Why we did not recommend Tips, a 70X stock?

​​Producer of India's leading albums like Raja Hindustani and Karan Arjun, Tips Industries Ltd is also a 100-bagger in the stock market. If you had invested ₹1 lakh in Tips Industries 5 years ago, you would have a whopping ₹1.23 Crore today!

However, our analysts found some red flags in the company, which is why we did not recommend it in Finology 30. Learn more in this article.

What makes the Music Industry special?

Music is an important part of India's media and entertainment sector. Each year, over 20,000 original songs are created in India by over 40,000 creators, generating over ₹12,000 crore in revenues annually. As per the IFPI Global Music Report, India ranked as the 14th largest music market globally in 2023, witnessing a 15.3% growth in revenue during FY2023

Value of the music industry in India from 2007 to 2022, with estimates until 2025.

Tips is an Indian entertainment company that creates and acquires audio-visual content and licenses it digitally on various distribution platforms in India and abroad.

Its music library has over 30,000 songs across various genres and major regional languages.
It is on various global digital platforms like YouTube, Spotify, Jio Saavn, Resso, Apple Music, and Amazon Prime. As of March 2024, Tips Music has over 9.7 crore. subscribers on its YouTube channels and has received over 19,400 crore views.

Music is important for Tips Industries as it is its source of revenue. Therefore, to comprehend Tips Industries, we must understand what makes music exceptional and the business model.

High-value content and repeatability make music unique.

Content that can be monetised multiple times naturally commands greater economic value, and music ranks at the top of the content pyramid when ranked on repeated monetisation. 

Understanding the Music Industry

The music industry works under a perplexing web of numerous participants. The partnership structure comprises the creator side (lyricists, composers, directors, singers, etc.), the customer-facing side (devices, venues, streaming platforms, etc.), and connecting the two is the business side (booking agents, production houses, labels, publicists, distributors, etc.).

To make it a bit clearer, here's a very basic portrayal of the music industry's value chain:

The entertainment industry broadly has two types of music - Film-based and Individual/Album (Non-Film).

The industry is a fast-growing industry. According to the FICCI–EY Media & Entertainment (M&E) Report 2023, the Indian M&E sector grew by 20% in CY2022 to ₹2.1 lakh Cr., 10% above its pre-pandemic level and is expected to grow 11.5% in CY2023 to reach ₹2.34 lakh Cr. and then grow at a CAGR of 10% to reach ₹2.83 lakh Cr. by 2025.

As per IMI's Digital Music Study Report 2022, 67% of the surveyed respondents in India say that music is crucial for maintaining their mental health. Also, the recorded music industry in India grew by 19% to reach ₹22 billion. Film music, which had been reduced during the pandemic, returned to scale. 87% of revenues were earned through digital means.

Most importantly, the music listening hours per week in audio streaming increased by 17.2% in CY2022 over CY2021 to 6.7 hours a week, as per IMI. India's market is largely digital, with digital revenues accounting for 86.9% of overall revenues.

Some of the factors affecting the growth of the music industry are:
Convenience: Listeners no longer need to carry separate devices; smartphone apps make music available 24x7 with a tap and a swipe.
Rising Data Consumption: As per Ericsson Mobility Report (EMR), there were 81 crore smartphone subscriptions in India in 2021 compared to 73 crore in 2020. This number is expected to touch 120 crore in 2027.
Cheap Data: India has the lowest data costs in the world. Given such low costs, data prices are no longer a hindrance to the adoption of mobile Internet. 

Company History

In 1975, the Taurani brothers used to trade in LP's (Long Playing Phonograph Records) for three of the biggest companies in India – HMV, Music India & CBS. By 1977, they had become the biggest dealers for these companies in Western India.

After seeing great success in the LP's business in Western India, the Taurani brothers first established Tips Cassettes & Records Co. as a partnership firm in 1988. The firm's main interest lies in the manufacture and trade of audio and video cassettes.

