DQ Entertainment IPO Analysis, Updates, Company Profile, Risk and Concern Outlook and Much more

DQ Entertainment (International)

DQ Entertainment (International) Limited is coming with a 100% book building; initial public offering (IPO) of 1,60,48,011 shares to raise about Rs 1.28 billion. The equity shares of Rs 10 each are being offered in a price band of Rs 75-80 per equity share.

At least 60% of the issue will be allocated to Qualified Institutional Buyers (QIB). Further, up to 10% would be available for non-institutional bidders and remaining 30% for the retail investors.

The issue will open on March 8, 2010 and will close on March 10, 2010. The shares will be listed on the BSE only.

The face value of the share is Rs 10 and is priced 7.5 times of its face value on the lower side and 8 times on the higher side. The minimum order quantity for bidding has been fixed at 80 shares and thereafter in multiple of 80 shares.

Book running lead manager to the issue is SBI Capital Markets

Company Secretary and Compliance Officer for the issue is Anita Sunil Shankar.

Profile of the DQ Entertainment (International) :

DQ Entertainment (International) was incorporated as “Animation and Multimedia Private Limited” on April 13, 2007. The company has been promoted by Tapaas Chakravarti and DQ Entertainment (Mauritius). Tapaas Chakravarti had earlier promoted DQ Entertainment Limited, which was engaged in the development of animation production services.

The company is one of the leading producers of animation, visual effects, game art and entertainment content for the Indian as well as global media and entertainment industry. It is a producer, co-producer and global distributor of TV series, direct-to-home videos and feature films. It is also a creator of game art for online, mobile and next-generation consoles. It has forayed into production and distribution of live action television and feature films. The company has an asset base of over 350 hours of animation content from which it can earn revenues through licensing and distribution activities.

DQ Entertainment has produced/co-produced and distributed brands such as Iron Man- the first 3D animated TV series, Twisted Whiskers, Casper, third season of Mickey Mouse Clubhouse and is now producing properties like Little Prince and Little Nicolas.

DQ Entertainment (International) IPO Grading

Fitch Ratings has assigned an ‘IPO Grade 3′ rating, indicating average fundamentals, to the initial public issue of the company.

Proceeds is being used for

Investment in co-production agreements, focusing on IP content creation;

Development of office premises and production facilities; development of infrastructure and additional facilities at the SEZ Unit, Kokapet Village, Rangareddy District, Andhra Pradesh; Investment in the subsidiary, DQ Entertainment (Ireland) Limited; and General corporate purposes

Industry Overview

The global animation industry is one of the fast growing components of the global media and entertainment industry. The global animation market was estimated at $68 billion in 2008 and is expected to grow at a CAGR of 10% to reach $100 billion by 2012.

The genesis of the Indian animation industry lies in the outsourcing opportunities created during the initial years. During 2002-03, Indian studios and production houses were primarily performing support work like background, wire removal, clean-ups etc. and the important value-addition process, such as conceptualization, pre-production, story-boarding etc. were performed almost solely by the studios in the West. Over time, the skill-set of Indian studios and the quality of their work gained recognition and they moved up the value-chain to more complex activities.

The entire animation industry in India was estimated at $314 million in 2006, $494 million in 2008 and is expected to grow at a CAGR of 22% between 2008 and 2012 to reach $1 billion by 2012. Increased outsourcing from overseas countries due to India’s inherent cost advantage, maturity of international animation studios, emphasis on IP (intellectual property) creation and attractive domestic opportunities has been the principal growth drivers. Nonetheless, India continues to be dwarfed by the global animation arena where revenues are expected to cross the $100 billion mark by 2012.

DQ Entertainment (International) IPO Pros and strengths:

Innovative animation techniques – The company has, over time, developed the flexibility to produce different styles of animation including traditional 2D animation; technology based 2D digital and 3D animation. It has also developed several in-house animation techniques and technologies, which has given it an advantage over its competitors. The company has also experimented and became successful by using motion capture (MOCAP) techniques.

Diversified revenue streams and client base with low-risk business model – The revenue stream of the company comprises of production and licensing & distribution revenues and each of the two have various sub-streams. Service revenues comprise revenues from traditional 2D animation, digital 2D animation, 3D animation and 3D game art. The company has strategically moved along the animation value chain, gaining greater exposure to intellectual property ownership and distribution. Not only this has the company also adopted a low-risk approach, entering into co-production arrangements. It also has a client base of over 90 companies which includes internationally recognized brands such as, the Disney Group, Nickelodeon, American Greetings, BBC, Moonscoop Group, ZDF-Germany, Australian Broadcasting Corporation and NBC Universal.

Robust Order Book – DQE has a strong order book worth about Rs 456.72 crore, providing high levels of earning visibility. More than 80% of FY10 revenues are identified with over 40% of the order book already in various stages of production & balance to commence during the year. Rs 134.51 crore are to be executed in FY10 and Rs 158.53 crore and the balance beyond FY 10. The momentum of revenue growth is expected to be maintained for FY10 and FY11.

