DQE has shifted its business model from a largely outsourced model to a co-production model and its future growth may depend on continued rollout of IP content in which the company has little experience

DQ Entertainment (International) Ltd has shifted from a largely outsourced model to a co-production model with large animation studios. However, DQE has a limited track record of realising revenues from licensing and distribution. The company has limited experience in Intellectual Property (IP) content creation and has forayed into production of its own IP content.

The company’s major chunk of revenues is derived from the US and Europe which contributed 41.57% and 51.18% revenue for FY08 and FY09 respectively. DQE plc, the promoter group company, has incurred a loss of Rs90.71 crore in FY 2008. Television production contributed nearly 91% of its revenues in FY09. Licensing and distribution activities and motion video and game development contributed 5% and 4% respectively.

The company’s earnings before interest, tax, depreciation and amortisation (EBITDA) margin has increased to 38.6% in FY09 from 26.6% in FY08.

DQE, incorporated in 2007, is engaged in production of animation, visual effects, game art and entertainment content for the Indian and global media and entertainment industry. DQE is a producer, co-producer and global distributor of TV series, direct-to-home (DTH) videos and feature films. Besides, the company has forayed into production and distribution of live action television and feature films. DQE Mauritius, incorporated in Mauritius is a wholly-owned subsidiary of DQE plc, an Isle of Man incorporated entity.    

DQE currently enjoys tax benefits under Section 10A of the Income-Tax Act, 1961. However, the tax benefits under Section 10A under the current provisions will not be available from 1 April 2011. If the company’s proposal to move its production facilities into an SEZ is delayed, its tax expense will increase, thereby reducing its profitability.

“At the upper band of Rs80, the market capitalisation post-issue for DQE would stand at Rs634 crore, which equates to rich valuations—P/E of 20.3x, P/BV of 1.6x and EV/Sales of 2.6x FY2012E. 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,” said a research report by Angel Securities.

According to the prospectus, the proceeds of the issue will be invested in co-production agreements, IP content creation, development of office premises and production facilities, development of infrastructure and additional facilities at the Special Economic Zone (SEZ) Unit, (Kokapet Village, Rangareddy District, Andhra Pradesh) and investment in its subsidiary DQ Entertainment (Ireland) Limited.

The issue opened on 8 March 2010 and closes on 10 March 2010. The issue size is Rs120 crore-128crore with a price band of RsRs75–80. The promoters’ holding will be diluted from 94% (earlier) to 75% after the issue.

The company recently raised Rs25.70 crore through a pre-initial public offer placement of 0.38 crore shares of Rs68.10 each to certain select investors including Infrastructure Development Finance Company (IDFC) Investment Advisors Ltd.

SBI Capital Markets Ltd is the lead book-running manager for the issue. Fitch has assigned a grade of ‘3’ to the IPO, indicating ‘average fundamentals’.