New Content Acquisition And YouTube Deal Will Broaden Global Reach

Key Takeaways

• Strategic investment in content acquisition and international deals are anticipated to expand market reach and enhance revenue growth through increased monetization.
  
• Successful catalog monetization, regional releases, and digital subscriptions contribute to sustained revenue growth and robust earnings through diversified music offerings.
  
• Increased content costs and intense competition might strain margins, while reliance on YouTube and uncertain international deals pose revenue and liquidity risks.

Catalysts

Engages in the acquisition and exploitation of music rights in India and internationally.

• Tips Music Limited's strategy to invest 25% to 28% of revenue in new content acquisition is expected to enhance its content library, contributing to future revenue growth through increased market share and monetization of high-quality music.
  
• The extension of the deal with Sony Music Publishing, including YouTube for international publishing, is likely to expand Tips Music's international reach and revenue from global markets, boosting overall earnings.
  
• The anticipated increase in paid music subscriptions on platforms like Spotify and YouTube, driven by platform restrictions and market trends, is expected to enhance digital revenue streams, contributing positively to revenue growth.
  
• The successful monetization of existing catalog music and viral trends in older content are anticipated to sustain and potentially increase revenue margins, as existing content continues to generate significant consumption and earnings.
  
• Tips Music's ongoing deals and strong pipeline for new releases, particularly in regional languages and high-profile films, are strategic catalysts expected to support robust revenue and earnings growth, maintaining the company's growth trajectory.

Tips Music Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tips Music's revenue will grow by 31.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 53.6% today to 51.1% in 3 years time.
• Analysts expect earnings to reach ₹3.6 billion (and earnings per share of ₹28.2) by about May 2028, up from ₹1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.4x on those 2028 earnings, down from 49.5x today. This future PE is greater than the current PE for the IN Entertainment industry at 41.3x.
• Analysts expect the number of shares outstanding to decline by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.81%, as per the Simply Wall St company report.

Tips Music Future Earnings Per Share Growth

Risks

• The increased content cost, evident from a 25% rise in Q4, coupled with a strategic focus on quality over quantity, might strain margins in the short term, potentially affecting PAT growth if the new content fails to achieve expected virality or hits.
  
• The provision for doubtful debts, amounting to ₹2.5 crore due to aged advances and loans, indicates potential issues with credit management and could impact net earnings if such provisions persist.
  
• While international deals like the one with Warner contribute significantly (around 25% of revenue), delays in advance receipts or consumption-based revenue recognition might lead to cash flow timing challenges, affecting liquidity and operating cash flow.
  
• Heavy reliance on YouTube as a significant revenue driver could pose risks, especially if platform policies or algorithm changes occur, potentially impacting revenue stability.
  
• Market competition within the Hindi music segment remains intense, with increasing costs for acquiring quality content possibly leading to higher acquisition costs and impacting net margins if not managed prudently.

Valuation

• The analysts have a consensus price target of ₹818.0 for Tips Music based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹7.0 billion, earnings will come to ₹3.6 billion, and it would be trading on a PE ratio of 44.4x, assuming you use a discount rate of 15.8%.
• Given the current share price of ₹645.5, the analyst price target of ₹818.0 is 21.1% 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.