Mr Kumar Taurani and his brother, Mr Ramesh Taurani, are also the founders of TIL. The company has a library of over 30,000 songs and earns royalty income. TIL has produced and released around 40 Hindi films in the past 20 years and also sells theatrical, satellite, and various other rights to distributors, broadcasters, etc. 

Currently, with a market capitalisation of ₹6,396.29 Cr. and under the managing director, Mr Kumar Taurani, the company is rising digitally.

What does Tips Industries Ltd. do?

Tips Industries focuses on the value chain of Music - its production and acquisition as a music label company. Its strategy for music production is to discover and develop promising singers by engaging with artists across various genres and languages, which helps them promote fresh talent.

For the purchase strategy, Tips purchases music rights from other producers when it sees profitable opportunities, and this content acquisition is entirely funded through internal accruals without any borrowings or leverage.

Monetisation

On the revenue front, 100% of the operating revenue comes from license fees, as it focuses purely on music. During FY23-24, the company released 733 new songs and music revenue of ₹241.58 Cr. compared to ₹186.78 Cr.. in the previous year, representing an increase of 29.34%.

Specific revenue recognition criteria for Tips Industries are:

Royalty from Music Rights: Revenue from music rights is recognised either at the point of time the license is made available to the customer or over the access period as per the terms of the agreement/contracts, depending on whether the customer obtains 'right to use' or 'right to access'.

Interest Income: Interest income is recorded on an accrual basis based on the agreed terms.

Ownership of the music content IPs (Intellectual Property) grants Tips Industries two types of rights through which it can monetise: 

(i) Sound Recording Rights: It is a direct licensing contract that gives a license to play a song for 60 years.
(ii) Publishing Rights: It is the license to use the song lyrics and composition, and it is  'life of author + 60 years'.

Platforms

With its music catalogue, where 90% of business is from the catalogue till 2020. It includes Hindi, Punjabi, Gujarati, and Bhojpuri. This vast collection is licensed to numerous over-the-top (OTT) video platforms, social media platforms, content aggregators, television channels, telecom companies, radio stations, advertisers, event management companies, hotels, restaurants, and many others.

Payback Period

This refers to the time a company takes to recover the money it spends on acquiring and marketing new content in a financial year. For Saregama, this payback period is within five years, while for Tips Industries, it is within two years.

Does Tips have robust financials?

The company consistently rewards shareholders through Buybacks & Dividends.

The growth in the margins is primarily driven by increased usage and consumption on digital platforms.

 

The company has a balance of revenue sharing between India and overseas.

The promoter holding decreased to 68.92% from 75% in Q2 FY24 due to a block deal.

The Block Deal is done by the promoter itself. With the deal money, the management is planning to make films and grow as they have separated their companies (film and music). Earlier, both companies, Tips Industries and Tips Films, were together, but now they are planning to expand their film business by spending the money. (Planning to produce 8/10 films after a year - a mix of regional/Hindi.)

Does that mean that if they need more funds in the future to produce films, they are likely to sell their holdings? 
No, as per the chairman & MD of the company, Mr Kumar Taurani, the company has enough cash for that, and with the rising demand, they'll partner with other companies instead of diluting.

Business prospects

The company seems to have sustainable competitive advantages.
The company's strong moat can be indicated by its content library, which contains over 30,000 songs across genres and languages and gives more visibility to music revenue. It has a vast library of music content spanning various genres and languages like Hindi, Punjabi, Gujarati, Bhojpuri, and more.

Distribution Network: Music streaming, downloads, internet radios, and other subscription-based music services have become important channels for the distribution of music. With its presence across leading global digital platforms such as YouTube, Spotify, Jio Saavn, Resso, Apple Music, Amazon Prime, etc., it has built a strong distribution network.

Content Acquisition Strategy: The company follows a different method of accounting, which is cash-based. It always writes off all the content costs in the year of release. Nothing is capitalised and carried in the balance sheet.

