NEW DELHI: When film production and distribution company Eros International Plc’s shares dropped by as much as 20% earlier this month after being downgraded by two rating agencies, not too many people in the industry were surprised.

Rating agency CARE on 5 June, cut its ratings from BBB- to D, citing delays or likely default in serving debt availed from banks. Moody's Investor's Service downgraded the corporate family ratings to B2 from B1.

In a statement issued three days later, Eros insisted it has a strong liquidity profile and healthy balance sheet with over $135 million of cash and cash equivalents, and net debt of $145 million.

But industry experts say all is not well with the Sunil Lulla-owned company.

For starters, its video streaming service Eros Now hasn’t been able to take off.

“The company had to keep pumping in investment after the launch of the service in 2012 but the point is, right now, OTT (over-the-top video streaming) in India is a business where nobody makes money. People are looking to build valuation, but from a cash flow perspective, it is extremely tough," said a media analyst on the condition of anonymity.

Defending the company, group chairman and CEO of Eros International, Kishore Lulla, said Eros Now had risen to 18.8 million paid subscribers and 154.7 million registered users as on 31 March, far exceeding its target for 2019 of 16 million subscribers. Hotstar, the OTT service owned by the Star network, commands 300 million monthly active users, while Netflix that had hit five million subscribers (last reported in 2017) is looking for its next 100 million subscribers to come from India.

“This represents a 138% increase in paid subscribers over the past 12 months, and an 18% increase over the prior quarter. Our success in building our subscriber base will further increase the visibility of our earnings and move the company towards a more annuity-based business model. which will deliver continuing and profitable growth," Lulla told Mint in an email.

According to Asia-on-Demand, a report on OTT investment brought out by strategy and economic advisory firm AlphaBeta advisors, Asia accounted for around $2.7 billion investment in content spending in 2017, and this could nearly quadruple by 2022 to $10.1 billion. Around $4 billion of this spending is in the form of foreign direct investment by global players. With the kind of deep pockets that American services such as Netflix and Amazon Prime Video have, it becomes increasingly tough for an Indian player like Eros to power through. Add to it the challenge of broadcaster-led apps, such as Hotstar, which come with massively popular properties such as the Indian Premier League (IPL) and the ICC Cricket World Cup. The list of top 10 entertainment apps of 2018 in India, according to the Ficci-EY media and entertainment report 2019, is led by Hotstar and does not include Eros Now.

“Digital is becoming an increasingly tight and competitive space. There should be some rationalization over the next year or two and weaker players will have to exit," said Jehil Thakkar, partner, Deloitte India.

To be sure, Eros has recognized that the subscription market in India is at a latent stage and the real potential lies overseas. It has tied up with a host of players ranging from Apple Inc. to UK-based TV and broadband company Virgin Media for distribution abroad. But industry experts said the service hasn’t caught on outside the country either. Reportedly, the company also had plans to launch a bunch of television channels to reach out to overseas audiences, which have not materialized.

When asked, Lulla said the company was not focused on TV channels.

“As a result (of the huge investment in digital), Eros had to constrict its movie side a bit. That led them to doing joint ventures and then not getting into the large tent-poles films that much. When the smaller films didn’t work, that led to more stress," the analyst added.

To be sure, Eros hasn’t backed a big-ticket Bollywood film since Sanjay Leela Bhansali’s 2015 magnum opus Bajirao Mastani that cost them over Rs. 145 crore. It has earlier admitted to letting go of projects like Padmaavat and Shivvaay because of budget concerns and the fact that the company was looking to consciously shift from box office to online video streaming. In the period thereafter though, its repertoire has been cluttered with box office failures, even in the form of low-scale, modestly mounted films like Manmarziyaan, Bhavesh Joshi Superhero, Mukkabaaz, Munna Michael, Sarkar 3, Rock On 2 and Baar Baar Dekho.

“Eros first adopted the strategy to focus on content-driven films with high potential for returns in 2015. We take a portfolio approach to our film slate focusing on the right mix of language, genre and budget and this reduces our dependence on big budget theatrical releases. We have always showcased a strong pipeline of theatrical and original content, which is yet to be fuelled by Rs. 10 billion joint venture investment with Reliance Industries," Lulla said.

However, trade experts say the crunch for Eros has been on for about a decade. The company has had a history of investing in big-budget box office failures since the mid-2000s with disasters like Veer, Drona and Yuvvraaj, and then marking figures up unrealistically for investors. The period thereafter saw some hits like R..Rajkumar, Goliyon Ki Raasleela Ram-Leela and Tanu Weds Manu Returns, all co-productions where profits had to be shared. In 2015, a section of investors in Eros’ US-listed unit filed a class action lawsuit accusing it of making misleading statements or concealing information that affected its share price. That resulted in a 45% crash in its New York Stock Exchange-listed holding company in October 2015 and a 20% fall in the Indian unit’s stock. In 2017, a class action lawsuit was dismissed by the US District Court for the Southern District of New York and Lulla says the company is fully compliant with all corporate governance norms and has always disclosed all related party transactions and made full, complete and comprehensive disclosures since prospectus.

Members of the industry, however, insist, there is no smoke without fire and Eros’ poor reputation for commitment and transparency is a real and old one.

“Its shift from big-budget films also has to do with Eros’ financial crunch and the fact that a lot of names in the industry do not want to be associated with the company, given its record for accounting discrepancies," a trade analyst said.

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