Business model
DQ started as a pure outsourcing service model. It produced its first 2D digital project – Delta State. Over the years, DQ has moved up the value-chain. Five years back, it got into 3D animation and gaming. It struck deals with the likes of Disney (‘Mickey Mouse Club House’) and their association is still on.
It is a minor partner for ‘Ironman’ (a 3D animation serial) and a major partner for ‘The Jungle Book’ and ‘Lassie’ (other animation series). These co-production agreements not only provide production revenues at usual profit margins, but also helps DQ to obtain equity participations, for a share of the license revenues. The focus on co-production has provided the company an opportunity to leverage its existing expertise in content creation, while at the same time adopting a low-risk approach.As of March 2009, DQ has invested Rs 47 crore in co-productions which have been completed and have generated revenue of Rs 53 crore for the company. Another 33 productions are currently under development. The company proposes to deploy about 45 per cent of the IPO proceeds towards co-production and IP content creation businesses.
Stock Financials & Anlaysis
DQ Entertainment has seen its top-line grow at a CAGR of 35 per cent in the last five years. While revenues have grown at a fast clip in recent years, its operating margins, too, have improved sharply aided by costs control and better revenue mix.
About three-fifth of the revenues currently comes from 3-D animation projects, whilst low margin 2-D accounts for the remaining. A combination of manpower cost reduction and higher revenues from high-end 3D animation should ensure that margins sustain at these levels.Within animation, the revenues accrue from television, movies and merchandising. In terms of revenue mix, the television segment contributed around 90 per cent in 2008-09. But, its share would decline to around 75 per cent in the next 2-3 years as the company intends to increase its share from movie content and merchandise.
The order book currently stands at Rs 450 crore, and provides revenue visibility for the next two years. However, the order book is skewed towards European and American geographies, which together account for over 90 per cent of revenues. In light of the strong order book, DQ’s revenues are expected to grow by about 29 per cent in 2009-10 and 2010-11. At the operational level, the company is expected to do well; this would help deliver faster growth in net profit.
IPO Analysis & Conclusion
While the flip side is DQ’s limited track record of realizing revenues from licensing and distribution, collaboration with international partners and its past performance stand it in good stead. The strong order book also provides confidence and revenue visibility.
In terms of stock valuations, DQ has no major comparable peers. At the upper price band of Rs 80, the stock trades at 17 times its 2010-11 estimated earnings and appears fairly priced. Investors may buy IPO with a long-term investment perspective.