Content Cost: Content cost for Q2 FY24 was ₹4.7 crore vs ₹17.2 crore in Q2 FY23. The fall in content cost, which usually comes to 25% (average of last ten quarters) of the revenue, boosted the operating margin to over 80%. As per management, this substantial rise in the margin is because of lower content this quarter and a few new releases.

Despite low content this quarter, Tips Industries seems above the margin, making a cost-effective content acquisition.

This advantage over its competitors doesn't mean it has pricing power. Its whole business lies in the production and acquisition of music. 100% of operating revenue comes from licensing. 
As a music label, it doesn't have control over the platform prices, such as YouTube, Spotify, Jio Saavn, and Apple Music, which people generally pay to listen to songs.
In India, where the market is price-sensitive, the subscription model is still growing.

Can it be copied?

The business model of the company can't be copied because of the entry barriers.

For a new player to enter into this business is very difficult as survival would be very tough due to not having enough IPs or catalogues. 

The entry barriers in this industry are huge. If one tries to start a label of one's own and acquires the music of one film, on average, he gets 4 to 5 songs. If he goes out there and has deals going with 100 different producers, which is a herculean task for anyone, then he might get 500 songs in a year. If the same continues for a decade, he probably ends with 5,000 songs. And in 50 years, he will only get 25,000 songs.

For example, Saregama sits on 1,30,000 songs, and Tips on 30,000 songs. A new player may have a song being released on YouTube, which did well, but on a sustained basis, developing a business around it is a difficult task. Globally, as well as in the music industry, the advantage that the players have is that the entry barriers are massive.

The company is also not cyclical, as it operates in the media and entertainment industry, which has no specific cycles.

Tips doesn't depend heavily on external sources. The company record their songs, produces them under its label and then distributes them. When it comes to artists, a singer holds all rights to the song, so they don't have to get into the hassle of royalty over every song.

Growth and Profitability

There has been consistent growth in sales and profits over time. Sales have increased from ₹47 Cr. in FY18 to ₹187 Cr. in FY23, with a 5-year CAGR of 31.51%. Profits have also increased from ₹3 Cr. in FY18 to ₹77 Cr. in FY23, with a whopping 5-year CAGR of 89.5%. This growth in revenue is primarily driven by increased usage and consumption of Tips Industries' music on digital platforms.

The company is also able to convert its operating profit into healthy cash flows, as the CFO/PAT for 2023 is 1.08 and is showing an upward trend post-COVID.

With a 5Y average ROE of 38.89% and a 5Y average ROCE of 53.77%, the company has been generating free cash flows and consistent shareholder returns.

To maintain its growth in the long term, the company is focusing on its acquisition and production strategy.
For the production, Tips Industries has a strong team that engages with artists across genres and languages to promote upcoming talent. 
For music acquisition, it always tries to maintain costs while acquiring music rights, and the same can be seen in its content-acquisition cost.

Demerger

Tips Industries has recently announced the demerger of its film division (Tips Films) from Tips Industries. Earlier, both companies were together, and now they plan to expand their film business by spending the money (planning to produce 8/10 films yearly).
Recently, the management has diluted shareholding by 6.07% (~ ₹268 cr, 78 lakh share @ 344) equity. The promoter holding was at 75%, which would come down to ~ 68%. The management is planning to spend the money raised on its film business.

This demerger also shows that the management is separating its profitable music business from the films and plans to grow the film division separately.

Partnership: Tips Industries and Sony Music Publishing (SMP) have teamed up to promote Tips Music's songs globally. The partnership is expected to increase publishing revenues for Tips Music and expand the reach of Indian music to international audiences.

Tips vs its peers

We have done a peer comparison of Tips Industries by comparing it to its listed peers operating in the Media and Entertainment segment. By comparing Tips Industries to its peers, we can better understand its performance relative to that of its competitors.

Tips Industries is involved in licensing music in audio/video format within the Music and Entertainment industry. We have compared it with its closest competitor, which also operates in the music segment.

