Saregama India

New business ventures drag margins

June 16, 2008 „ Results: Saregama India (SIL) reported subdued Q4FY08 results with

Q4FY08 Result Update

consolidated revenue of Rs393m, growing by 37.1% YoY. Despite higher
contribution from non-physical music sales, losses in the movie segment
Rating Outperformer resulted in subdued EBITDA margin of a meagre 4.9% for the quarter.
Price Rs101 Consequently, net profits declined by 26.4% YoY to Rs32m.
Target Price Rs186 Consolidated revenue for FY08 stood flat at Rs1,423m (0.6% YoY decline).
Implied Upside 84.2% Op. margin contracted by 417bps YoY to 5.2%. Contribution from the high
margin non-physical music business increased from 29% in FY07 to 41% in
Sensex 15,190
FY08. However, new initiatives like the movie business has proved to be
(Prices as on June 13, 2008)
loss making (Rs54m loss) and responsible for dragging the overall
company margins. Consequently, PAT in FY08 declined by 41% to Rs85m.

Trading Data
„ Music releases: SIL didn't have any major music (film) releases; rather it
had only one non-film music release - Classically Mild by Sonu Nigam.
Market Cap. (Rs bn) 1.5
Shares o/s (m) 14.7 „ New business ventures drag margins: For the quarter under review, the
music segment reported EBIT margin of 23%; however, the new business
Free Float 46.9%
ventures (films/TV serials) reported an op. loss of Rs24m. Consequently,
3M Avg. Daily Vol (‘000) 21.9 operating profit margin for the quarter stood at a meagre 4.9%.
3M Avg. Daily Value (Rs m) 2.7
„ Outlook & valuation: SIL’s has seen an increase in contribution from
digital mode of content; however, declining physical sales and piracy
issues continue to be worrying factors. Again, some of the new initiatives
– films and TV serials – have failed to deliver to their true potential, and
Major Shareholders has been a drag to the overall profitability of the company. Over the
Promoters 53.1% past quarter the scrip has considerably underperformed market returns;
Foreign 12.6% at the current market cap we see immense strategic value for its
repertoire of 300,000 songs. At the CMP of Rs101, SIL trades at 12.1x
Domestic Inst. 0.9%
FY09E and 8.1x FY10E earning estimates. We maintain Outperformer
Public & Others 33.4%
rating on the stock.
Key financials (Y/e March) FY07 FY08 FY09E FY10E
Revenue (Rs m) 1,415 1,423 1,607 2,327
Growth (%) 11.8 0.5 17.6 44.8
Stock Performance
EBITDA (Rs m) 133 74 144 275
(%) 1M 6M 12M PAT (Rs m) 134 82 122 182
Absolute (16.4) (66.6) (62.9) EPS (Rs) 9.1 5.6 8.3 12.4
Growth (%) (57.7) 111.9 (38.6) 49.0
Relative (5.5) (44.2) (72.6)
Net DPS (Rs) — — — —

Source: Company Data; PL Research

Price Performance (RIC: SARE.BO, BB: GCOI IN) Profitability & valuation FY07 FY08 FY09E FY10E
(Rs) EBITDA margin (%) 9.4 5.2 8.9 11.8
390 RoE (%) 16.3 8.9 11.9 15.4
340
RoCE (%) 15.8 9.7 11.4 14.6
EV / sales (x) 0.7 0.8 0.7 0.4
290
EV / EBITDA (x) 6.9 15.1 7.6 3.4
240
PE (x) 11.1 18.0 12.1 8.1
190 P / BV (x) 1.7 1.5 1.4 1.2
140 Net dividend yield (%) — — — —
90 Source: Company Data; PL Research
Apr-08
Feb-08
Jun-07

Aug-07

Dec-07
Oct-07

Jun-08

Mihir M Shah
MihirMShah@PLIndia.com
Source: Bloomberg +91-22-6632 2232
 Saregama India

Q4FY08 result overview (Rs m)

Y/e March Q4FY08 Q4FY07 YoY gr. (%) Q3FY08 FY07 FY08 YoY gr. (%)
Net sales 393 286 37.1 290 1,415 1,423 0.5
Expenditure
Direct costs 109 56 94.4 87 328 371 13.1
% of sales 27.6 19.5 30.5 23 26.0
Personnel costs 59 61 (3.6) 58 203 235 15.7
% of sales 15.0 21.4 20.3 14 16.5
Other expenses 206 146 41.0 129 751 743 (1.1)
% of sales 52.4 51.0 45.0 53 52.2
Total expenditure 373 263 41.9 274 1,283 1,349 5.2
% of Sales 95.1 91.9 95.8 91 94.8
Operating profit 19 23 (17.2) 16 133 74 (44.1)
% of sales 4.9 8.1 5.5 9 5.2
Depreciation 8 8 7.8 8 42 40 (4.7)
Other income 32 35 (9.5) 13 72 85 18.8
PBIT 43 50 (15.7) 21 162 119 (26.6)
Interest 7 1 371.4 6 6 20 235.0
PBT 36 49 (26.7) 15 156 99 (36.6)
Tax 4 6 (29.5) 2 23 14 (36.4)
ETR (%) 11.4 11.9 10.0 14 14.4
PAT before MI 32 43 (26.4) 14 134 85 (36.6)
Minority interest - - - - 3
PAT after MI 32 43 (26.4) 14 134 82 (38.6)

June 16, 2008 2

 Saregama India

Prabhudas Lilladher Pvt. Ltd.

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Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

PL’s Recommendation Nomenclature

BUY : > 15% Outperformance to BSE Sensex Outperformer (OP) : 5 to 15% Outperformance to Sensex
Market Performer (MP) : -5 to 5% of Sensex Movement Underperformer (UP) : -5 to -15% of Underperformace to Sensex
Sell : <-15% Relative to Sensex
Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

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June 16, 2008 3