Eros International Media Ltd Management Discussions

Global Economy

The global economy appears poised for a gradual recovery from the devastating effects of the pandemic and of war in Ukraine. China is rebounding strongly following the reopening of its economy. Supply-chain disruptions are unwinding, while the dislocations to energy and food markets caused by the war are receding. Simultaneously, the massive and synchronous tightening of monetary policy by most central banks should start to yield results, with inflation slowly going down. Although inflation has declined as central banks have raised interest rates and food and energy prices have come down, underlying price pressures are proving sticky, with labour markets tight in a number of economies. Side effects from the fast rise in policy rates are becoming apparent, as banking sector vulnerabilities are coming into focus and fears of contagion have risen across the broader financial sector, including nonbank financial institutions. Policymakers are taking actions to stabilize the banking system. Global growth will bottom out at 2.8% in 2023 before rising modestly to 3.0% in 2024. Global inflation will decrease from 8.7% in 2022 to 7.0% in 2023 and 4.9% in 2024.

Projected growth share of global growth in 2023

Source: IMF, World Economic Outlook, April 2023.

Indian Economy

Indias economy has shown remarkable resilience in the face of global uncertainties, cementing its position as a significant driver of global economic progress. The country has registered GDP of 7.2% in FY2022-23, remaining one of the worlds fastest-growing economies, surpassing the UK to become the fifth-largest economy in the world. This success is partly due to the Governments efforts to enhance transportation infrastructure, logistics, and the overall business ecosystem, which have created a more favorable environment for businesses to operate in and have been instrumental in sustaining Indias economic growth.

To ensure economic stability, the Reserve Bank of India (RBI) has adopted a stable monetary policy stance, considering the declining inflation trajectory, positive macroeconomic factors, and increasing consumer aspirations. As a result, the RBI has decided to keep the repo rate unchanged for the second consecutive time, taking a cautious approach.

The Indian Governments strategic initiatives, including the PM Gati Shakti (National Master Plan), the National Monetisation Plan (NMP), and the Production Linked Incentive (PLI) plan, have played a crucial role in fostering economic growth. Furthermore, there are optimistic prospects for the manufacturing, services, agriculture, and related industries, which, combined with improved business and consumer confidence, are expected to support domestic consumption. Additionally, the accelerated credit expansion is anticipated to further contribute to the overall economic growth in the near term.

Indias economic success has been built on the foundation of a robust private sector and a government committed to creating a favorable business environment while ensuring long-term stability.

Media & Entertainment Industry

The Indian Media & Entertainment ("M&E") sector grew 20% to 2.1 trillion (US$26.2 billion), 10% above its pre-pandemic levels. While television remained the largest segment, digital media cemented its position as a strong number two segment followed by print media. The M&E sector is expected to grow 11.5% in 2023 to reach 2.34 trillion (US$29.2 billion), then grow at a CAGR of 10% to reach 2.83 trillion (US$35.4 billion) by 2025.

The filmed entertainment segment recovered as theatrical releases doubled and reclaimed the fourth position overtaking online gaming. Over 1,600 films were released in 2022, which is 9% higher than 2019 levels. 335 Indian films were released overseas. Gross box Office (GBO) revenues increased almost three times the revenues of 2021 to

105 billion. The 100 billion mark in GBO collections was crossed only the second time in Indian history. There is a large expansion in regional films. Of the 1,623 movies released this year across languages, the highest number of films were released in Telugu (278), Kannada (233), followed by Tamil (288) and Malayalam (199). Only 194 films were released in Hindi. Filmed entertainment recovered to 90% of its pre-pandemic levels. We expect the film segment to continue to grow, driven by theatrical revenues as Hindi movies go mass in their storytelling, incorporate more VFX to enhance the movie-going experience and expand into tier-II and III cities.

As per the FICCI-EY Report, the Filmed Entertainment segment will grow to 228 billion by 2025 driven by higher per capita income, which will expand the cinema audience base to 120 to 150 million, and by offering segmented offerings - classy and massey - for distinct audience sets across markets and price points.

Source: FICCI-EY Media & Entertainment (M&E) Report 2023.

