Book Profits in Saregama

Saregama India Ltd (SIL) reported disappointing results for Q2FY2008. While the operating revenues fell by 2.7% year on year (yoy) to Rs33.8 crore, the operating profit declined by 57.9% to Rs2.7 crore. Consequently the net profit before extraordinary items decreased by 44.7% yoy to Rs2.6 crore.

SIL’s share in acquiring new music rights declined to 9-10% from about 30% in the past. With competition setting in, the cost of acquiring these rights has gone up substantially. The current scenario wherein music rights are awarded on minimum guarantee as against revenue sharing in the past has increased the risk for music companies.

Increasing competition, lack of aggression on the part of the management and sharper decline in physical sales raise concerns. The company is expected to report an EPS of Rs 11.1 and Rs 15.5 for FY08 and 09 respectively. The current market price of Rs293.1 fully factors the risks and rewards associated with SIL’s business and thereby advice investors to book profit.