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Demerger of publication, digital distribution business

About the stock: Saregama India (Saregama) is India’s oldest music label with ~1.3 lakh songs across various languages, which is monetised over various formats such as digitals (streaming, YouTube), physical (Carvaan) and television.

Apart from music, it is also into TV serials/(Tamil) and creates low budget films as well as web series for OTT platforms through Yoodlee Films

Event: Saregama has demerged its entire distribution business of the company relating to sale of all its physical products including Carvaan on digital marketplaces along with identified non-core assets (i.e. investment in publication business)

Demerged division topline was | 17.4 crore in FY21 while bottomline (in our view) is miniscule. We highlight that demerger only involves digital distribution arm and Carvaan business stays with Saregama residual entity. As per our understanding, distribution arm enjoys non-exclusive rights of selling Carvaan on e-commerce platform, which will continue

The scheme does not involve cash consideration and existing shareholders will receive “two fully paid up equity shares of | 10 each of the resulting company (Digidrive Distributors Ltd), credited as fully paid up, for every one equity share of | 10 each of the demerged company (Saregama)”

What should investors do? Saregama’s share price has grown by ~18.7x over the past five years (from ~| 234 in March 2017 to ~| 4597 levels in March 2022).

Demerger of non-core activity, especially publication, is a key positive likely to drive a focused approach of management on key business of music. We expect digital monetisation to provide sustained growth. We maintain HOLD rating on the stock

Target Price and Valuation: We value Saregama at a revised target price of | 4890, at 40x FY24 P/E, as we roll over, bake in QIP and higher growth guidance.

Key triggers for future price performance:

Growth trajectory in music licencing, which the management envisages to grow at 25-30%+ in medium term, along with new content performance

Recovery in Carvaan on the back of economic reopening and expansion in movies and web series segment

Alternate Stock Idea: Besides Saregama, we like Inox Leisure in media coverage.

Beneficiary of cinemas recovery and merger synergy

BUY with a target price of | 680

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