively sharpening a quick overview? The better way to learn is to use the idea of progressive rendering. Get a rough outline as quickly as possible. Then gradually improve your understanding of the subject over time. This document is a rough outline of my understanding of Shemaroo Entertainment. Overtime I will improve my understanding of the media industry and Shemaroo in detail. Click here to read the rest.

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15 thoughts on “Shemaroo Entertainment

  1. Jana, outstanding report! The best I have seen for a media – entertainment company. Having worked as a CEO of a leading company in the field, appreciate the nuanced analysis. My own take is that Shemaroo has considerable inventory of slow moving or ‘dead’ content, I.e. movies which are of little interest to the present generation. As you have mentioned, with rapidly increasing acquisition cost of the new as well as fairly recent films, the company has limited opportunities without further deterioration in finances. Silver lining: Some day a new media player could buy it out and there is an open offer to the shareholders!
    Dilip Mehta.
    Mobile No. 99800 18722.

  2. Dear jana,

    I am a regular at your blog, and am really amazed at the clarity with which u put across the conceptually difficult insights. I wish I could learn to think and then articulate the same way.

    I want to learn how you conduct research, what are your sources and what additional reading apart from Annual Reports do you do to understand an industry and then a company within the industry.

    Thanks
    Anshul GAur
    anshul.anz@gmail.com

    • Hi Anshul,

      Thanks for reading and leaving a comment. Researching a company and an industry is similar to how we learn everything else. You have to read from standard sources like Annual report, Investor presentation, Conference call transcripts, etc. While reading you are trying to answer simple questions like

      (a) what product/service does a company sell?
      (b) why is it valuable to its customers?
      (c) who are its customers and how affluent are they?
      (d) how much capital does the company invest and what are its sources?
      (e) why does the company earn above the cost of capital?
      (f) Would it earn above average returns 5 to 10 years from now?

      You are like a detective trying to find answers. Be skeptical as much as possible. Any statement you make should be backed with numbers. Certain qualitative factors can’t be backed by numbers. Being aware of that is good. Finally, don’t buy because an authority figure is buying.

      Regards,
      Jana

  3. Hi,
    Nice write-up. Have 2 questions related to the accounting –

    1. How does the inventory deplete in value (for accounting purposes)? Meaning if they bought 112 crs worth of rights in a given year, how much is charged to the P&L over subsequent years?

    2. Also, what method do they follow to value the closing stock on the B/S. Am struggling to understand the footnotes – “The copyrights are valued at a certain percentage of cost based on the nature of rights. The Group evaluates the realisable value and/or revenue potential of inventory based on management estimate of market conditions and future demand and appropriate write down is made in cases where accelerated write down is warranted”

    Thanks

    • Hi Yash,

      Investor presentation slide 27 talks about it [https://goo.gl/4yt44V]. I am sure you would have already seen it. My understanding is that they run through most of the inventory as expenses for aggregated content in the year of sale. For perpetual content 65 percent of the cost is amortized over 5 years.

      Regards,
      Jana

  4. Respected Jana,
    Please keep on feeding us with your write ups,stories like Marva Collins ,to understand something write about it and so on,please do not take such wide breaks,hope everything is fine, god bless,,
    Knowledge begets knowledge.

  5. Hi Jana
    This is an amazing write up! Please do a blog post on Indian pharma industry when you get a chance. It would be wonderful to know your thoughts on this sector.
    Warm Regards
    Kartik

  6. Hi Jana
    Truly a simplistic insightful framework for in depth analysis. One additional question which knocks my mind is why the content, which is the revenue generating asset is classified as inventory and not fixed assets. It has to be looked into from corporate governance point of view. In a sense, like PAT would have been lower, has this been shown as FA on account of depreciation. I understand that you have excluded this from CFO for the same reason.
    Further inputs wud be helpful

    Regards
    Manek

    • A valid query. Entertainment and media content needs a different approach then plant and machinery. As a former a CEO of a leading music and other entertainment, many companies charge the entire acquisition cost to that year’s P&L. As no one could predict whether the particular creative content would remain saleable for 50 years , would become virtually unsalable (flop) within days! Hence it is prudent to absorb the entire cost
      at one go.

      • Hi Dilip,

        Thanks for the insightful response. Shemaroo’s thesis boils down to understanding what’s so special about their content and why would it generate sales growth without a lot of growth in inventory. As an outsider I don’t know the quality of their inventory and I am not sure if the latter would ever happen. I have put the company aside for now.

        Regards,
        Jana

      • Absolutely. As rightly concluded, by you, free cash flow analysis should capture the essence. Incidently, they do have interesting library of classical old Hindi films. Currently, TataSky are offering this content through their special extra payment offering called TataSky Classic. Shemaroo must be receiving a decent income by way of fixed upfront amount or variable revenue sharing.my feeling some day Shemaroo will make a killing by selling their movie rights to likes of Netflix, Amazon, Jio.,

  7. Dear Sir:

    As always it has been a delight to read your new post. Though I would like to point out something from my own research. The recording of copyrights as inventory is because of accounting standard, so not much can be done here. Also, if you look at the accounting policy for inventory, it is completely at management’s discretion. This means if the management is not able to monetise on a particular copyright, it may completely write it off or may not. The exact details are not provided. Moreover Shemaroo being a content aggregator would it not be appropriate to value it based on the content library rather than trying to forecast for free cash flow? Another interesting point is that, management says they are near the end of content acquisition phase, but my understanding says if they stop acquiring new content how much can they monetise on the same content in entertainment industry? In my opinion they will always need to keep buying more copyrights. So it becomes even more difficult to reasonably forecast. If they can strike a balance between content acquisition and growing revenues, that would be interesting to see and that is when value will be created.

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