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

Following Adar Poonawalla’s Serene Productions’ decision to acquire a 50 percent stake in Karan Johar’s Dharma Productions, a name in film production and business, there has been some discussion about the way forward and of course, ratings.

Johar rose to prominence in Bollywood in 1998 with the mega-successful romantic drama Kuch Kuch Hota Hai. This led to more box office successes before he became a 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, in addition to revenues from a stream like satellite, which was once the business’s source of income, taking a hit. This was reflected in pressure on revenues and profits.

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

A press release issued says that Serene has acquired a 50% stake in Dharma for Rs 1,000 crore, valuing the company at Rs 2,000 crore. A closer look means the multiples are 4x of revenues and with an EBITDA of Rs 5.5 million, it is over 360x. “It’s an extremely expensive business based on fiscal year 2024 numbers, but a big hit could change everything.

To that extent, this is not an annuities business”, says a banker who follows the sector. The change in revenue composition is evident – ​​according to Dharma’s annual report for FY24, revenues from film distribution and exhibition and other rights, including syndication, were Rs 111 million, with terrestrial and satellite generated 70 million rupees. Music accounted for Rs 82 million, while the digital portion was Rs 163 million. Another Rs 70 million came from advertising films.

The other question is about the infusion of Rs 1,000 crore and whether Johar (he is Dharma’s largest shareholder, while his mother has a smaller stake) is exiting his stake completely. No details on this have been shared, although analysts think it is largely new capital coming in.

“The money will flow over time and not all at once, with the majority going towards increasing Dharma’s share capital. It is quite likely that the money will be used to finance deals and Karan Johar will receive a share of the profits if the projects perform well,” says an employee at a brokerage firm.

For now, this is a 50:50 ownership structure and according to the press release, “Karan Johar, as Executive Chairman, will lead the company’s creative vision, while Apoorva Mehta, in her role as CEO, will work with Karan on guide the strategic direction and oversee the operational excellence of the organization.” The banker cited above states that the deal is structured to “make the best use of Johar’s own capital to close deals and still remain a shareholder”.

That said, Dharma’s finances could be a source of concern, prompting Johar to go in search of funds. The company was earlier in talks with Reliance and Saregama before they fell through. An email sent to the communications agency representing Serene and Dharma received no response.

For Poonawalla, the money that goes to Dharma represents a small proportion of her overall business. He is mainly known for the Serum Institute of India, a major player in the vaccine manufacturing segment.

A report released by CareEdge Ratings last December says that “the group’s promoters are resourceful and are present in a wide range of businesses ranging from stud farms, real estate, non-bank finance, aviation and pharmaceuticals”. Serum Institute rose to prominence during the pandemic with its Covishield vaccine. This led to an increase in revenues and in FY22 it reached Rs 25,645 crore and a net profit of over Rs 11,000 crore. It fell after the pandemic the following year – revenue was 10,190 crore rupees, with a net profit of close to 4,200 crore rupees.