We continue to love EROS

Eros stock witnessed a significant decline from all time high levels of INR 635 in mid-July 2015 to about INR 173 currently and is trading below its October, 2010 IPO price of INR 175 per share. The sharp correction was due to concerns raised by a short seller over accounting practices followed by the parent company (Eros International PLC). The major issues were 1) the stark increase in receivables owing to increased business exposure to UAE, 2) validation of the Eros Now user base and 3) the future cash flow viability. The parent has provided a point-to-point rebuttal to the concerns followed by Eros International’s announcement of a completion on March 21, 2016, of an internal audit review with the assistance of Skadden Arps Slate Meagher & Flom LLP. The review covered analysis of company's financial reporting areas which includes its UAE sales and revenue, amortization policy of intangibles, related party transaction with Eros International Media. Eros International got a clean chit in an independent internal review, thereby reinforcing confidence in the company's accounting policy, practices and disclosures (stock was up merely 5% on this announcement on the day of the announcement).

Eros International’s results are scheduled to be out on May 27. The company has remained confident of not having done anything wrong in this entire saga and has taken all the necessary steps to address the concerns raised by bears. While Eros currently trades at a very low one year forward PE ratio of 5.8x (vs 9.0x for its peers), we believe the concrete triggers for the company’s re-rating are- the improvement in receivables, a clear transfer pricing deal with the parent coupled with other steps such as announcing dividend payment and a possible share buyback- that would revive confidence levels in the stock.