Saregama India ltd: Business Model & Research Report

“Music is the divine way to tell beautiful, poetic things to the heart." thoughtfully quoted by Pablo Casals, one of the greatest cellists of all time. Just think about it, have you ever found anyone who doesn't enjoy music? We highly doubt it, and that's the power it brings.

The global music industry has been on a growth ride for the past six years. The industry shined even during the pandemic. We can conclude that ways might change, technologies come & go, but people won't stop listening to music.

But what about the Indian music industry? So, Today we bring you a detailed highlight of the Music industry & an overview of our beloved music label, Saregama India Ltd. Let’s get started!

Music Industry

First thing first, we will talk about the Indian music industry but from an investor’s point of view. To estimate fishes in a pond, we must know the size of the pond. The Indian music industry is valued at Rs 1500 Cr and has grown at 10.3% CAGR in the past five years. The sector grew fast as smartphone usage increased, data prices decreased, and the government took the initiative to reduce piracy (that's why we couldn’t use songs.pk anymore). 

In India, music is heavily dependent on the film industry; 70% of recorded music is film-based. Unlike other countries where independent artists & their albums contribute majorly to the industry.

On the other hand, the way we listen to music has changed. People are highly reliant on mobile phones, which have also become the go-to device for listening to music.

But how does the music industry work?

Let's have a look at the value chain of the music industry. The value chain of a music industry can be broadly divided into three parts. Creators: First and foremost, we have the creators. Who are they? Well, music director, lyricist, singer-composer, and all those involved in creating new music are included in the creator’s side. They come up with the idea and create songs. 

Film Producers & Music Labels: Generally, film producers hire creators to compose music for their films. Film producers use all these songs in their movies and sell IP rights of these songs to record label companies. Labels are the soul of this industry. Whenever film producers create anything, they need to distribute this; here’s where labels help them. But it is a win-win situation for both; producers sell their IP rights of songs to label companies, and in return, the label company publishes and distributes pieces. So, all significant rights regarding the songs are with the label companies. 

Distributors: Finally, the labels hand out licenses of songs to the streaming platforms. So, all these platforms like Spotify, Saavn, Gaana on which we play music own the license of those songs, and every time you play any song, these platforms pay license fees to labels.

Before these platforms became popular or even existed, distribution was handled by DVDs, and before that, there were cassettes (90’s Kid alert). You would be surprised to know that around 60% of royalty fees that these all platforms pay go into the pockets of record labels companies.

To understand this clearly take a look at the Value creation model of the industry.

We know that Music labels are the heart & soul of the industry. Moving forward, we will learn about such a label that has been giving us some of our most favorite songs for ages. Diving in!

Saregama India

Once you understand the industry it will be easier for you to pick the stock from it. To analyze the value chain of the music industry, why it has been a laggard, and what the future holds for it, in more detail, you must read Recipe's Investment Insight- "The Rocks & Rolls of Indian Music Industry".

(Source: Recipe)

"Woh Sikandar hi Doston, kehlata hai. Haari Baazi ko Jeetna jise aata hai" This is how the annual report, 2021 of Saregama India, was highlighted as according to them they are reclaiming the Leadership position. 

Moving ahead we will see how the company works and its research report. Stay tuned!

Saregama is India’s oldest music label with the largest library of intellectual property rights related to songs, film dialogues, background scores in its bouquet. Let’s quickly move to the revenue streams of this business to understand it better.

Revenue Streams of Saregama India Ltd.

The success of revenue generation lies in the number of streams one has, the more the revenue streams the better it is. Take a look at all the revenue sources of Saregama.

Let’s dig deeper and understand how Saregama makes money. The company has 2 sources of income: 

• Music segment

Under this, the company has two divisions Licensing to third-party apps & Retailing.

• Video segment 

1. Music

Under licensing to third parties, we first have OTT (over-the-top) video streaming platforms like Netflix, Amazon Prime, YouTube music, etc. Under OTT music streaming, we have ganna.com, Spotify, Amazon music, etc. So, whenever you play any song owned by Saregama on this platform, a variable fee is paid to the latter. The company also gains a partial cut from ads streamed here. Then comes the broadcasting platforms like Star TV, Viacom, and others. Here the company licenses its music to Television Channels for use in various TV serials, reality shows, promotions, etc.

As far as social media is concerned, YouTube is the largest contributor here. Saregama’s YouTube channels have grown from 0.5 Mn to 940 Mn in a span of 68 months. YouTube and Saregama share ad revenues from here. Even Instagram and other short video apps buy licenses from Saregama for certain songs. 