Digital Media Segment

It is estimated that the number of households paying for one or more SVOD services has the potential to reach 100 Million, resulting in a total digital video subscription of approximately 110 Billion by 2025. The subscription revenues are anticipated to grow at a CAGR of 11%, eventually reaching 97 Billion in 2025.

If prices remain at current levels, paid video subscription households can grow to 52 Million. However, if prices are rationalized, this number can reach up to 100 Million, resulting in a total subscription revenue of between 91 Billion and 110 Billion. The growth in the number of subscribing households is also dependent on factors such as growth in per capita income, data pricing, growth of high-quality broadband and the arbitrage between television & OTT pricing.

In the digital media space, the sharing economy is likely to manifest itself in group subscription products for families, friends, neighbours, colleges and corporates. Furthermore, there will be more opportunities for content syndication among telecommunication companies, direct-to-consumer platforms of brands and through various distribution channels such as transactional video-on-demand (TVOD). These opportunities have the potential to generate more than 10 Billion by 2025.

The demand for original content is expected increase from 3,000 hours in 2021 to over 4,000 hours by 2025, supplementing the digital video subscription industry in India for significant growth and expansion going ahead.

Company Overview

Eros International Media Limited (Eros International) is a leading global Company in the Indian filmed and digital Entertainment Industry which co-produces, acquires and distributes Indian language films in multiple formats worldwide. The success is built on the relationships we have cultivated over the past 40 years with leading talent, production companies, exhibitors and other key participants in our industry. Leveraging these relationships, we have aggregated rights to over 2,000 films in our library, including recent and classic titles that span different genres, budgets and languages. We have co-produced/acquired a portfolio of over 130+ new films over the last three completed fiscal years. Film distribution across theatrical, overseas and television and other channels along with library monetization provide us with diversified revenue streams. In addition, Eros International produces and acquires content for Eros Now, parent Eros Media World Plcs, OTT entertainment service. Launched in 2012, Eros Now has digital rights to over 12,000 films, out of which approximately 5,000 films are owned in perpetuity, across Hindi and regional languages from Eros internal library, as well as third-party aggregated content.

Your Companys key asset is a film library of over 2,000 films. In an effort to reach a wide range of audiences, we maintain rights to a diverse portfolio of films spanning various genres, generations and languages. These include rights to films in Hindi and several regional languages, Tamil, Telugu, Kannada, Marathi, Gujarati, Bengali, Malayalam and Punjabi. We have strong operational focus in syndication and monetization of these film and Music Rights as part of our business development and operations.

Post COVID-19, your Company had challenges in completing projects for releasing its films on account of significant cashflow challenges leading to deferment of planned film slate. This impacted the revenue and profitability of the Company during financial year 2022-23, and your Company was forced to evaluate strategic assets sale of its Music library to a third party. The consequent reduction of Bank debt and liquidity in the balances is expected to allow your Company to recommence production on its previously planned film slate.

Your Company is hopeful about sailing through the current situation successfully and coming out on the other end. In order to do this, it is working on innovative ways of earning revenue and strengthening its value proposition, thus re-inventing itself, and further fortifying its position.

The Company has also initiated formulating innovative ways of updating its existing content libraries. Given a rise in demand for content and increasing viewership on OTT platforms, coupled with the limited production of new content, existing library content is likely to become more valuable. Moreover, once normalcy resumes, owing to pent-up demand, the M&E sector may be one of the first sectors of the economy to see a revival, and Eros International is well-prepared with its large existing content library, to take advantage of any digital opportunities that exist, in the meantime.

Financial Overview (Consolidated)

	FY 2022-23	FY 2021-22	YoY Change (in %)
Revenue from Operation	68,063	37,313	82.41
( in lakh)
EBITDA ( in lakh)	(4,386)	6,100	(171.90)
Loss after Tax ( in lakh)	(11,978)	917	(1206.22)
EPS	(12.48)	(0.96)	(1200.00)

Key Ratios* (Amount in Lakh)

	FY 2022-23	FY 2021-22	Change (%)	Reasons
Debtors Turnover	0.59	0.34	73.53	Due to Decrease in trade receivables
Inventory Turnover	Nil	Nil	Nil	NA
Interest Coverage Ratio	(0.62)	1.12	(155.36)	Due to Loss in Current financial year
Current Ratio	1.08	0.89	21.35	Due to increase in trade receivables
Debt Equity Ratio	2.50	2.47	1.21	NA
Operating Profit Margin (in %)	(9.00)	23.27	(138.68)	Due to Increase in expenses in current year
Net Profit Margin (in %)	(0.26)	1.44	118.06	Due to Increase in expenses in current year
Return on Net Worth (in %)	0.68	1.73	(60.69)	Due to Increase in loss in current year

* Computed on Standalone basis.

