Eros Earnings Review: An Abundance Of Red Flags

Summary

• Eros claims to be “well-capitalized” yet plans a shelf offering. The company also sold shares of its key Indian operating subsidiary the very day of its earnings release.
• The company reiterated a claim from early April that it is in advanced stages of negotiations for a debt refinancing deal, yet it still has no deal in place.
• The company is facing spiking financing costs which are +463.6% q/q; Short-term debt and contractual obligations due within one year stand at $262 million.
• Past accounting questions appear to have intensified.
• Eros announced a near doubling of its content library, yet we find zero CY 2017 movies “Recently Added” to its ErosNow website.

Introduction

With this report, we intend to update the market on our findings following Eros's (EROS) latest annual results released on July 28^th and the company’s 20-F filing released on July 31^st. Much of the market seemed focused on Eros's top line and bottom line miss and how the results tarnished the company's growth story. Despite those important takeaways, we believe the full story is significantly worse.

Asset Sales and a Potential Shelf Offering Spell More Liquidity Issues

A key bullet point from the earnings release focused on Eros’s supposedly strong capitalization:

Not including the $40 million set aside for the (revolving credit facility), Eros has over $112 million of cash on balance sheet, availability under existing lines of credit and access to capital markets and the company remains well-capitalized and able to invest in future growth.

Despite the self-proclaimed clean bill of health, the company’s actions, subsequent statements, and reported debt and off-balance-sheet obligations seem to conflict with the notion that the company is adequately capitalized. In particular, the company suggested it is seeking more capitalization options. In the earnings release, it stated:

…we are in advanced stages of negotiations for a debt refinancing deal as well as expect to file a shelf for a potential capital raise soon after this earnings.

We can’t help but notice that in early April, the company similarly stated it was “in advanced stages of executing multiple long-term refinancing options” after a failed bond offering and a temporary extension of its revolving credit facility. With debt maturities looming and without a finalized deal in place, we believe the company is short on time and short on options.

Even more telling, the aforementioned equity and refinancing alternatives are being explored despite the company’s rapid selling of shares in its key Indian operating subsidiary, Eros International Media

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.