DQ Entertainment (International) Ltd (DQE) is tapping the initial public offering (IPO) market with a public issue of 16 million shares, including a reservation of 0.3 million shares for the eligible employees. The issue of new shares would comprise 20.2% of the post-issue paid-up capital of the company and the net issue will constitute 19.8% of the post-issue paid-up capital of the company. Thus, the company intends to raise between Rs120 crore and Rs128 crore, at a price band of Rs75-80 per share.
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DQE is an animation services and production company, focused on both the Indian and international markets. It has an asset base of at least 350 hours of animation content from which it earns revenues through licensing and distribution activities.
The company recently completed a pre-IPO placement of 3.8 million equity shares to certain selected investors, including Infrastructure Development Finance Co., for cash, at a price of Rs68.10 per equity share, raising Rs25.7 crore. The IPO proceeds are intended to be used for investments in strategic alliances, global and local intellectual property (IP) development and partnership, venture into live action and expansion of its production facility and workforce.
DQE has a strong order book worth Rs457 crore to be executed over FY10-12. It has a client base of at least 90 companies, which include internationally recognized brands. Moreover, the company has moved upward in the animation value chain, gaining greater exposure to IP ownership and distribution, by following a co-production model for content development. It has launched its first home-grown 3D CGI television series, The Jungle Book, based on Rudyard Kipling’s epic novel, as well as three special television features—Balkand, Omkar and Ravan—based on Indian mythology, for India and the Indian diaspora across the globe.
Over the last couple of years, DQE has exhibited strong growth rates, given its strong order book in animation production and sound execution capabilities.
Moreover, its focus to move up the value chain into co-production, licensing and IP creation has helped the company improve its margins from 25% in FY08 to 35% in FY09.
However, going ahead, the company’s growth story is highly dependent on: acquiring projects (mostly from Europe or the US), which is again dependent on macroeconomic conditions favourable to these economies, acquiring IP rights, and earning revenues through licencing and distribution (lack of experience in the same is a cause of concern), and favourable currency fluctuations.
At the upper band of Rs80, the market capitalization post-issue for DQE would stand at Rs634 crore, which equates to rich valuations—price-earnings of 20.3 times, price/book value of 1.6 times and enterprise value/sales of 2.6 times its estimated FY12 earnings. Moreover, a lack of clarity over its business model and a limited execution record in IP creation makes us wary of DQE’s growth rates in the future. Hence, we recommend a neutral view on the issue.
Graphics by Yogesh Kumar/Mint