	YouTube Subscriber Base (Cr.)	Music Catalogue	5Y Sales Growth	5Y Profit Growth	5Y ROCE
Tips Industries	8.79	30,000	31.51%	89.57%	53.77%
Saregama India Ltd.	9.7	1,50,000	15.62%	45.40%	27.36%
Zee Entertainment Enterprises Ltd.	13.4	12,000	5.07%	-38.82%	18.77%

 

Used EBITDA margins to compare cash operating profits and to know business operational efficiency. Over the last five years, Tips Industries' margin has shown growth.

SWOT

Strength

• Increased focus on music: Focussed business towards music production and acquisition by demerging its film division.
• The payback period of content cost is less; it is two years, compared to 5 years for Saregama.
• Has brand recognition with blockbuster songs like 'Raja Hindustani', 'Hero No. 1', etc. 
• Reduced debt to make it a debt-free company.
• Improvement in the net profit from the last three years.
• Diversified geographic balance in terms of revenue. 

Weakness

• High cost of talent replacement as famous singers like Alka Yagnik and Atif Aslam are associated with the company.
• Operates in a market where local, regional music label companies can exploit in digital format.
• The song catalogue is more focused towards the 90s. It should have a mix of modern and classic to attract every generation.

Opportunity

• As customer preferences are volatile in this segment, diversifying its song portfolio could be an opportunity.
• Targeting more customers to increase its customer base in digital segments.
• Looking for a potential merger and acquisition of a music label company.
• Deals with platforms like Sony Music can help it grow internationally.

Threat

• Competitive pressures from established players like Saregama, Zee Music and local music label companies.
• Piracy is one of the rising threats, as most people want to listen to songs for free.
• Any legal or regulatory changes related to the copyright or trademark.

Future Outlook

The company's music products are popular, with a high number of YouTube subscribers and views. Overall, workers seem to be happy with the company culture, as per reviews on Ambition Box. The company has an overall rating of 4.0, with work satisfaction being the highest-rated category at 4.5. However, work-life balance could be improved.

In comparison to its closest competitor, Saregama, Tips is growing faster on YouTube platforms.

Despite all this, the company faced legal or compliance issues in recent years. The issues are not significant, as the business operation wasn't disturbed significantly.

• Wynk utilised Tips Industries' content without a formal commercial arrangement.
• This led to a case where the court disallowed Wynk from using any part of the Tips repertoire, and Tips received a favourable judgement from the Division Bench of the Bombay High Court that Wynk could not access and use music owned by Tips Industries Ltd. without explicit consent.

Why did we not recommend Tips Industries Ltd.?

There were multiple reasons why we did not recommend this stock -

Corporate Governance Concerns: The chairman & managing director also serve on the audit committee, which raises concerns about the independence of internal controls. This lack of separation could lead to conflicts of interest, weakening oversight and transparency.

Legal and Compliance Issues: While past legal and compliance problems did not majorly disrupt operations, their existence points to underlying risks. Any future escalation could negatively impact the company’s performance and investor confidence.

Piracy and Regulatory Risks: Piracy remains a growing threat, with more consumers opting for free music options. Additionally, changes in copyright laws could further pressure the company's earnings, posing a long-term risk.

Catalogue Limitations: Tips Industries has a strong song catalogue, but it is heavily focused on music from the 1990s. In today's rapidly evolving music landscape, there is a need for a more balanced mix of modern and classic songs to appeal to a wider audience across different age groups. Without this diversity, the company risks losing relevance among younger generations.

While Tips Industries has a valuable music catalogue and operates in a growing digital market, concerns about governance, piracy, and the limited appeal of its song collection make it less attractive as an investment opportunity at this time. The company needs to address these strategic challenges to unlock its full potential. Hence, we suggest investors to be cautious.

Tips got rejected in our thorough screening criteria for good long-term stocks. However, there are very few stocks that cleared it. Check them out here.