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Weekly Insights #18- Music Labels: Uptrend to Resume

Music Labels like Tips and Saregama have been one of the biggest multibaggers over last 3-4 years. It is a trend driven by the evolution of music industry that started playing out from 2014-2015 and was finally discovered & discounted by the market in 2020 & 2021.

You can understand this evolution and read our research on the same in our old blog post from 2021 here-

After delivering very strong returns in 2020 and 2021, both these stocks: Tips & Saregama has gone into consolidation over last 1-1.5 years. The reason for this has been a confluence of few factors; of which overall market correction is known & understood. But aside from that, there are two additional factors which according to us have led to this correction-

A. Poor Bottomline Performance in FY23

After many years of non-linear growth in profits, FY23 saw both companies reporting lower growth in profits even though the revenue growth was still strong.

Tip’s revenues grew by 38% but profits grew by only 18% in FY23; similarly, for Saregama profits grew by only 14% even though music licensing revenues grew by 22%.

This compression in margins (reason for lower profits growth) was on account of sharp rise in content costs for both these companies. Content costs for Saregama increased by ~50% in FY23 and by 94% for Tips.

B. Valuation Headwinds

During 2020 & 2021, as the market discovered these stocks, there was a sharp re-rating such that Saregama started trading at a PE multiple range of 60x and Tips at 40x, which then corrected to a range of 30x and 20x for Saregama & Tips respectively over last 1-1.5 year.

One reason for this multiple compression is obviously the slowdown in growth as highlighted above; market just hates margins compression.

But more importantly, there is another fundamental principle of the market at work here. Music Labels as a business model is still relatively new for the markets; there is still a lack of understanding & coverage for these businesses.

As a principle, Markets ignores short term issues while valuing a business only when it has seen a reasonable period of stable performance from a business and believes in the terminal value of the business. Valuations of new businesses & companies are typically volatile in early stages as the market is not ready to give that benefit of doubt to near term issues. Only when these companies are able to show that their long-term growth is structural in nature is when the market ignores near term issues and does not punish a stock for near term challenges.

Having tracked this space closely since 2020, I have seen how the market narrative has shaped up for these businesses. Early on in 2020 & 2021, general thought was that it is a covid led trend and will fade away once things open up. And thus in 2023, market was little skeptical around growth for these companies and that affected valuations as well.

But these companies have shown sustained revenue growth in FY23 as well and thus there has been a slight change in market’s perception around the long-term growth here. But the market is now worried about the sharp increase in content charges.

We have always maintained a view that monetization of music rights will continue to improve and thus these businesses will deliver sustained growth for many more years to come. Further, in terms of content costs, we believe that from here on content costs will not increase at the high pace that it has in past few years.

These companies have gone from spending very little to no money in new content to a sizable base now (Tip’s content cost has tripled over last few years).

We believe FY24 will see uptrend to resume in these stocks as profits will grow atleast in line with revenue if not more and then with sustained revenue growth, market’s perception here will continue to improve and thus there would be re-rating as well for these stocks.

When we first wrote our blog on music companies in 2021, we stated that we expect 3-5x returns here; we did see a 3x in 2021 itself and have seen consolidation for last 1-1.5 years; and expect that 5x returns to be achieved in FY24.

That’s it for this week, new insight coming up next week. So stayed tuned!



Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.

“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”

“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”

“The securities quoted are for illustration only and are not recommendatory”

Stock specific investment disclosure:

Tips Industries- Invested. Not Traded in last 30 days. Active recommendation in Research Service.

Saregama- Not Invested. Traded in last 30 days. Not an active recommendation in Research Service.

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