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Rating Action:

Moody's assigns first-time rating of B1 to Eros International Plc

11 Apr 2019

Singapore, April 11, 2019 -- Moody's Investors Service has assigned a corporate family rating of B1 to Eros International Plc ("Eros Plc"). The rating outlook is stable.

This is the first time Moody's has assigned a rating to Eros Plc.

RATINGS RATIONALE

Eros Plc's B1 rating reflects the company's leading position in the Indian film industry, with an unparalleled content library, consisting of multi-format rights to over 3,000 films and over 12,000 digital rights. The company is an integrated operator with an extensive and well-established global distribution platform which provides monetization opportunities across the life cycle of a film.

The rating also accommodates Eros Plc's very small scale (revenues of around $300 million) compared to global peers, strained cash flow metrics resulting from an ongoing need to invest in content, moderate liquidity profile as well as its complex group structure.

Through its Indian and international subsidiaries, Eros Plc distributes Indian films in India and overseas. The mechanism for sharing revenues and costs between entities is governed by a relationship agreement between its 62.39% indirectly-owned subsidiary, Eros International Media Limited (India), Eros International Plc and Eros Worldwide, whereby companies are bound by exclusivity and non-compete clauses.

Global rights are key to its distribution strategy as they enhance monetization opportunities beyond India. Eros Plc generates around 50% of consolidated revenues outside India through theatrical, TV syndication and digital revenues.

"Eros Plc is shifting its strategy away from high budget films and reducing its reliance on theatrical revenues which depend on box-office performance. Although the company continues to produce around 50 films annually, these are mostly low-budget and mid-budget films which diversify its risks. Revenue contribution from the theatrical segment reduced to 28% for 9 months ended December 2018 from 40% for FY ended March 2017," says Nidhi Dhruv, a Moody's Vice President and Senior Analyst.

Over the last two years, the company has significantly diversified its content library to include regional films and content to appeal to a wider audience, especially for its OTT platform, Eros Now. Regional films contribute up to 83% of Eros Plc's film library.

"Given digitization of cable TV, and increasing 4G and smartphone penetration in India, Eros Plc's strategic focus is on its digital business, especially Eros Now, which improves revenue diversification and also de-risks its top line through access to a contractual revenue stream," says Nidhi Dhruv, also Moody's lead analyst for Eros Plc.

The number of paying subscribers at Eros Now had grown to 15.9 million as of December 2018 from 5 million a year ago, recording a YoY growth rate of 218%. About 90% of these subscribers are in India, and Eros Now earns contractual revenues from its agreements with various telecom providers and others.

Eros Plc is well positioned to capitalize on the expected growth in the Indian media and entertainment industry which is expected to grow at a CAGR of 12.3% between 2014-2023, and the favorable macro-economic tailwinds.

Nonetheless, the company remains exposed to the risks inherent to the film industry including production delays or cost overruns and the challenge of continually acquiring and distributing content that meets the changing demands of consumers. This is somewhat mitigated by Eros Plc's track record of over 30 years as well as its established relationships and contracts with key talent, cinema operators and production houses.

"Eros' pre-sales strategies also provide revenue visibility and an ability to recoup a substantial part of the production costs ahead of a film's theatrical release. Across all content types, Eros recouped about 31-57% of its Hindi, 93-108% of its Telegu and 96% of its Tamil content costs through its pre-launch strategy over the last two years," adds Dhruv.

The B1 rating also reflects the significant ongoing investments ($200-$250 million annually) required to build its content library through the acquisition of film rights and co-productions, which will continue to lead to negative free cash flows. The company has an adequate financial profile for its rating level, and Moody's expects adjusted leverage to remain within 4.5-5.0x over the next two years, and RCF/net debt to remain in the range of 15-20%.

Eros Plc has a moderate liquidity profile, wherein the company continues to rely on rolling over of short-term uncommitted facilities to fund its content strategy. However, Moody's believes the risk is limited given the track-record of successful renewal of these annual facilities since 2016.

The stable outlook reflects Moody's expectation that the company will retain its position as the leading aggregator of content for Indian language films. Moody's also expects Eros Plc to grow and deleverage in line with expectations, while maintaining adequate liquidity through the business investment cycle.

There is limited upward pressure on the rating. Over time, the rating can be upgraded if the company grows and deleverages in accordance with its strategy of remaining focused on the OTT space. Financial metrics which would lead to an upgrade include adjusted debt/EBITDA remaining below 3.5x, EBITA margin improving to over 30% or RCF/Net Debt improving to over 20% on a sustained basis.

The rating could be downgraded if Eros Plc's operating and financial profile weakens, such that adjusted debt/EBITDA remains in excess of 5.0x, EBITA margin falls below 20.0-25.0% or RCF/Net Debt falls below 15% on a sustained basis. The rating would also be downgraded if there are significant changes to the relationship agreement between Eros International Media Limited (India), Eros International Plc and Eros Worldwide.

The principal methodology used in this rating was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Eros International Plc is the holding company of the Eros Group. Through its Group subsidiaries, the company acquires, co-produces and distributes Indian language films in various formats globally (50 countries, in over 25 dubbed or subtitled languages), then monetizes the IPRs through multiple distribution channels. Eros Plc is listed on the New York Stock Exchange, and the promoter group owns 38.6% of the company.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nidhi Dhruv, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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