Elara Capital Plc is sector agnostic and has undertaken transactions of almost $ 1 billion in the last three years through various instruments. The bank firmly believes in the India growth story and has played an instrumental role in the transformation of fast growing mid-cap Indian companies into global majors.

In this conversation with Businessofcinema.com, Elara Capital Group chairman and CEO Raj Bhatt holds forth on why investors are currently playing the wait and watch game before investing into the Indian movie business, how rising actor prices is hitting the business in a major way and more.

Excerpts:

How has the nature of the film business changed in India and how are investors looking at this change?
The entire economics of the movie business in India has changed over a period of time. While earlier we didn’t have such large budget films being made and had limited revenues; now people are exploiting the same content on so many different platforms. On the income side, filmmakers have a film library to exploit, various rights and at the same time overseas distribution income has also gone up significantly.

On the other hand, while investors are very happy with the new streams of income, the rising costs are a factor of worry for them. Star prices are shooting like never before and as movies are becoming more and more successful, people are demanding more money. Moreover the stars in the industry are limited. Hence one can make only a handful of high budget films with the top bracket actors.

The dilemma that investors are facing right now is that the market has not yet matured. Currently the situation is like that of a casino wherein people want to make quick bucks. Stars are getting into production and are asking for profit share in the movie. The industry needs time to mature.

According to you how long will it be before the market matures and investors will look at the filmed entertainment space more seriously than they are at present?
Changes have been gradually taking place in the sector. The last three – four years have seen more corporate entering the space and that has taken out the cash element from the business and money is readily available via the institutional route for movie production. So these changes have already taken place.

The one thing that needs to change dramatically is the cost of the stars.

While on the one hand star prices are on the rise, some of them are also eyeing a profit share. Is there any scope for their prices to go down?
Eventually if the movies don’t make money then it is bound to happen. Once movies start losing money, the bidding will stop. There has been vigorous bidding between companies like UTV Motion Pictures, The Indian Film Company and Eros International. Once that stops and the demand is not there, the prices are bound to come down. When the market matures overtime, things will be more stable. However one cannot predict how long it will take for the market to mature.

The only change we can see is that corporate money is available for movie production and that in turn has brought about some discipline in terms of movement of money. Earlier there were a lot of allegations that money was channelized from unauthorized sources and there were a lot of private lending. That has come down significantly. Now either existing houses are molding themselves into the corporate structure or are winding up.

What is it about the film business that investors are finding it a lucrative sector to invest in? There are so many funds coming up, private equity investment is also on the rise in this sector.
I would say that there was a keen interest from investors until a few months ago but right now investors are playing the wait and watch game and no one is investing until the film production market matures. I think over the last three months the situation has changed. While people have announced plans to launch movie funds, I don’t think anyone is going to get the money.

Money is not available due to the credit crunch and that has affected people and investors are not very keen to invest into a business that has not matured. I think within the next three to six months, when the credibility of existing movie companies will be established, things will look up on the investment side.

So while investors are playing the wait and watch game, how are the current investors, who have already put their money into the market, looking at this situation?
They have all lost money. If you look at the share prices of companies who have raised money, say UTV, IFC or even Eros, they all have seen a dip. Eros even did a second round of funding when their share price was £5+ but today it is trading at £3.30. So anyone who has invested in the film business has lost money and hence the appetite obviously is going down.

Why is it that while these companies are churning out big films and reporting good results, it’s not reflecting positively on their stock price?
Basically the stock price is affected by market sentiment and has nothing to do with the performance of the company. Secondly, these companies are all listed on the Alternative Investment Market (AIM), which is a very liquid exchange and a lot of people don’t participate in AIM. Hence volumes are low. So even if a small seller comes with a small volume then the price can come down dramatically; this is not reflective of the fundamental value. Additionally the volume of shares that trade everyday is also very insignificant.

Traditionally the movie business is considered a very risky business. So what are the factors that investors keep in mind to cover themselves?
The movie business used to be a risky business but now people have the opportunity of de-risking themselves by selling certain rights even before the film is released. So a lot of these corporate houses are partly selling their movies even before it comes into the market. Hence they are passing over the risk to distributors or someone else in the chain and in turn de-risking themselves.

Secondly, corporate are also taking the portfolio approach wherein they have a bunch of movies out of which some may be big, some medium and some small. Hence the risk is divided.

So can we safely say that the movie business is becoming less risky with the corporate knowhow in place?
Yes absolutely, there’s no longer the cowboy approach anymore. 

What are the prospects that private equity investors see in the filmed entertainment companies?
The movie business is not one that can be affected by the recession. However, other sectors are not really recession-proof. If the economy is not doing well then companies in other sectors are likely to not perform well, whereas movies is a business that comes under leisure and hence it gets a hedge against recession.

