Expansion Into Live Events And New Content Will Support Future Success

Key Takeaways

• Transition from free to paid streaming may boost revenue as remaining users shift to paid subscriptions.
  
• Strategic content diversification into new music trends and international collaborations is set to drive revenue growth by engaging younger demographics.
  
• Aggressive investment in new content and markets, alongside challenges in revenue growth, may strain Saregama's margins and impact long-term profitability.

Catalysts

Operates as an entertainment company in India and internationally.

• Saregama India's transition from free to paid audio streaming platforms is expected to improve long-term revenue as the closure of free services motivates remaining users to move towards paid subscriptions.
  
• The aggressive investment in new content, including global hits like Stree 2 and diverse regional content, is anticipated to significantly boost revenue over the next 3 to 4 years, once the initial step-function increase in content expenses stabilizes to a linear growth.
  
• The growth in video content consumption, driven by the explosion of smartphones and cheap data, is projected to contribute high single-digit EBITDA margins with an expected 25% CAGR over the next five years, positively impacting earnings.
  
• Expansion into the live events business, with successful tours like Diljit Dosanjh's Dil-Luminati Tour, positions the company to capitalize on growing discretionary spending on experiential entertainment, potentially driving higher IRR and supporting revenue growth.
  
• The strategic diversification of content, including forays into hip-hop and international collaborations, alongside existing catalog marketing, is expected to support revenue by tapping into younger demographics and emerging music trends.

Saregama India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saregama India's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.6% today to 23.9% in 3 years time.
• Analysts expect earnings to reach ₹3.8 billion (and earnings per share of ₹19.68) by about March 2028, up from ₹2.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.0x on those 2028 earnings, down from 46.5x today. This future PE is lower than the current PE for the IN Entertainment industry at 47.1x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.21%, as per the Simply Wall St company report.

Saregama India Future Earnings Per Share Growth

Risks

• A significant portion (58%) of Saregama's revenue this quarter came from live events, a lower margin business, impacting the overall EBITDA which decreased to 21%, potentially affecting net margins and earnings.
  
• With Airtel Wynk shutting down, there is short-term pain expected due to the immediate loss of minimum guarantees from this and other free platforms that have ceased operations, which could impact revenue growth temporarily.
  
• The ongoing aggressive investment strategy in new content could continue to pressure net margins, as the initial write-off costs may exceed incremental revenue growth in the short term, impacting earnings.
  
• The entry into new markets such as Hip Hop and the massive scale of investment (₹1,000 crores) planned for new music content can result in unexpected execution risks, which might affect future profitability if not successfully monetized.
  
• The video business is still in early stages and remains unprofitable, showing negative EBIT; without significant improvement, this could drag overall earnings and impact company-wide margins.

Valuation

• The analysts have a consensus price target of ₹596.167 for Saregama India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹640.0, and the most bearish reporting a price target of just ₹512.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹15.9 billion, earnings will come to ₹3.8 billion, and it would be trading on a PE ratio of 46.0x, assuming you use a discount rate of 15.2%.
  
• Given the current share price of ₹479.85, the analyst price target of ₹596.17 is 19.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.