Eros International PLC (EROS) ("Eros PLC") is a leading distributor of Indian language films. The company also operates a nascent streaming business known as Eros Now. While the company claims it has grown revenue and operating income, its consistent lack of free cash flow tells a different story. Digging into the company's foreign subsidiaries and accounting policies reveals that the reported numbers are a mirage and that the company has misled investors about its financial results and financial health. Finally, we believe the company has lied to investors about the content available on Eros Now and its user metrics. Our research suggests Eros Now is late to enter the streaming market, which already has numerous competitors. The competitive position of Eros Now is only likely to worsen once Netflix launches. We believe EROS is most likely worthless or worth only a small fraction of its current market value, and our analysis shows that:
- Due to aggressive accounting practices, EROS' reported earnings are significantly overstating the economic reality of its business model. 80% of its COGS and 57% of its total operating expenses are the amortization of its film library. EROS' accounting policy for amortization is more aggressive than its U.S. peers despite the fact that piracy more meaningfully impairs the longer-term value of the company's assets. Also, we believe that EROS' policy is counter to the matching principle; there is very little revenue earned from these assets beyond the year of theatrical release. We think economic profits are significantly lower than reported profits.
- EROS' subsidiary financials reveal a lack of free cash flow and raise many questions about the company's accounting. More than 100% of the revenue growth, representing about one third of total revenue now, is being earned in the United Arab Emirates. In addition, while the British Virgin Islands, Singaporean, and Mauritian subsidiaries show
