• NOVEMBER 23, 2000

Gramophone comes clean (Analysts meet)

Gramophone Company, (renamed as Saregama India) held an analysts meet to clarify its future strategy and explain the company’s half-yearly performance. The company has grown revenues at 38%, led primarily by the 43% jump in music cassette volumes. These in turn have been led by the sales of its new release ‘‘Mohabbatein’’ apart from a 26% growth (in value terms) of catalogue sales. (Catalogue sales comprise the sales of older Hindi films and contribute almost 60% of the company’s sales.)

Sales Volume 1HFY00 1HFY01
Music Cassettes 16.2 23.2
CDs 0.68 0.81
Revenues (Rs) 610 840
*in m    

The management also clarified on the recent deal where the company merged a group company RPG Music International with itself. (See Gramophone: The master’s voice). The management argument was that they basically went by the valuation of Price Waterhouse Coopers though they would have liked a higher valuation. Also, they got a 43% stake in the group’s retail chain Music World in return, which can be hived off in the future, if the need be.

A significant change in the business model is the company’s increasing investment in regional music particularly, Tamil film music. The music rights of Tamil films are relatively cheaper (Gramophone paid Rs 12 m for 6 films in the first half as against Rs 75 m for the rights of ‘Mohabbatein’ alone) and the amount has to be paid closer to the film’s release (this helps in easing working capital constraints). Also, the demand for Tamil film music exists in countries such as Malaysia, Singapore and even Japan.

Gramophone Company sells its music under the ‘HMV’ brand name. It has a tie–up with the international major EMI, which holds around 8% 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. The company had a library of music rights of almost 4,500 Hindi movies apart from Tamil, Telegu, and Malayalam movies’ music. Gramophone is now digitising its catalogue that will make it possible for its customers to order custom made CDs either from its site hamaracd.com or the kiosks placed at music shops.

To further enhance its earnings in future, the company has initiated a Voluntary Retirement Scheme (that would cut its employee strength by over 25%), rationalisation of its distribution structure (the company has almost 650 distributors and dealers all over India) and a supply chain initiative (which would save Rs 40 m annually). 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 1,750 m in the current year and an EPS in the range of Rs 13. If one were to exclude the write off of Rs 90 m for the VRS in the current year, the per share earnings amounts to over Rs 21. The current price of Rs 526 implies an earnings multiple of 25 times FY01 operational earnings.

In the next year however, the company has taken up another six films but none of these belong to a big banner. (Each of them however, costs less than a third of what the company paid for its recent big banner releases.) Hence the turnover is more likely to be driven by catalogue sales.

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