The Indian Film Company (IFC): Investing in Bollywood I

August 6, 2008 at 10:39 am

I believe that the market for Indian film is significant and have been interested in investing in some of the companies that recently listed at AIM in London. When I tried to research, tough, I realized that most of the writing I see on these companies seems to be done by financial journalists who have very little knowledge of (nor interest in) the actual product that these companies produce/distribute and almost no understanding of the dynamics of the specific market for this type of filmed entertainment. Quite often I found myself disputing things that journalists claimed, simply on the basis of my closer familiarity with Bollywood product and my interest in the transnational exposure of this cinema over the years. This made me to want to carry out my own scrutiny on the publicly traded companies, a matter on which I am planning to write a series of articles, especially as I see that the coverage on these matters is on the increase with new developments that bring Hollywood and Bollywood closer together.

Today I am looking at The Indian Film Company.

The Indian Film Company seems to have been created especially for the purposes of trading at LSE’s AIM market, where it listed in June 2007 for an IPO placed at 100p, which allowed it to raise about £55 million (£53mil. after adjustments). Since then prices have been moving between 93 and 44p. The current market capitalization is below £30m and the stock sells at 52.7 p on August 6.

Akshay Kumar and Katrina Kaif in Welcome.

The company, which is engaged in film production, is registered in Guernsey and has subsidiaries in other off-shore heavens such as Cyprus and Mauritius (Film Investment Managers Ltd). Chairman is well-known Bengali film director Shyam Benegal and CEO is Sandeep Bhargava. Over 21% of the shares are owned by 47-year old Raghav Bahl, one of the company’s directors and an Indian media mogul, linked to Network 18 and Studio 18. The IFC is part of a complex conglomerate of companies: It is linked to Viacom 18, a joint venture with Sumner Redstone’s Viacom (VIA), which has been in in existence since May 2007. The other arms are Network 18, a conglomerate of media and filmed entertainment companies, and the film-focused Studio 18. The company does not have employees but outsources all the work. It seems that they mostly have investment in production (with a portfolio of just below 20 films) and not so much stake in distribution.

The catalogue of Studio 18 includes several blockbusters, all starring the up-and-coming megastar Akshay Kumar (who the IFC does not appear to hold on a contract), often relying on the interest in stories involving cultural transplantation between India and the West. Their first hit was the jingoistic Namastey London (2007), followed by box office hit Welcome (2007), which climbed up to a third place on the list of top-grossing Bollywood films last year. The much-anticipated Singh Is Kinng (2008), co-produced with Australia, is about to open on 8 August 2008 and promises very good box office potential, with significant hype created in advance.

IFC’s first annual report was released on July 24, 2008 and is available from the company’s web-site. It reveals that the main planned area of activity is to acquire, co-produce, or produce more of the same type of films and keep exclusive worldwide distribution rights to these. The reported revenues for the first year are £11.45 million, the profit – £2.18 million, the EPS – 3.56, and the P/E – 21.8.

The company’s own estimate of the size of the Indian film market worldwide is at £1bn annually, growing at 16% per annum.

Investors Chronicle covered the IFC twice. In January 2008 it made a recommendation for a speculative buy, when the price was at 76p, but then later in the year, in July, the same analyst said that shares were actually fairly priced at 60p. At the moment of this writing shares are at 52.70 (August 6).

In assessing the IFC, I could not help remembering Peter Lynch‘s recommendation to try to come up with a two minute-long narrative on the reasons for which you would like to buy into a certain company. In this particular case, I could not really deliver a narrative which would make a convincing case for buying into the IFC. My narrative contained more reservations than exciting promises. The company is mostly engaged in production, it is not clear how they relate to the major distribution players in a field where it is distributors and not the producers that call the shots. The films that the IFC is engaged with are films of blockbuster potential yet they are also films of limited appeal as they are typical products of formulaic Bollywood that is yet to be seen crossing over and capturing audiences beyond NRIs (Non-Resident Indians). Thus while the market may be sizable, it is also self-contained, and it is highly unlikely that these films would sell successfully in territories without substantial Indian diasporic presence. It may well be that with the release and potential success of Singh Is Kinng we will see a temporary leap upwards in share price. But on the long run I see investing in this company as a risky proposition.

© Dina Iordanova
6 August 2008