We expect the company to continue to consolidate its market position primarily aided by expansion of its global distribution deal with Warner Music and commitment to invest 25-30% of its revenue on new content acquisition. In fact, at a time when most music labels are finding it difficult to grow (market declined 2% in FY25, as per EY FICCI Report) on account of consolidation amongst music OTTs and the subsequent decision by the top 2 market leaders to stop doing minimum guarantee (MG) deals, the Warner deal ensures topline growth visibility for Tips Music.
Amongst the two listed music labels in India, we have a clear preference for Tips Music over Saregama (HOLD, TP INR 550). This is because the former stands out due to: its pure play focus on music content monetization; its catalogue being recent and therefore more monetisable; guaranteed access to new music content from Tips Films (NR); and easy-to understand accounting policies.
Given the multi-year annuity nature of the music business and expectations of broadly stable operating cash flows, we value Tips Music using 15-year DCF assuming a WACC of 12% and Tg of 5%. Key risks include 1) Irrational rise in competitive intensity driving new content cost, 2) Hiccups in distribution partnership with Warner, and 3) Slower-than-expected uptake in paid subscriptions and digital penetration.
Partnerships with global giants and aggressive content investments to drive growth: Tips Music entered into a 4-year global content distribution deal with Warner Music in Mar’24. The partnership is likely to contribute 30%+ of its revenue in FY26 vs. 25% in FY25. It is an MG deal with a clause for escalation of value every year, thus ensuring high revenue visibility over the medium term (FY25-FY28), especially at a time when the market is yet to recover from the adverse impact of consolidation of music OTTs and a shift in the remaining OTTs’ focus to paid subscriptions. Tips Music recently also entered into a revenue sharing deal with Sony Music Publishing (SMP) through which it intends to generate incremental publishing revenue in international markets. It also remains committed to investing 25-30% of its revenue towards new content acquisition, which ensures steady access to content to drive topline growth.
Prefer Tips Music over Saregama: Tips Music is singularly focused on music content acquisition/creation and monetisation, having strategically demerged its Films division to streamline its music business. This focused approach has drastically reduced its business risk, and improved revenue and operating profit visibility, in turn, leading to efficient use of capital. Moreover, given that promoters of both demerged entities remain the same (the Taurani family), the former still gets access to any music content produced by the latter at an arms’ length basis. Music labels with high revenue visibility and guaranteed access to new content are likely to be at an advantage, especially at a time when content cost is rising.
Expect medium-term earnings to grow 24%; initiate with ‘BUY’ and Mar’26 TP of INR 800: We expect Tips Music’s revenue to grow ~25% over FY25-28, factoring in the aforementioned strategic partnerships and aggressive content investments. This, in turn, should translate into healthy earnings CAGR of ~24%. We believe the company deserves to trade at premium valuation multiples to Saregama (FY26/27 PER of 41x/33x) as it is not only expected to meaningfully outperform the broader music label industry growth in India but also has lower business risk. We initiate with a BUY and a TP of INR 800 (implied FY27E PER of 40x).
