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We initiate coverage on Saregama with a BUY rating and a DCFbased Dec’23 TP of INR 450 (implied FY25E PER of 34x). Saregama is presently the second-largest music label in India and is expected to further consolidate its position driven by sharp increase in its share of new content investments. During FY18-FY22, it delivered above-industry growth of c.26% in its music licensing business by leveraging its large catalogue and re-popularising retro content that offset the lack of investments in new content for nearly 2 decades (2000-2020). However, from a sustainable growth perspective, it is imperative that the company invests in new music content as ‘c.70% of the total music consumed in a year is <18 months old’. We, therefore, believe if Saregama successfully executes its new content acquisition strategy, its music licensing business can easily deliver ~23% CAGR over FY22-25E (~1.5x industry growth). Further upside can come from faster-than-expected adoption of Audio OTT streaming platforms (~200mn users as of CY21), sharp rise in % share of paid subscriber base (~1.5% as of CY21) and tuck-in acquisitions (similar to acquisition of Mango Music in Jan’22). Growing share of the very high-margin music licensing business in the revenue mix, scale benefits, and divestiture of the loss-making publication business should ensure that margins remain at 26-29% in the near term. Given the multi-year annuity nature of the flagship music licensing business and expectations of broadly stable operating cash flows, we value Saregama using 15-year DCF assuming a WACC of 12% and Tg of 5%. Key risks include 1) Irrational rise in competitive intensity driving new content cost, 2) Substantial increase in investments towards Carvaan/TV & Films businesses, and 3) Industry consolidation (Zee Music and Sony Music).

OTT streaming platforms driving growth for music industry: 

EY-FICCI estimate the Indian music industry to report a CAGR of 14.5% over CY21-CY24. Growth is likely to be driven by streaming revenue aided by fast growing penetration of OTT platforms, Youtube and ShortForm Video platforms. While globally, a large proportion of streaming revenue is generated through paid subscriptions, the Indian market is primarily dependent on advertising. If domestic OTT platforms too start pushing end-customers towards paid subscriptions there could be significant incremental upside to industry growth

New music content investments should lead to above-industry growth:

The management believes this is an opportune time to invest in new music content given the strong industry tailwinds. Therefore, after a relative lull towards new content investments of almost 2 decades, it raised INR 7.5bn (~USD 100mn) in Nov’21 to step up investments (organic as well as inorganic). Given that Saregama delivered ~26% CAGR over FY18-FY22 despite lack of investments, we believe the music licensing business can easily deliver ~23% CAGR over FY22-25E (1.5x industry growth) if the management successfully executes its new content acquisition strategy.

Technology investments and decentralised approach give an edge:

Small specialised teams extensively use data analytics and predictive models for new content purchase decision making. The company also claims to heavily use data analytics to market the content. Such tactics make Saregama more agile leading to superior performance vis-à-vis the industry.

We expect strong 18% PAT CAGR over FY22-25E, recent correction in valuations offers a good entry point:

We forecast strong 22% revenue CAGR for Saregama translating into ~21%/18% EBIT and PAT CAGR over FY22-25E. We expect Saregama to consolidate its No. 2 position amongst music labels in India as we expect 1) independent producers to prefer large, established non-integrated music labels and 2) limited competition for the company in regional music. We initiate with a BUY and a TP of INR 450 (implied FY25E PER of 34x)

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