Then moving to the retailing side, the company launched ‘Carvaan’ in 2017, their very own music player with 5,000 preloaded songs. Carvaan was a hit product as soon as it entered the markets. Now, with the digital age coming up Carvaan 2.0 is launched, which is more of a platform instead of a product where you can listen to podcasts and other stuff too. It's going to be interesting to watch how Carvaan 2.0 creates its niche market.

2. Video

Yup, Saregama even has a music production house called Yoodlee films. Yoodlee makes films for 3rd party digital platforms. Although the company doesn’t invest heavily in this filmmaking venture, they have still targeted to make 50 films and web series in the coming 3 years. The segment has released 16 films in the last 44 months on Netflix, Disney+Hotstar, and Zee5.

Then under the Video segment, Saregama even broadcasts TV serials which are mainly in the Tamilian dialect. Saregama has created over 6k hours of content for Sun TV.

    3. Publication

Open Magazine, a weekly current affairs magazine, is run by Saregama. 

These were the revenue streams for Saregama. The majority of the company's revenue comes from music licensing itself. The company monetizes existing IPs and keeps on building new IPs. Saregama doesn’t only have content in Hindi, but the company has a presence in other regional languages like Tamil, Bhojpuri, Punjabi, Gujarati, Telugu too.

Financials of Saregama India Ltd.

After understanding the music industry and business model of Saregama, We will now move forward to the financials. The topline has grown except for the last two years, mainly as Carvaan’s sales were affected. As you can see, the bottom line is increasing, which is a good sign. If you look at music licensing businesses, they generally have very high operating margins as the business doesn’t have to incur any cost after buying any rights.

Standalone P&L of Saregama

(source: Ticker)

Balance Sheet of Saregama

(source: Ticker)

Moving on to the balance sheet, reserves have increased, and the company is debt-free, but assets haven’t increased much. So, we can say it's overall a sound balance sheet. 

Further, let's talk about its stock price. Is it not amazing that 1 lakh invested in Saregama ltd would have been 86 lakh today!

Stock Price of Saregama India Ltd:

The stock price of Saregama India ltd went from around 400 in 2020 to more than 4000 in 2021. But how? Some of the reasons are

• The ongoing extended bull market

Nifty50 grew by more than 10k points since the 2020 pandemic and is on a continuous upside. Few stocks like Saregama were among the major gainers in this extended bull run.

• License deal with Facebook & Instagram

Saregama said it has entered into a global deal with Facebook to license its music for video and other social experiences across products offered by the social media giant.

• Reduced piracy

The GOI has been very active to combat the piracy issue in the country which led to increasing in licensed music used throughout the country. The increasing popularity of music apps like Spotify, Gaana, Saavan have also directly reduced piracy.

• Improving financials

The P/E ratio of the stock is rather high indicating overvaluation but if we take a look at Return on equity (ROE) the ratio has been strong and consistent. The topline has grown by 15.11% in the last 5 years while the profit growth has been 69.97% in the following period.

• The pandemic effect

People were highly inclined towards music & movies during the pandemic, Saregama being one of the market leaders in providing this content became popular, this effect was clearly visible in its stock price. 

Competitors

Well, we had a look at the industry's value chain, we hope it is clear that these label companies aren’t in any competition with Spotify or ganna or iTunes, or any other platform. In fact, they are the provider of these apps. So, who do you think are the competitors of Saregama? 

We have 10-12 players in this industry, and 4 of them are national-level players. Saregama majorly faces competition from Zee Music, T-Series, Tips, Sony Music Entertainment.

Conclusion

Finally, we would like to say that tailwinds are contributing to the growth of this sector, and this has led to India being the top country in the world when it comes to listening to music. We Indians spend almost 19 hrs a week listening to music, whereas the global average is 18 hrs a week. And if we get into the habit of paid subscriptions, then these companies’ revenues can grow multi-fold. 

Bottom line, Saregama is a good company with efficient management, and able promoter group, and is good to invest in but not at current valuations. This is our take on the company. If you feel like investing in Saregama please do your own research. 

By now you would have struck the chord that this business is dependent on trends and customer preferences, after all, a music label that has songs that would stay relevant in the future is poised to lead the industry’s orchestra.

Hope you enjoyed our detailed analysis & findings of the stock today. Share the information with someone to increase their knowledge quotient :)

*Disclaimer: The stock discussed above aren't recommendations from Finology, they are only picked to make you understand the concept.