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Gramophone: Getting back into rhythm

Sep 12, 2000

The stock price of Gramophone Company has been through a roller coaster in the current year. After having touched a high of Rs 2316 (on March 6, 2000), the stock came off to Rs 440 in May, 2000. It currently quotes at Rs 720. Gramophone Company sells its music under the HMV brand name. It has a tie–up with the international major EMI, which holds around 9% of the company’s Rs 93.4 million equity. The $290 m (approx. Rs 14 bn) domestic music industry has been traditionally dominated by Gramophone Company via its HMV lable. However, the passing of long play records and the introduction of the cheaper music cassettes in the eighties saw Gramophone’s monopoly getting eroded from newer entrants such as T–Series, Venus, Tips and Magnasound.

With the growth in music channels on television and the boom in cassette players, Hindi film music made a grand comeback in the nineties. Gramophone, which had a presence in the Indian market for over a century and practically had a monopoly for over 50 years grasped the opportunity.

The company had a library of music rights of almost 4500 Hindi movies apart from Tamil, Telegu, Malayalam movies’ music, which it made full use of. (Music companies hold the copyright for the music rights they buy for 60 years and catalogue sales yield almost 30–35% in revenues every year. Gramophone infact gets almost 60% of its sales from them.)

The RPG group’s relationships with the top Hindi film producers helped the company in bagging music rights of the top Hindi movies. (Hindi film music still accounts for almost 70% of the music sold in the country.) For example the company bagged the rights of Rakesh Roshan’s ‘Kaho Na Pyar Hai’ for which it paid Rs 17.5 m. The movie became a super hit and the company sold almost Rs 500 m worth of music cassettes and CDs. During the last quarter the company has bagged the rights of Yash Chopra’s ‘Mohabbatein’ apart from the exclusive rights of six forthcoming A. R. Rahman releases.

The company is now digitising its catalogue that will make it possible for its customers to order custom made CDs either from its site or the kiosks placed at music shops. (The RPG group also has set up Music World stores apart from stores such as ‘Groove’ and ‘Planet M’ in Mumbai which distribute Gramophone’s products, though not exclusively.) Besides, it is also exploring tie–ups with other websites to enhance its presence on the net.

A VRS (that would cut its employee strength by over 25%), rationalisation of its distribution structure and a supply chain initiative (which would save Rs 40 m annually) would further enhance earnings in the future. Besides, the company is also building Saregama as a new brand, just in case EMI refuses to renew its brand franchise after 25 years.

Gramophone can be expected to report a turnover in the range of Rs 1550 m in the current year and an earnings in the range of Rs 17. (One must keep in mind the fact that the company writes of the cost of buying music rights upfront while the revenues from those would accrue in the form of catalogue sales in the future.)

The current price of Rs 720 implies an earning multiple of over 40 times. However, it is the value of the company’s catalogue, which is expected to drive valuations in the future.

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