The Indian equity markets have surged since the formation of the new government in June 2014, and I expect the rally to continue as the government is pushing hard for reforms that will ensure that the country’s GDP growth remains robust in the coming decade. Consumer-related themes are likely to be very attractive over the next decade in India with the country having the best demographics in the world and a high savings rate. This article will discuss one consumer related stock that has strong long-term growth prospects.
Eros International (EROS, Financial) co-produces, acquires and distributes Indian language films in various formats worldwide. In the last seven years, the company’s revenue has grown at a CAGR of 19.8% and the company’s EBITDA has grown at a CAGR of 13.6%. For FY14, the company derived 34.1% of its revenue from television, 20.3% from digital and 45.6% from theatrical.
The first reason to be bullish on Eros International is the point that the company is a well-established brand that is best positioned to benefit from the growing entertainment industry in India. The company has a 43% market share in the U.S. and a 40% market share in the UK. With a leading market share in countries where there is increasing viewership of Indian movies, Eros International is well positioned to gain in the coming years.
The second reason to be bullish on Eros International is India’s demographics. India is a young nation with a median age of just 27 years as compared to 31 for Brazil and 37 for China. Further, with urbanization and relatively strong economic growth, there is a bigger middle class that has increased its discretionary spending over the years. This is positive for a local market with a population of 1.2 billion people. It is expected that the Indian entertainment industry will grow at a CAGR of 14% over the next five years. With Eros International being among the big players in the industry, revenue growth rate of 15% to 25% over the next five years can’t be rule out. This will certainly send the stock higher.
It is also important to mention here that the theatre screen per million populations in India is just 10 as compared to 120 in the United States. This is an indication of the underpenetrated entertainment industry and as theatre screens are opened in tier 2 and tier 3 cities, the revenue growth from movie tickets will surge.
Besides the theatre industry, India’s household penetration of television is also low at 61% as compared to 90% for Brazil and 98% for China. With the Indian television revenue expected to grow at a CAGR of 16% over the next five years, the advertising and subscription based revenue will trigger additional growth for Eros International.
I mentioned earlier that Eros International derives 20.3% of its revenue from digital media and I believe that there is huge untapped potential even in this segment for Eros International. As of 2013, India’s internet penetration was just 17% as compared to 44% for China, 60% for Brazil and 86% for the United States. In the coming years, internet penetration is likely to surge and this will provide strong growth traction to the company’s digital media segment.
In conclusion, Eros International is operating in a country where the entertainment market is vastly underpenetrated. The company has been making the right growth moves and the company also has the advantage of market leadership. In my view, the stock is likely to be an outperformer with a 3-5 year investment horizon. Investors can consider this potential value creator at these levels.
