At first glance, there seems to be no similarity between the science based pharmaceuticals industry and the fine arts based music industry. Surprisingly, there is one characteristic that makes their business model eerily similar viz intellectual property rights (IPR). Companies of both these industries enjoy tremendous protection from competition due to their invaluable and inviolable IPR.
Saregama (erstwhile HMV, erstwhile Gramophone Company of India), belonging to the RPG Group, is amongst the largest music companies in India with IPR of 150K+ songs, 70 films & web series, 6K+ hours of television content. Its CEO is Vikram Mehra, who was part of the team that launched the hugely popular car Indica and DTH company Tata Sky.
Whenever a title owned by Saregama is played anywhere, be it on YouTube or OTT platforms (like Gaana, Saavn, Spotify) or in the background of any movie or is used in an ad jingle, etc. Saregama’s cash register also jingles through the share of advertisement revenue or subscription charges of that channel.
With smartphone proliferation, internet penetration/affordability and lower piracy, in five years between FY2018 and FY2023, Saregama’s revenues went up 2x to 737 cr, Ebitda went up 6x to 221 cr and PAT went up 6.6x to 185 cr. Reflecting this buoyancy, its share price too went up almost 9x to a peak of around Rs 500 in this period.
However, since last few quarters, its growth has slowed down and its stock price has also slipped by 33% to around Rs 335 levels because of the following reasons:-
- Saregama is the king of old content in India which is its strength as well as its biggest weakness. Old music clicks with the 35 plus age group but the younger generation connects much less with it. With time, the younger population is rising leading to lower listenership for older content.
- In the past few quarters three of the six main OTT channels namely Gaana, Resso, and Hungama have moved from free ad-based streaming to paid models. Because of this shift, their listenership has gone down substantially. While Saregama’s payout per title is higher in the paid model, the volumes have gone down to a larger extent thereby affecting its revenue growth.
Management’s response to the above issues has been as follows:-
- Saregama is buying newer content aggressively to cater to the taste of the younger generation which was lacking in its portfolio. Of all the media IPR, music has the longest shelf life and the content bought today will keep resonating with this generation for years as they age.
- It has bought a company called Pocket Aces which creates short form video content and web series aired either on its own channels or licenced to OTT channels. As per management, Pocket Aces is the leading youth platform in the country with 95 million digital followers which almost doubles Saregama’s own strength of 100 million followers.
- Regarding the slowdown in growth due to the shift of OTT channels to paid model, management acknowledges that short term is seeing some pressure but on medium term basis it is expecting over 27-28% growth for the combined entities.
At current market price of Rs 335, Saregama with ROCE of around 18%, zero debt, unmatched music IPR is available at a PE of 35 on currently suppressed earnings. If the above remedial actions pan out as per expectations of the management, music may again begin for its investors after a brief lull.