By Keynote Capitals

Highlights

Price Band : Rs75 - 80 per share

Issue Size : Rs1.28bn or $28.2mn (at the cap price)         

IPO open during : March 8 - 10, 2010

Book Running Lead Manager : SBI Capital Markets

IPO Grading : 3/5(Fitch Ratings)

Market Cap post-listing : Rs6.34bn or $139mn (based on the cap price)

Market Cap of Free Float: Rs1.59bn or $35mn (based on the cap price)

Executive Summary

- DQ Entertainment (International) Ltd. (DQEIL) is an animation producer focused on both global and domestic markets, and carries out production, co-production and global distribution of TV series, direct-to-home videos and feature films. It also creates game art for online, mobile and next-generation consoles, and visual effects, game art and entertainment content.

- DQEIL has produced / co-produced and distributed titles such as Iron Man (the first 3D animated TV series), Twisted Whiskers, Casper, third season of Mickey Mouse Clubhouse and is now producing properties like Little Prince and Little Nicolas.

- The core promoter, Mr. Tapaas Chakravarti, has been involved in the animation, media and entertainment industry for over a decade. The original entity viz., DQ Entertainment Ltd. was established in 1987 and moved into animation production in the year 2000. Thus the current entity DQEIL has a track record of around a decade.

- The ownership structure of DQEIL is somewhat complicated. DQEIL is a subsidiary of DQEIL Mauritius, which is in turn, a 100% subsidiary of DQEIL plc, incorporated in the Isle of Man and listed on AIM stock exchange in UK.

- As per NASSCOM & Ernst & Young Report 2009, the estimated size of the Indian animation industry was $494mn in 2008, and is projected to reach $1bn by FY12. While the animation industry is at a nascent stage in India, we note that India, which typically used to earlier attract the lower end of animation work in outsourcing deals, has of late started getting quality work outsourced from Hollywood studios. Crest Animation Studios, a peer, is currently working on a full-length animation film, “Alpha and Omega” for Lions Gate Entertainment and expects to complete it by the end of the calendar year.

- As of September 2009, US and Europe together accounted for 96% of revenues. However, exposure to the US has reduced from 41.6% of total revenues in FY09 to 33.4% in H1-FY10, while exposure to Europe went up from 51.2% to 62.8% in the same period.

- A substantial portion of its revenues comes from the animation segment, which accounted for around 93% of H1-FY10 revenues. EBITDA margin expanded from 24.7% in FY08 to 35.1% in FY09, primarily on account of capitalization of expenditure of Rs7Cr. EBITDA margin in H1-FY10 though lower at 32.1% is still healthy.

- It has a library of over 350 hours of international programs for distribution, including Little Nick, The Jungle Book (for which it recently signed broadcasting deals in Singapore, Israel, Germany and France), Fan Boy and Chum Chum, The Penguins of Madagascar, Maryoku Yummy - Season 1.

- Its foray into co-production has helped DQEIL secure a strong order book worth ~$95mn (~Rs457Cr), along with IP content rights. The company expects the order book to be executed over a period of a few years, apparently providing visibility to revenue streams.

- However, we note the lack of adequate disclosures and risk of reduction in order book. The company has not provided financial statements prior to FY08, on either standalone or consolidated basis. Of the order book worth ~$95mn, the company has executed deal memos outlining mutual commitments for orders worth ~$39mn or 40% of the order book. However, there are possibilities of these not getting converted into firm orders.

- DQEIL concluded a pre-IPO placement to IDFC Investment Advisors at a valuation of Rs68.11 per share in December 2009, at a discount of 14.9% to the cap price for the IPO.

- The company’s guidance on the order book execution is confusing. As per the RHP, over 80% of FY10 revenues are identified with over 40% of the order book already in various stages of production & balance to commence during the year. $28mn are to be executed in FY10 and $33mn and the balance beyond FY10. The yearwise execution of order book over the next few years is therefore unclear. We are therefore unable to arrive at earnings estimates for this company.

- However, we arrive at fully diluted EPS of Rs2.56 for FY10 (annualized H1-FY10, growth of 26.6% y-o-y) and Rs3.59 for FY11, assuming growth of 40% y-o-y. Based on these estimates, the IPO is priced at 31.2x FY10E and 23.3x FY11E at the cap price, which in our view appears quite rich.