Ashok Kumar, theIPOguru, is a man of few words. So, when he speaks, investors and particularly those chasing the IPO Rainbow with
the proverbial 'pot of gold' at the end of it, listen carefully.
Floor Price:Rs. 75 – Rs 80 No of Shares(FV Rs.10) :16.05 million shares Issue Size: Rs 1204 million to Rs 1284 million Issue Opens-Closes:8thMarch 2010 – 10th March 2010 Listing: BSE and NSE
Post Listing Details
Pre-Issue Promoter Holding : 94.03 per cent Post Issue Promoter Holding : 75 per cent Post Issue Equity Capital: 792.8 million Post Issue Equity Shares (nos) :79.28 million shares Market Cap: Rs.5946 million – Rs 6343 million EPS (Projected FY11): Rs. 3.15 Forward P/E Ratio (x):24–25.5 times
DQ Entertainment (DQE) is an animation, entertainment and live action entertainment production and distribution company. The company claims to have an asset base of over 350 hours of animation content and earns revenues through licensing and distribution activities. The company has also forayed into development its own IP in 2009 and launched homegrown 3D CGI (Computer Generated Imagery) television series like, The Jungle Book, Balkand, Omkar and Ravan. It has also produced / co-produced and distributed brands such as Iron Man, 3D animated TV series - Twisted Whiskers and Casper.
While the company has already concluded a pre-IPO placement of Rs 256.9 million with IDFC Investment Advisors (IDFC) and other investors, it has proposed to dilute more than 20 per cent of its post issue capital in the public issue.
The proceeds of the issue will be utilized to partly fund the objectives mentioned below.
Objectives (Amount in Rs Million)
Total Estimates
To be Financed from
IPO and Pre-IPO
Debt
Internal Accruals
Investment in co-production agreements, focusing on IP content creation
1,049.67
549.58
456.37
43.72
Development ofoffice premises & production facilities and infrastructure facilities at the SEZ Unit, Kokapet Village
519.16
392.31
112.5
14.35
Investment in Subsidiary, DQ Entertainment (Ireland) Ltd
145.9
129.22
16.68
FINANCIAL SCAN AND ANALYSTs’ NOTES
Particulars (Amount in Rs Mln)
6M FY 2010
FY 2009
Income Statement
Total Income
737.5
1509.08
Total Expenditure
479.34
972.2
Profit after tax
101.66
160.49
NPM %
13.78
10.63
Balance Sheet
Debt
378.10
364.73
Networth
1562.40
1461.22
Debt to Equity (x)
0.24
0.25
As the company was incorporated in 2007, it has a limited operating track record.
The revenue stream of the company comprises production and licensing & distribution revenues. Service revenues comprise revenues from traditional 2D animation, digital 2D animation, 3D animation and 3D game art. Further, the IP exploitation revenues comprises licensing for free and pay televisions, cable television, DTO, publishing, merchandising and distribution. Thus, the company seems to have diversified sources of revenue streams. However it derives almost 90 per cent of its revenues from the animation business and the balance in contributed by gaming and distribution. Moreover it derives more than 90 per cent of its earnings from production services on a fixed-price, fixed-time frame basis.
As per the consolidated financials for HY2010 (ending September 2009) and FY 2009, the company’s earnings from related party transactions (from Method Animation SAS, which is an associate of DQE plc, ultimate holding company ) aggregated Rs.99.38 million and Rs. 359.64 million (almost one third of the total revenues) respectively. The fortunes of the company for now thus depends on the flow of business from the related subsidiaries and the parent company to a great extent.
Positives
Satisfactory Order-book size : DQE has a strong order book aggregating USD 95.07 million or Rs. 4,567 million. Notably, more than 80 per cent of FY10 revenues are identified and over 40 per cent of the order book is already in various stages of production providing satisfactory revenue and earnings visibility. However, one would do well to note that almost 41 per cent of the orders (worth USD 38.74 million or Rs. 1861 million) only have executed deal memos outlining the mutual commitments. As there is no definitive and binding agreement for the rest, there can be no assurance that the same will be concluded.
Scaling up the value chain : DQE’s strategy to move up the value chain by entering into co-production agreements with IP owners and also develop its own IPs will enable it to share the potential upside arising from the final product. The company has thus moved from a pure outsourcing service model to a co-production model along with large animation studios and also developed its own Intellectual property (IP) content.
The Indian Advantage : The animation industry in India is still at a nascent stage and was estimated at USD 494 million in 2008. However, it is expected to grow at a CAGR of 22 percent between 2008 and 2012 to reach USD 1 billion by 2012. Thus, the high growth expectation for the industry will help the companies in this space to achieve higher growth which in turn would influence their valuations. Resultantly, listed entities in this space are already commanding valuations commensurate with the expected growth rate of the industry.
Further, the Indian animation industry has a distinctive cost advantage over its peers due to lower labour costs and a large English speaking population. This makes the country a favorable destination for global production houses. Moreover, unlike in the past, Indian companies were known to be less technology-oriented that led to lower output quality. However, now these companies have been enhancing and developing their capabilities to match the requirements of their customers and also move up the value chain.
It is worth noting though that the Indian animation industry is highly fragmented and spread across the value chain that mostly provides outsourced services. The excessive dependence on the outsourcing model exposes the Indian industry to higher risk. A high extent of piracy is yet another concern area.
Concerns
Limited operational track record enhances risk: Further, the future growth of the company will be largely dependent on the continued roll-out of IP content. Here once again, it has limited experience as it has recently forayed into production ventures focused on developing its own IP content. This has led to the limited track record of realising revenues from licensing and distribution. Short product lifecycles and frequent introduction of new products only enhances the risks associated with its products.
Geographical concentration and exchange rate risk: Owing to the nature of its business at present (outsourcing), the revenue contributions from the US and European nations for Fiscal 2009 were 42 per cent and 51 per cent respectively. This automatically exposes the company to a higher exchange rate risk.
CONCLUDING NOTES
Though the industry offers good potential, the ability of the company as a dominant player in this segment remains to be tested. With the fragmented nature and large number of players, consolidation remains the key for growth of the industry. For now, as it is still in the nascent stage, high growth rates can be safely assumed. However, the pricing of the issue even seems to have discounted the potential growth and thus the IPO seems fully priced.
While high risk traders can consider applying in the issue, more conservative investors can bide their time to pick the stock at lower levels post-listing.
