Dharma stake sale: Is Karan Johar-Adar Poonawalla's Rs 2,000-cr deal too expensive?

Post the decision of Adar Poonawalla’s Serene Productions to pick up a 50 per cent stake in Karan Johar’s Dharma Productions, a name in the film production and business, there has been some discussion on the way forward and of course, valuations.

Johar earned his stripes in Bollywood in 1998 through the mega success of romantic drama Kuch Kuch Hota Hai. That led to more hits at the box-office before he turned producer, with a film like Kal Ho Na Ho. The last few years have been difficult with the banner’s films not always working out plus revenue from a stream like satellite, once the business’ cash cow, taking a hit. That has reflected in the pressure on both revenue and profit.

For FY23, data from Tofler shows Dharma’s revenue at Rs 1,040 crore with net profit at Rs 10.72 crore. However, FY24 saw both taking a hit – revenue dropped to Rs 512.3 crore and net profit down to just Rs 62 lakh.

 
A press statement put out says Serene has picked up a 50% stake in Dharma for Rs 1,000 crore, valuing the company at Rs 2,000 crore. A closer look at that means the multiples are 4x of revenues and at an EBITDA of Rs 5.5 crore, it is at over 360x. “It is a hugely expensive deal on the basis of FY24 numbers but one big hit can change everything.

To that extent, this is not an annuity business,” says one banker tracking the sector. The changing composition of revenue is evident – according to Dharma’s annual report for FY24, revenue from distribution and exhibition of film and other rights, including distribution was at Rs 111 crore, with satellite and terrestrial rights brought in Rs 70 crore. Music accounted for Rs 82 crore, while digital’s chunk was Rs 163 crore. Another Rs 70 crore came from ad films.

The other question is on the infusion of the Rs 1,000 crore and whether Johar (he is the largest shareholder in Dharma, while his mother has smaller stake) is completely exiting his holding. No details on that have bene shared, though analysts think it is largely fresh equity coming in. 

“The money will flow over time and not in one stroke with most of it going into enhancing Dharma’s equity capital. It is quite likely that that the money will be used to finance deals and Karan Johar will get a share of profit in the event of projects doing well,” says one at a brokerage.

For now, this is a 50:50 ownership structure and according to the press statement, “Karan Johar as the Executive Chairman will spearhead the company's creative vision, while Apoorva Mehta, in his role as the Chief Executive Officer, will work with Karan in steering the strategic direction and overseeing the operational excellence of the organization.” The banker quoted earlier maintains that the arrangement is structured to “get the best out of Johar’s equity to strike deals and yet remain a shareholder.” 

That said, Dharma’s financials could be a source of concern, leading to Johar going out and seeking funds. The company was earlier in talks with Reliance and Saregama, before they fell through. An email sent to the communications agency representing the Serene and Dharma elicited no response.

For Poonawalla, the money going into Dharma is a small proportion of his overall business. He is known primarily for Serum Institute of India, a big player in the vaccine manufacturing segment.

A report put out by CareEdge ratings last December says, “the group’s promoters are resourceful and have presence in wide array of businesses ranging from stud farm, real estate, non-banking finance, aviation, and pharmaceuticals”. Serum Institute came into prominence during the pandemic with its Covishield vaccine. That led to a surge in revenues and for FY22, it hit Rs 25,645 crore and a net profit of over Rs 11,000 crore. It did drop after the pandemic the following year – revenue was Rs 10,190 crore with a net profit of close to Rs 4,200 crore.