Investments In New Content And Hip Hop Will Expand Future Opportunities

Key Takeaways

• Investment in new music content and the Hip Hop sector aims to boost revenue growth and attract the youth market.
  
• The shift to paid streaming models and video content expansion are crucial for revenue growth amid rising competition.
  
• Dependence on live events and increased costs from content investments pressure margins, while a decline in Carvaan revenues negatively affects current earnings.

Catalysts

Operates as an entertainment company in India and internationally.

• The transition of audio streaming platforms from free to paid models is expected to drive long-term revenue growth, as the shutdown of platforms like Wynk may encourage others to follow suit, thus increasing subscription-based revenue.
  
• The strategy of aggressively investing ₹1,000 crores in new music content over the next 3 years is anticipated to boost future revenue streams and market share, leveraging a data-driven approach to maintain a high hit ratio.
  
• The expansion into the Hip Hop music sector, including partnerships with platforms like MTV's Hustle and signing new artists, is poised to tap into the rapidly growing youth segment, which can enhance future revenue and diversify income sources.
  
• The continued growth of Saregama's video content vertical, including short-form content through Pocket Aces and other productions, is expected to contribute to overall earnings with a projected CAGR of 25% over the next 5 years.
  
• The live events business is showing significant growth potential as disposable incomes rise; this high-revenue, high-IRR segment could become a major future revenue and profit driver, despite its current low EBITDA margins.

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 February 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 45.9x on those 2028 earnings, down from 48.2x today. This future PE is lower than the current PE for the IN Entertainment industry at 48.4x.
• 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 15.08%, as per the Simply Wall St company report.

Saregama India Future Earnings Per Share Growth

Risks

• A disproportionate 58% of revenue comes from live events, which are lower margin. This could impact the overall net margins of the company.
  
• The shift from free to paid audio streaming platforms, with only two free options left, may result in short-term revenue loss before industry adjustments increase paid subscriptions, affecting short-term earnings.
  
• Aggressive investment in new content is increasing the cost structure, which could delay the revenue to outpace content charge-offs, impacting profitability in the short term.
  
• Video segment profitability is still negative due to write-offs and might only reach high single-digit EBITDA margins in future periods, affecting net earnings.
  
• The Carvaan product line is experiencing revenue decline, expected to shrink with improved profitability margins later, but currently impacting the revenue negatively.

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 45.9x, assuming you use a discount rate of 15.1%.
  
• Given the current share price of ₹497.35, the analyst price target of ₹596.17 is 16.6% 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.