In fact, the company has filed an amended F-1 Registration Statement with the US listing authorities ahead of the IPO. It is a 199-page document and one I have been pouring over. That's because I have been following Eros for quite some time, having first highlighted the investment case when the shares were trading at 247p ('Movie time', 22 February 2011); reiterated the advice in April ahead of the company's initial public offering (IPO) on the NYSE when the shares were at 286.5p ('Bolly good show', 23 April 2012); and remained a frustrated buyer, at 200p, six weeks later after Eros pulled its float due to the market turmoil ('Unloved and undervalued', 12 June 2012).
I then advised buying in mid-November last year when the shares were hovering around the 200p level with the 14-day relative strength index (RSI) on the floor and close to its lowest level since the end of the last bear market ('A problem to solve', 19 November 2012). My last update was in January when the shares were priced at 243p ('A share firmly in the picture', 15 January 2013). At the current price of 275p, we are showing modest profits on our shareholdings, albeit after a turbulent ride.
However, if the NYSE listing does go ahead later this year as is clearly the plan, then expect Eros's share price to play catch up. And the senior management are definitely incentivised to get this one away as Jyoti Deshpande, chief executive and managing director of Eros, has just entered into a new employment agreement pursuant to which she is entitled to receive a 4 per cent stake in the company's share capital on or before 20 September 2013, of which an equal percentage of shares will be locked up for one, two and three years. In addition, Ms. Deshpande is entitled to receive "A ordinary shares" of Eros International plc valued at $2m within seven days of the company's shares being admitted to trading on the NYSE. With an incentive like that on offer, I would be gobsmacked if the IPO doesn't take place this time.
And that should be good news for us, as there is obvious upside from buying the shares now in order to get in before Eros transfers its listing from London's Alternative Investment Market to the NYSE. That's because a listing will give Eros a strategic advantage, access to additional equity capital and liquidity, as well as trading with a more comparable peer group with broader analyst coverage.
Attractive valuation
In my view, the potential upside from a US listing is not yet in the price even after factoring in the 11 per cent appreciation in the US dollar against the Indian rupee since Eros reported its full-year results on 20 June.
Post those results, analyst Patrick Yau at broking house Peel Hunt expected Eros to grow revenues from $215m to $232m in the 12 months to March 2014. And reflecting an improvement in the operating margin, underlying EPS was forecast to rise from 22.9¢ to 39.9¢. By my financial modelling, the 11 per cent appreciation in the US dollar against the rupee in the past 11 weeks will have wiped off around 7 per cent of those EPS estimates. Still, at around 37¢, or 24p a share, Eros is hardly being highly valued on a forward PE ratio of 11.5.
I think that US investors would find that a very enticing valuation when Eros re-launches the US listing process since the company is currently only being valued on around 9.4 times this year's cash profits (after factoring in the recent fall in the rupee), once you factor in net debt on the balance sheet to calculate the company's enterprise value (market value plus debt). This compares favourably with US content providers.
Game changing joint venture
I also feel that US investors will be attracted by Eros's game changing joint venture with US premium network operator HBO which, in my view, significantly increases the appeal of the company's shares to US fund managers.
This landmark agreement not only brings the best of Hollywood and Bollywood together, but means that Eros is ideally placed to tap into the rapid growth forecast in the digital pay-tv (direct-to-home satellite and cable) markets in India. In fact, driven by the growth in the middle classes, who spend far more on entertainment, analysts at KPMG predict digital pay-tv audiences in India will rocket from around 65m this year to 161m by 2016.
So, in order to capitalise on this opportunity, earlier this year the company launched two new premium advertising-free movie channels, HBO DEFINED and HBO HITS, to bring digital-only, advertising-free film and TV content channels to the growing pay-TV market in India. The channels feature Indian movie content in a new premium movie window shortly after its theatrical release as well as all film content from Warner Brothers and Paramount. These channels are co-branded and revenues are based on a share of subscription fees from carrying networks.
Previously, both HBO Asia (a joint venture between Time Warner and Paramount) and Eros provided movies to network operators in India in the pay-TV window, which is between three and 12 months after the theatrical release (Hollywood movies tend to be longer). Media analyst Patrick Yau at broking house Peel Hunt has pointed out that "the new venture creates a window that starts immediately for Indian film content (US movies will follow later) following the theatrical release in the window before existing satellite broadcast. As a result, this is the first opportunity for Indian audiences to see any Indian film on TV after its theatrical debut and will be a key part of the channels' marketing".
In other words, by shortening the lead in times for release of movies to the pay-tv market, the joint venture has a massive marketing pull over other players to attract customers willing to pay to view films at a much earlier date than was previously possible. And the financial rewards from this joint venture with HBO Asia could be massive as Mr Yau calculates that net profits could ramp up from $3m on a net subscriber base of 800,000 in the financial year to March 2014, to $16.5m the year after (net subscriber base of 2.2m), and $43.3m in the year to March 2016 assuming net subscribers of 3.6m out of a total pay-tv market of 169m in India that year.
It's worth noting, too, that Eros has a free ride here as there are no ongoing costs for the company since HBO Asia and Turner International India (also owned by Tim Warner) will run the day-to-day management of the channels. The contribution of Eros to the joint venture is in providing a quota of new movies and library titles as well as marketing and local expertise.
Catalysts for a rerating
In my opinion, it's the scale of the potential upside from this HBO Asia joint venture that will be of keen interest to US fund managers when Eros starts its IPO roadshow ahead of a listing on the New York Stock Exchange.
True, we are awaiting an announcement on when that will happen, but frankly I don't see much point waiting for the official pricing and size of the fundraising to be announced now that Eros has filed an amended F-1 Registration Statement with the US listing authorities.
I still believe that an earnings multiple around 15 times current year earnings estimates is fair value for the company, implying Eros' equity is worth upto 350p a share. Priced on a bid offer spread of 270p to 280p, I rate Eros shares a trading buy and have an end of year target price of 330p. Please note, as a result of the US listing, the Aim-traded shares of UK shareholders will be exchanged for US shares in the NYSE-listed company, details of which will be released in due course.
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