EXCLUSIVE: Bollywood power Eros International is accustomed to melodrama. But even its scriptwriters might find it hard to devise a story with as much financial intrigue as the one that’s taken place at India’s No. 1 film studio and subscription streaming provider over the last five weeks.
Anonymous Twitter and web postings have charged the company with fraud — taking Eros’s stock price down 70% since October 12, just before it held its first Investor Day gathering in New York. At about $9.55 a share in late afternoon trading on Friday, India’s first movie company to list on the New York Stock Exchange has lost $744 million of market value in a little over a month.
That has hit the company hard: Although nobody died, Global CFO Prem Parameswaran showed the depth of his frustration when he told me that he feels like there’s been “a terrorist attack on the company. We would like to destroy the terrorists.”
Tweets from accounts named Alpha Exposure and Market Farce, and longer anonymous pieces at a popular investor site Seeking Alpha, leveled several charges. Among them: Eros inflated revenues by misrepresenting the number of films it released, relied on overly aggressive accounting, and exaggerated the prospects for its Eros Now streaming service launched early this year.
The person behind Alpha Exposure told the SEC, in a letter yesterday, that Eros “is perpetuating a widespread fraud on investors that touches nearly every aspect of its operations.” In a post today the person asserts that “the company is a scam and…the equity is worthless.” He or she also corrected a mistake calculating Eros’ revenue, but insists that it does not “negate any of the other damning questions that remain unanswered.”
Eros vigorously denies all of the claims, adding that its finances are solid and prospects bright. “It feels like we’re shadowboxing,” Parameswaran says. “We’re fighting a ghost.”
What’s the motive? CEO Jyoti Deshpande says that her company was victimized by a “coordinated shortselling campaign” — an effort to drive down a stock price by investors who profit when that happens. Eros shares are thinly traded, so the stock can make a big swing when relatively few holders sour on the company.
That could devastate Eros. It’s determined to become a global force, building on the growing demand for Indian language and dubbed films and content — especially in China, Japan, South Korea, South America, Middle East and Europe. It has a library of more than 3,000 films, and produces or releases about 70 new ones a year. (This year’s successes include Bagrangi Bhaijaan, Tanu Weds Manu Returns, Welcome Back, Gabbar is Back, and Dil Dhadakne Do.) It’s also a major player in TV and digital.
To help restore investor confidence, the board’s Audit Committee hired law firm Skadden, Arps, Slate, Meagher & Flom to conduct an independent review. On Tuesday it released earnings for the September quarter that topped analysts’ key expectations. Shares are up 34% this week.
If Eros is right that critics are spreading falsehoods to game the system, then it is the latest casualty in what the SEC has identified as a growing problem in the social media age. With anonymous posts “fraudsters can spread false or misleading information about a stock to large numbers of people with minimum effort and at a relatively low cost,” regulators warned investors late last year.
Parameswaran says that he believes “there is a very good chance” of market manipulation in this case but declines to say what legal remedies Eros might pursue.
Still, as often happens when a stock nosedives, several law firms that specialize in investor-related class action claims are suing Eros, echoing the online critics’ charges. The company’s shares remain depressed, roughly back to their early 2014 trading price.
“It’s funny: Even our debt in the UK has traded down,” Parameswaran says. “But we pay our interest payments and we have a very conservative balance sheet. So there’s no liquidity crunch here.”
One of the handful of analysts who follow Eros, Wells Fargo Securities’ Eric Katz, withdrew his “buy” recommendation for the stock in late October saying that executives’ efforts to address the charges left him “feeling a bit confused.”
Others consider Eros a solid investment, even a bargain. Jefferies Equity’s John Janedis says the stock should be worth $21, and is undervalued because the market is “not giving Eros credit for the value of its film library and potential of Eros Now.” Macquarie Capital’s Tim Nollen, who also has a $21 target, reached a similar conclusion — adding that his firm ran an analysis of Eros disclosures that suggests there’s “low likelihood of fraud.”
Parameswaran is on the front line of the effort to restore the Street’s confidence in Eros. Although he just joined the company in May, he’s well known from a 23-year career in investment banking at Jefferies — where he was Global Head of Media and Telecommunications Investment Banking — as well as Deutsche Bank, Goldman Sachs and Salomon Brothers.
Eros’ biggest holders “are standing by us,” he says. That group includes Singapore’s Temasek Holdings and Fullerton Fund Management, Los Angeles-based hedge fund Dalton Investments, and Capital Group.
Parameswaran scoffs at one of the critics’ main charges: that Eros inflated the number of films that it told investors it distributed.
“This is ridiculous,” the CFO says. “In the U.S. and UK you can check Rentrak, third party sources. And this year we had some of the biggest Indian box office hits.”
The number of annual releases may confuse some people because “there are regional films [in India] that we buy that may have been released on a single screen a couple of years ago that we’ll re-release with a bigger theatrical distribution.”
Still, Eros responded to the charges of miscounts by posting a list of all its recent releases. “Lionsgate, Disney — none of the other studios have all their films on their website. We put them all on. And [the critics] attacked that.”
Challengers raised additional concerns about the growing amount of revenue that Eros recognizes in the United Arab Emirates, a popular tax haven. Yet Parameswaran says that’s just another example of fear mongering.
“DreamWorks Animation, Sony, Bertelsmann, Disney and others do business out of the UAE. So do we…It’s more of a tax friendly zone. People don’t understand the UAE as well as people in Asia do, but in the tech and media world it’s actually not a bad place to do business.”
He also dismisses the allegation that Eros has overhyped its Eros Now business. Critics say that its prospects are limited in a country where piracy is rampant, broadband is expensive, and it may face potent streaming rivals including Fox’s Star India and Zee TV’s Ditto.
Parameswaran says that “we have over 30 million register users, and those have been audited and confirmed” by the company’s auditor, Grant Thornton.
Eros says it’s eager to respond to these, and other, charges. But at the end of the day, the best case it can make for itself will be its performance.
This week it reported a September quarter net profit of $11.0 million, up 154.7% vs the period last year, on revenues of $98.8 million, up 97.9%. The top line was well ahead of the $90.7 million consensus figure among four analysts who follow the company.
“We’re going to focus on the fundamentals of the business and keep delivering great results,” Parameswaran says. By the end of March, the close of its fiscal year, Eros will be cash-flow positive. “Our stock price will be a byproduct of our success. And eventually we will squeeze the shorts out.”
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