Globus: EROS's Elephant In The Room

Summary

• We believe that none of the core issues from our June 9th note have been addressed by EROS management, the sellside, or the market at large.
• We strongly believe that Globus and 11 UK companies are likely to be related parties of EROS that may have been utilized to create fictitious UAE revenues.
• The sellside should ask serious questions on the 1Q17 earnings call, not another round of softball ones regarding non-GAAP Eros Now metrics or the "potential" in China.
• All investors would benefit from an honest discourse about the real issues that pertain to Globus and the 11 UK Companies.

In light of both poor EROS fundamentals and deepening accounting concerns, we are surprised that EROS's stock is up 45% in the last few months since our initial note regarding undisclosed related party links in the UAE.

To simplify things, we believe that the strong evidence we have laid out demonstrates the following:

1. Globus Ent FZE ("Globus"), an apparent related party of EROS domiciled in the UAE, commissioned the EROS film Rana through the vehicle Rana Productions Ltd. ("Rana Productions"), an apparent related party of both Globus and EROS, for 1 GBP.
2. Rana charged Globus 6.7MM GBP for "film rights" but neither collected any cash nor released the film Rana.
3. Converted at 1.50 GBP / USD, these film rights represent $10MM of UAE revenue, which may represent 48% of EROS's cumulative UAE revenue from 2012-2013 and help explain the ballooning receivable balance at EROS. Including non-related party receivables, total Rana Productions uncollected receivables appears to be 14MM GBP, or ~$20-21MM USD, compared to cumulative EROS UAE recognized revenue of $20.7MM from 2012-2013.
4. Rana Productions is one of the eleven UK companies we have uncovered that appear to be related parties of both EROS and Globus.
5. While detailed revenue disclosure after 2013 is limited, this network of apparent related party UK Companies linked to both Globus and EROS may be responsible for the growth in EROS's Revenue by Customer location in the UAE from $14.5MM in 2013 to $103.8MM in 2015.

If we are right about Rana Productions and Globus, the market should have serious doubts about the truthfulness of EROS's financial statements. EROS's investors should demand an explanation for what is going on with this EROS linked network of shell companies.

Furthermore, the sellside should ask about Rana Productions, Globus, and the other ten UK Companies on the 1Q17 earnings call.

Analyst’s Disclosure: I am/we are short EROS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author of this article is a private fund manager. At the time of publication, funds and accounts managed by the author were short Eros International Plc (EROS). Such funds and accounts may buy and sell securities of EROS (and other companies mentioned in this article), including by covering short positions in EROS and/or changing to long positions in EROS, both before and after the publication of this article and without giving further notice to any party. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article represents the opinion of the author as of the date of this article. This article contains certain "forward-looking statements," which may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "potential," "outlook," "forecast," "plan" and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents.