India's Eros Defends Business Amid Analyst Downgrade, Questions About Emirates Revenue

'Bajrangi Bhaijaan' poster - P 2015
Courtesy of Eros

Wells Fargo raised red flags over the Indian major's financials as its stock fell in New York and Mumbai.

Indian entertainment major Eros International saw its shares tumble more than 19 percent on the Bombay Stock Exchange Monday after an analyst at Wells Fargo raised concerns over the company's financials.

Eros slid 17 percent to $14.65 at Friday's close in New York, bringing its drop for the week to 45 percent. In Bombay, the stock has fallen by over 22 percent since Oct. 20, closing at $5.45 (354.4 rupees) on Monday.

Eros produces, acquires and distributes Indian-language films, and its film library consists of over 2,000 titles while its annual production slate includes 65-70 titles. The company recently delivered Bollywood hits Bajrangi Bhaijaan, starring actor Salman Khan, and runaway comedy hit Tanu Weds Manu Returns, starring actress Kangana Ranaut.

Downgrading Eros shares to "market perform" late on Friday, Wells Fargo analyst Eric Katz pointed to three major areas of concern after being unsatisfied with an analyst call organized by the company on Friday to address these issues: the company's growing business in the United Arab Emirates “driven by a sudden spike in revenues"; questions about whether Eros would actually be cash-flow positive by financial year 2016 “as previously guided"; and questions about the company's reported 30 million-plus user base for its digital service ErosNow, billed as India's answer to Netflix.

“We still don’t know the largest content buyers driving this increase, and we aren’t fully comfortable with the fact nearly half of the revenue originates outside of India,” Katz said in his note in reference to Eros' United Arab Emirates revenue. He said that was "a red flag for some investors." The company reported fiscal 2015 UAE revenue of $103.8 million, up from $45.6 million in 2014 and $14.5 million in 2013.

In a statement to the Bombay Stock Exchange on Monday, Eros said that “analysts downgrade or upgrade stocks regularly and that as such is not a cause of concern." It added: "Note that Wells Fargo did not revise down their earnings estimate for the quarter or the year and the price target is $22, well above the price the stock was trading on the date the report was published."

Eros also pointed out that another “very positive” report from Macquarie analyst Tim Nollen, released on the same day as the Wells Fargo report, in which he maintained an "outperform" rating with a $25 price target. "We will be announcing what we expect to be a strong second-quarter result in the first half of November, and that will be another opportunity for us to answer further questions regarding all aspects of our operations and finance during that earning's call", the statement said.

As reported earlier, the company's digital service ErosNow has been gearing up to take on the impending arrival of Netflix and Amazon's video services as India's digital landscape heats up with more players. “We’re still feeling uncertain about the ErosNow user count,” Katz noted, adding, “Public websites that track app downloads (such as App Annie) show relatively low rankings for ErosNow versus other Indian streaming services with lower user counts. We can’t reconcile the disparity and it’s a red flag for investors.”

In its response, the company said that ErosNow's 30 million registered users “are over web WAP and APP and we have full registration details for these users.” It added that subscriber growth was also spurred by converting users from mobile services firm Tech Zone, which it acquired last year for an undisclosed amount. The South India-based firm is an aggregator, developer and distributor of entertainment content, including Bollywood film, music and regional language content, via mobile platforms.

As for Wells Fargo's reference to App Annie's low download tracking rank for ErosNow, the company stated: “In India, we are aware that several consumers with non-smart phones and lower-end smart phones prefer WAP and browser to access as apps take away too much space and memory, so purely going by some App Annie, which is not even a benchmark for measurement, seems a very ill-informed and perplexing route. None of the other analysts on the street other than Wells Fargo have questions on our user base. Our goal will be to broaden the user base with our new features pricing and originals and systematically convert to paid subs.”