Eros International Media Ltd Management Discussions.

The Indian economy has a promising outlook

The calendar year 2017 was a good year for the Indian economy. Retail inflation was the lowest in almost four decades, the rupee strengthened against the US dollar for the first time in seven years and several reforms such as the Goods and Services Tax (GST), recapitalization of banks and the Insolvency and Bankruptcy Code were implemented.

In November 2017, backed by the potential of the reforms to strengthen the economy, Moodys Investor Service upgraded Indias sovereign credit ratings from Baa3 to Baa2 and changed the outlook from stable to positive. Going forward, International Monetary Fund has projected that India will be the fastest growing economy in the world. Driven by strong tailwinds of private consumption growth, the media and entertainment industry is expected to grow well in the forthcoming years.

Real GDP growth (% )

The Media and Entertainment sector grew to Rs 1.5 trillion

The Indian economy is growing and the growth in Media and Entertainment sector is a reflection of this. Favourable demographics, a rise in consumer income, an ability to consume entertainment on multiple platforms and ‘on the go has created a huge propensity for the growth of Media and Entertainment industry in the country.

As per FICCI-EY Report 2018 edition, the Indian M&E sector reached Rs 1.5 trillion (US$ 22.7 billion) in 2017, a growth of almost 13% over 2016. With its current trajectory, it is expected to cross Rs 2 trillion (US$ 31 billion) by 2020, at a CAGR of 11.6%.

All figures are gross of taxes (Rs in billion)

Segment CY 2016 CY 2017 CY 2018E CY 2020E CAGR 2016-20
Filmed Entertainment 122 156 166 192 11.9%
Television 594 660 734 862 9.8%
Print 296 303 331 369 5.7%
Digital Media 92 119 151 224 24.9%
Animation and VFX 54 67 80 114 20.4%
Live Events 56 65 77 109 18.0%
Online gaming 26 30 40 68 27.5%
Out of Home media 32 34 37 43 7.7%
Radio 24 26 28 34 8.6%
Music 12 13 14 18 10.6%
Total 1,308 1,473 1,660 2,032 11.6%

Indian Film Industry grew by 27% in CY2017

The robust growth was on the back of box office growth - both domestic and international - coupled with increased revenues from sale of satellite and digital rights. All sub-segments, with the exception of home video grew and the film segment reached Rs 156 billion in 2017. The overseas box office growth was driven by the surging popularity of the Bollywood films in the China market.

DOMESTIC THEATRICALS

Content Consumption trends

Hindi films comprise the majority component of the Indian film segment. They contribute almost 40% of the domestic box office collections annually, despite comprising only 17% of the films released. Films in 29 other Indian languages account for approximately 75% of the films released and they contribute approximately 50% to the annual domestic box office collections. Hollywood and international films comprise the balance.

Revenues 2016 2017 2018E 2020E
Domestic theatricals 85.6 96.3 103.0 118.0
Overseas theatricals 8.5 25.0 25.0 28.0
Broadcast rights 16.0 19.0 20.0 22.0
Digital /OTT rights 6.0 8.5 10.0 14.5
In-cinema advertising 5.9 6.4 7.5 9.0
Home Video 0.4 0.3 0.2 0.2
Total 122.4 155.5 165.7 191.7

(Gross of taxes,Rs billion)

Relatable and niche content driving success at box office

Trends of 2017 re-iterated that content was king and it was the story, above everything else, that made a film successful. Save a few exceptions, in 2017, cohesive storytelling took precedence over mindless cinema. From Shubh Mangal Savdhan to Newton, content-backed cinema triumphed over ‘formula films displaying the changing tastes and growing maturity of the audiences as they embrace a wide variety of themes and experiences. The year also strengthened the trend of filmmakers shifting locations to the hinterland to contextualize their stories in Tier-II and Tier-III towns, which added depth and familiarity to the script and characters. This trend reflected the lives of the majority of middle-class audiences who unarguably enjoyed, but could never really connect to, the glitz and glamour of big cities. The year also saw success of cinema not driven solely by stars but by content delivered by competent actors.

Regional

One major trend in the regional cinema has been the increased consumption of dubbed films. The spectacular success of Baahubali 2: The Conclusion, a Tamil-Telugu bilingual dubbed in Hindi, took regional cinema to new heights in 2017. Tamil and Telugu cinema remains the mainstay of the regional cinema. The segment also benefitted from remake rights value as well as increased consumption of its dubbed films on Hindi film channels as well in the cinemas. 2017 was a very successful year for the Malayalam films with the satellite revenues being a healthy contributor. Bengali and Marathi films that are known for their content also have shown a potential for appealing to wider audiences with a Bengali film, Amazon Obhijaan setting a trend by being dubbed in five languages; Hindi, Tamil, Telugu, Oriya, and Assamese. Going one step forward, Eros International Media is leading this trend with an elephant film that is going to be shot simultaneously in the 3 largest film languages; Hindi, Telugu and Tamil. With the production and print and advertising costs being relatively low, the Regional cinema offers an attractive ROI opportunity for film studios that have developed trustworthy relationships and capabilities in regional cinema.