Secondly in terms of growth, if I remember correctly, India’s total expenses on entertainment are about 1.5 per cent of the total GDP, whereas in the western markets, it stands at about three-four per cent. So there’s a huge upside available.

Going forward media is going to explode and within media, movies constitute an important part and that’s the reason why people are investing in movies. This investment is not being made keeping today’s scenario in mind. A lot of funds have invested in the space keeping the future scenario in mind and will be rewarded in time.

What is your opinion of the movie companies in India and what are the challenges they face?
If you compare Indian movie companies to the west, the latter operate on a studio model, wherein they have all arms of the businesses under one umbrella. The Indian market is still fragmented and we don’t have any single company, which is involved in everything. However, that is changing now as slowly companies are bringing all verticals under one roof. That is a phenomenon that will mature overtime.

Additionally, the Indian film industry has to expand in terms of the star cast. While India churns out more number of movies every year as compared to Hollywood, the fact remains that India has only six or seven top bracket male actors who are sellable vis-à-vis Hollywood. However, overtime that is also going to evolve with new actors coming in and there will be a visible change in the type of movies that will be made.

In the media space, which sector out there – broadcasting, print and movie businesses – is attracting more investor interest and why?
There was an interest in the broadcasting space. However, over the last three – four months everything has changed including the broadcasting business, which has become very crowded now. Today, the interest is in the logistics business for media. As the media business grows, logistics and content providers will be attracting a lot of investor interest. People today need support functions and that is where the interest of investors will lie.

On the other hand, the print media is something that has many FDI restrictions especially on the news front. Earlier there was a lot of interest on the news broadcasting side as there was a lot of demand, however, now that too has changed. People know that out of the many channels that are operating today, only a quarter will survive and the rest three-quarters will shut down and hence the risk is very high. I don’t think news broadcasters are going to get money very easily now.

What is your view of Hollywood studios investing in India and how do you perceive this development in terms of mergers and acquisitions going further?
Hollywood does not consider India as a very lucrative market as yet keeping in mind Hindi movies per se. If you see the economics and numbers, of course people talk about the overseas numbers as compared to the domestic numbers for the exhibition of movies. But these numbers, when converted in dollars, are not very significant. I think it will take another five years before Hollywood studios find Indian movies attractive.

But Hollywood studios like Fox, Disney, Warner, Viacom have all increased their interest in the movie segment in India and are setting shop here.
True but they are not making content for India right now… it’s more of a backhand thing or their interest lies in animation. Viacom has been in India for over a year and a half in partnership with TV18 but Viacom has not produced any Hindi movie so to speak. There is one crossover movie that they are in talks for but that is going to take time. One has to see how many Bollywood themed movies are being made by Hollywood studios.

But if they are setting up base in India, they will be looking at local language content going forward. Won’t they?
They are setting up base here. What they will do is, when the market matures they will be looking at acquisitions. Some of the corporate houses will get sold out to the studios.

At present I personally feel that Hollywood studios are mainly interested in the backend and outsourcing business. They are not investing in Bollywood content.

As an investor, when you evaluate a business plan for an entertainment company, what’s the most critical element that you look for?
There are two things. The first most important thing is corporate governance and the second is the return on capital. Both are interlinked but even if the return on capital is lower and there is a good team in place, I think the investor will go for the team. Most of these Bollywood companies are personality driven and investors don’t like it because they are investing in a company and not in a person.

Any parting shots?
I think we need to wait for a couple of years in terms of the costing and the economics. Right now there is a lot bidding going on, which may not be conducive in the long run. Movies are produced by X, bought by Y and then released by Z. So a movie changes hands three to four times before it comes out in the market. This just goes to show that it is not a mature market.

Not to mention that fact that it leads to inflation in product prices…
Yes absolutely. If you look at Jab We Met, I think the movie changed hands three times. All these aspects need to mature. If you are producing a movie, you don’t have to sell it entirely. It is not a sign of maturity. There is a certain amount of commitment that is required. But the situation is bound to change in due course of time.

Once funds are available, the cash element of movie is diminished. So on the costing side, there is no conflict of interest. A star taking a stake and also starting a production house is not the right way to go. Everyone should stick to their area of expertise.

Isn’t that the way it works in Hollywood also? Big actors like Tom Cruise, George Clooney, Brad Pitt etc all have their own production houses.
They have their own production house but it is more for exploiting their own rights and smaller projects. The need is to create corporate entities in India the size of Universal or Sony Pictures. Today, the total budget of all Bollywood movies made in a year is about $ 1 billion, which is a very small amount looking at the Indian market.

Right now if there was an organized structure, then one doesn’t mind it. But everyone has different kinds of deals and because the star cast is limited, the production companies have to compromise and eventually it is affecting the shareholders.

There has to be some discipline that needs to come in place and that will come in time with maturity.