Strategic Overview

Our strategy is driven by the scale and variety of our content and the global exploitation of that content through diversified channels. Specifically, we intend to pursue the following strategies:

Scaling up productions, co-productions and acquisitions to augment our film library and original digital content

Expand our regional content offerings

Effectively monetize our strong film library across various platforms

Create compelling content for our Eros Now, our parent Eros Media World Plcs OTT entertainment service

Capitalize on the highly attractive market opportunity driven by secular tailwinds

Risk Management

The Risk Management framework includes Risk Management Policy and identification of risks at Company Level, Strategic Level and Operational level. The risk mitigation procedures associated with the business and prioritization of risks include scanning the business environment and having periodic risk review.

The risks associated with the Companys businesses are broadly classified in following categories:

Environmental Risk: Due to the adverse impact of COVID-19, the Company may suffer losses but it can restrict the losses as COVID-19 has been controlled.

Economic Risk: Due to adverse geopolitical situations or downturn which may negatively impact the Companys organizational objectives.

Regulatory Risk: Due to government regulations or any other statutory violations and amendments, which may lead to litigations and loss of reputation.

Operational Risk: Ability to attract and retain clients and manage a dynamic content distribution eco-system in view of rapid changes in audience preferences.

Internal Control Systems and their Adequacy

The Company has adequate internal controls required in the nature of its business and operations. The company can safeguard its assets and financial transactions with adequate checks and balances, while adhering to accounting policies. Systems are reviewed and improved regularly. With the Companys budgetary control system, it monitors revenue and expenditure with actual vs. approved budget. The Company has engaged an independent firm of Chartered Accountants as its Internal Auditor which monitors and assesses the adequacy and effectiveness of the Internal Controls and Systems. Deviations from standard operating procedures are periodically reviewed and compliances are ensured.

The summary of the internal audit observations and status of implementation are submitted to the Audit Committee every quarter for its review and concerns, if any, are reported to the Board. The statutory auditors review the efficacy and adequacy of the internal audit function as a part of their audit procedures and has full access to all the reports and findings of the internal audit.

Human Resource

The Company believes that it has an excellent talent pool. This talent pool is the key to our sustained performance and improvement initiatives. The Company has a diverse employee base with technical knowledge and functional expertise. This helps to deliver the stipulated target. Performance is valued as an essential tool to accomplish vision, mission and objectives. The Companys Human Capital headcount stands at 122 as on 31 March, 2023.

Outlook

The Media and Entertainment industry will continue to adjust business models to cater to a paradigm change in consumer preferences through deep customer understanding and strong engagement. The sector will witness integration of all four formats viz video, experiential, textual and audio to offer differentiated products in an omnichannel driven business model. The industry is also likely to witness consolidation and mergers, especially with the mid and low companies, to maintain a going concern and achieve scale. Operating priorities will be guided by leveraging the end customer data to reveal powerful insights, bringing efficiency in customer acquisition costs through precision monitoring and reducing the turnaround time for new product development. The M&E industry will have to leverage the opportunities in regional markets, growth in digital infrastructure and monetization strategies by investing in content, marketing and technology.

The pandemic has made the Company re-strategize operational and legal aspects of the business, such as project timelines, production costs and schedules. The Company has a large content library, of its own as well as on its group OTT platform Eros Now, and with the rise in new content consumption patterns, its existing content is becoming more valuable.

We expect the resumption of normalcy to be marked by the recovery of the sector and provide all the players in the M&E space, across mediums and segments, a much-needed boost and the Company is well prepared with its existing huge content library to exploit any and all digital opportunities that come its way in the meantime.

Cautionary Statements

Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be forward-looking statements within the meaning of applicable securities, laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could influence the Companys operations include economic developments in India or globally, demand and supply conditions in the industry, changes in Government regulations, tax laws, litigations, employee relations and others.