India is an under-screened market Screens per million of population

Despite producing the most number of films in a year, India stands as one of the most highly underpenetrated markets among major countries with 8 screens per million of population. This is primarily due to lack of penetration of cinema exhibition players in Tier-II, Tier-Ill and Tier-IV markets, hence leaving a large market with limited screen presence. However, the next wave of growth at multiplexes is expected to come by means of organic expansion in semi-urban areas. This is after opportunities for consolidation that led to a series of acquisitions and consolidation of screen counts in the high spending urban markets are mostly exhausted and therefore, deeper penetration in the semi-urban markets will be witnessed in the coming years.

Number of screens for top 4 multiplex chains in 2017

Overseas theatricals segment growing strongly

Overseas theatricals contributed approximately 16% to the overall segments revenue in 2017 and have emerged as a fast growing revenue stream for film studios. Apart from the growing international appeal of the Indian films globally, the main reason for this is the rising popularity of Bollywood content in the China market.

The Aamir Khan-starring film Dangal became the highest grossing non-Hollywood film in China ever with earnings amounting to US$ 169 million. Similarly, Bajrangi Bhaijaan which released almost 2 years after its release in India grossed an impressive US$ 50 million which was almost in line with its India box office numbers. This is noteworthy as China wasnt considered part of the ‘traditional foreign market for Indian films-which includes regions such as the North America, United Kingdom, Middle East, South East Asia which have a strong presence of the South Asian diaspora. Overall, leading Studios such as Eros International now release content in over 50 countries globally and in over 27 dubbed or sub-titled languages pointing to the growing global appeal of India content. Even as Indian economy is getting better integrated across the world, Indian content is attracting crossover audiences in markets such as Germany, Japan, South America and many others which have a limited presence of the diaspora audience.

TV viewing households grew to 183 million

Of the estimated 286 million households in India, TV penetration reached 64% taking the total number of TV viewing household to 183 million in 2017, which is a 3.5% growth over 2016. This accounted for approximately 780 million viewers. 83% of the total TV households were paying households.

2016 2017
Cable 100.5 98.5
DTH 49 52
HITS 0.5 1.5
Free TV 26 31
Total 176 183

(Television households in million)

More than a third of the total television viewership is generated by films. Film channels and GECs are the main buyers for Broadcast rights. Broadcast rights grew to Rs 19 billion in 2017 from Rs 16 billion in 2016, a growth rate of 18.7%.

Film content has also helped to grow the advertising revenues for major broadcasters due to the launch of Free dish channels namely; Star Utsav Movies, Zee Anmol Cinema, Sony Wah and Viacoms Cineplex. The pricing of the TV rights have remained firm as these channels use film content to penetrate into the rural households where films enjoy a very wide viewership and star appeal.

Other Film segment trends

1. More films turned profitable

Of the leading 50 Hindi films, the number of films which were able to record a positive return of more than 100% over their investment increased from 8 in 2016 to 14 in 2017. However, a few films with big stars and big budgets failed to generate the profits despite being among the top grossers for the year, suggesting good box office performance is not a guarantee for returns. On the other hand, many middle and smaller budget films delivered good profitability.

2. Digital and events increased their importance in the marketing mix

A films promotion budget is highest on television but is growing significantly in digital and to some extent on print and radio with activation and outdoor comprising of the balance. Digital and social media is playing a growing role due to its wide outreach amongst the target audiences and cost effectiveness, making a departure from a single-event launch or press interaction to an entire campaign spanning weeks or months. Core innovations in film marketing today include word of mouth screenings, co-branding, digital alliances, in-film integrations, promotional events with cast and crew involvement, social media, trailer launches in cinemas apart from the mass media usage.

3. Collaborations with foreign studios are increasing

India is witnessing a rise in collaborations between Indian production houses and foreign studios. Eros International has been leading this development with Chinas Huaxia Film Distribution Co Ltd and Peacock Mountain Culture & Media to co-produce Sino – Indian films. These include Kabir Khans travel drama The Zoo Keeper and Siddharth Anands cross-cultural romantic comedy Love in Beijing which are in development and pre-production and which require local approval from the China film bodies to qualify as local films.

4. Small-budget different themed films are going mainstream

The past few years witnessed many small budget, niche films with high-quality scripts made a mark in with hits Shubh Mangal Savdhaan, Newton, Neerja and Hindi Medium posting significant revenues despite low to modest star appeal.

Music

The size of the music industry based on music labels revenues was approximately Rs 9.2 billion in 2017. Sale of digital music accounts for about 65% of the overall music sales in India. Further, in the music industry, songs related to movies accounts for about 80% of the music revenues.