Developed infrastructure quality – The company has heavily invested in creating robust IT, technology and management infrastructure, including its proprietary ERP solution, developed over the past years. The company has an added advantage of maintaining consistently high quality standards that leads to repeat business.

DQ Entertainment (International) IPO Risks and concerns:

Revenue dependence on production services – DQE during each of FY 2008, FY 2009 and for the period ended September 30, 2009, has derived over 90% of its earnings from production services on a fixed-price, fixed-time frame basis. In respect of such fixed-time and fixed-price production services, the company bears the risk of penalty provisions, cost overruns, completion delays and wage inflation in connection with these projects. Such agreements also provide for penalty clauses where it is liable to pay penalties for any delay in the completion and handover of the material being produced under the agreement. The company’s failure to estimate the resources and time required for a project, uncertainties due to creativity issues, may adversely affect the reputation, business, financial condition and results of operations.

Competition from global companies – The company faces stiff competition from international and domestic animation production companies. International companies especially ones based in the US and Europe. Its major competitors include Aardman Animation, The Moonscoop Group, Porchlight Entertainment, etc. However, it has also collaborated with some of these entities for as co-production partners. Indian entities that undertake similar projects include Crest Animation Studios, Toonz Animation India, Compact Disc India and other smaller animation studios. Due to comparable cost structures, DQE also faces competition from animation production companies based out of south-east Asia, like Korea, Taiwan and Philippines. Not only this, in the distribution business also it is likely to face competition from corporate production houses like UTV Software Communications, Balaji Telefilms and other players in the media and entertainment industry.

Dependency on select geographical regions and clients – The company’s significant portion of production revenues are dependent on clients from select geographical regions, the company has high dependence on the European and American geographies, which together have contributed over 90% to the revenues over FY08 and FY09. Around 72% of the work in FY09 was from 3-D animation, whilst low margin 2-D animation services accounted for the remaining 28%. Any adverse economic impact in such regions could have an adverse effect on its business, results of operations and financial condition. The revenues derived from specific clients may also vary from year to year, particularly since they typically may not be the only content provider for such clients. The loss of a major client or a reduction in the services performed for such a major client could result in a reduction of their revenues.

Limited experience in IP content creation – The company has limited experience in IP content creation and it wishes to use the issue proceed in co-production agreements, focusing on IP content creation. It has recently forayed into production ventures focused on developing its own IP content and have produced series like Balkand, Ravan and are in the process of completing The Jungle Book, Omkar, Mysteries of Feluda, Toomai — the Elephant Boy, and has limited experience in developing its IP content. As on date it doesn’t have sufficient experience that demonstrates its ability to develop its operations in this regard. Any inability to effectively manage its foray into this field could adversely affect the business, prospects, financial condition and results of operations.

DQ Entertainment (International) IPO Outlook:

DQ Entertainment is one of the leading producers of animation, visual effects, game art and entertainment content for the Indian as well as global media and entertainment industry. It is a producer, co-producer and global distributor of TV series, direct-to-home videos and feature films. It is also a creator of game art for online, mobile and next-generation consoles. It has forayed into production and distribution of live action television and feature films. It has an asset base of over 350 hours of animation content from which it can earn revenues through licensing and distribution activities. The company has an added advantage that it holds a diversified revenue streams and client base with low-risk business model apart from this the company has an estimated order book of Rs 456.72 crore. In February this year, DQ raised Rs 25.69 crore through a pre-IPO share sale to IDFC Investment Advisors and other corporate and high net worth investors, with IDFC taking the largest chunk of shares worth Rs 20 crore.

On the concern side the company’s business is highly dependent on production services, 91% of the company in FY09 were from television production. Licensing and distribution activities contributed a meagre 5% of revenues, whilst full motion video and game development contributed 4%. Also the company has high dependence on the European and American geographies which together have contributed over 90% to the revenues over FY08 and FY09. The company will always be facing the risk of rapid changes in licensed software, evolving industry standards and changing customer preferences.

The shares are being offered in a price band of Rs 75-80, the issue would constitute 20.24% of the post issue paid-up capital of the company and the net issue will constitute 19.84% of the post issue paid up capital of the company. DQ posted a profit of Rs 16.1 crore on total sales of Rs 150 crore for the year ended March 2009 and its EPS for the FY9 stood at Rs 113.04, the shares have been priced relatively ok taking in view of its financial performance but revenue from the US and European nations were 41.57% and 51.18% for the last fiscal and the company needs to expand its reach so that it does not dependent on these two markets only, the other major hurdle in the profits of the company in rampant piracy market. But overall the industry outlook is good and the current animation industry is all set to grow with a compounded annual growth of 10% for the coming at least next three years.

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Category: IPO