Digital rights are getting more valuable

The advent of large OTT platforms in India such as Netflix, Amazon, Jio Cinema, etc, apart from OTT offerings of various telecom companies and broadcasters, has significantly increased the demand for films digital rights. This has increased the library value of players such as Eros Now who has the largest Indian language movie content library worldwide with over 11,000 digital titles, out of which approximately 5,000 films are owned in perpetuity. We expect this value to continue to be high in the near future, as demand for content continues to rise on the back of growing smart phone and broadband user base.

The rapid adoption of connected devices, especially smartphones and tablets, is instrumental in media consumption shifting beyond traditional media formats such as broadcast and cable TV toward digital mediums with the time availability for media consumption sky rocketing due to the ability to consume it ‘on the go.

Subscriber base of mobile users increased

As per Telecom Regulatory Authority of India (TRAI) there were over 1.2 billion wireless subscribers in India at the end of February 2018. The number of wireless internet users in India is likely to reach 829 million by 2021. The adoption of 4G is gradually increasing and now 3G and 4G constitute over 75% of the overall wireless internet user base. Initiatives such as broadband rollout and public Wi-Fi as part of the governments Digital India campaign and the promotion of 4G data packs by leading telecoms will only help boost the quality of digital infrastructure in India.

India has the second largest online video audience

At 250 million, India has the second largest online audience (behind China) which is expected to reach ~500 million by 2020, a 2x growth driven by rapidly increasing mobile penetration, increasing Internet speeds, advent of 4G and falling data charges.

Low-cost smartphone options increased

One of the key events of 2017 was the launch of low-cost smartphones. Jio launched itsRs 1,500 smartphone, and Airtel announced a smartphone priced around Rs 2,000-2,500.These devices come with bundled data plans, as well as Wi-Fi connectivity, and will enable deeper penetration of internet services and digital media.

COMPANY OVERVIEW

Eros International Media Limited (Eros International) is a leading global Company in the Indian filmed Entertainment Industry which co-produces, acquires and distributes Indian language films in multiple formats worldwide. Our success is built on the relationships we have cultivated over the past 40 years with leading talent, production companies, exhibitors and other key participants in our industry. Leveraging these relationships, we have aggregated rights to over 2,000 films in our library, including recent and classic titles that span different genres, budgets and languages, and we have distributed a portfolio of over 125+ new films over the last three completed fiscal years. Film distribution across theatrical, overseas and television and others channels along with library monetization provide us with diversified revenue streams. Furthermore, Eros International Media Limited and Reliance Industries Limited have partnered in India to jointly produce and consolidate content from across India. The parties will equally invest up to Rs 10 billion to produce and acquire Indian films and digital originals across all languages.

The Group has largest distribution network for Indian films worldwide. The distribution network spans over 50 countries, with offices in India, the UK, North America, United Arab Emirates, Australia, Fiji, Isle of Man and Singapore.

STRATEGIC OVERVIEW

Scaling up productions and co-productions including developing our own intellectual properties in-house and through our Joint venture company, Colour Yellow Productions Pictures, to release high quality content globally and augment our content library.

In partnership with Reliance Industries Limited, jointly produce and consolidate content from across India. The parties will equally invest up to Rs 10 billion to produce and acquire Indian films and digital originals across all languages.

Creation of never seen before digital content for Eros Now, our parent Eros International Plcs OTT digital entertainment service and evolve it as the preferred choice for online entertainment by consumers across digital platforms.

Expand our regional language content offerings to include films in more regional languages.

Foray into international co-productions with promising markets such as China, Russia and Turkey

Broaden the avenues for monetization of the Company content through existing and evolving revenue streams.

HUMAN RESOURCES

Within our strategic roadmap, we had 5 distinct themes that guided our actions.

Position Human Resources to support senior leadership in executing on the priorities for the organization.

Enhancing HR systems & process solutions to serve our employees better while ensuring accountability through policy and reporting. This through the introduction of a newly launched HRMS (Human Resource Management System).

Maximizing efficiencies and effectiveness in business through process standardization. Our quest to becoming

Employers of choice with our ability to retain, motivate, develop and continue to attract the best talent market has to offer through a stringent promotion, Internal recruitment and job rotation process. Our reward and recognition program forms a core part of the exercise. In order to maintain market leaders position of being an attractive employer, the company has developed global guidelines on diversity, equal rights and against discrimination.

Employee relations & listening post through an open door policy giving every employee the right and opportunity to discuss any work related issues directly with the management. In order for us to do so, we have aligned the workplace layout and seating to foster the said culture.

CAUTIONARY STATEMENTS

Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be ‘forward-looking statements within the meaning of applicable securities, laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could influence the Companys operations include economic developments within the country, demand and supply conditions in the industry, input prices, changes in Government regulations, tax laws and other factors such as litigation and industrial relations.