Saregama DCF: Building a Financial Model from First Principles

Parth began researching Saregama in late April 2023 after identifying it as a candidate through Value Picker community sentiment and a preliminary screen on Screener.in. The initial thesis rested on two observations: the company's old music catalog from the 1940s through 1970s was generating more revenue than newer acquisitions, and the management under Vikram Mehra was actively expanding into music management, events, and film.

He structured the research into two phases. The first four days were dedicated to deep qualitative work: reading three years of annual reports, listening to con calls, attending one live con call where he asked questions directly to management, and studying management remuneration as a proxy for incentive alignment.

From day four onward, he built the financial model using Aswath Damodaran's framework. He calculated cost of equity using the CAPM, deriving beta through a regression of Saregama's price movement against the Nifty 50. Revenue was modeled by source, including catalog royalties, new song acquisitions, and emerging business lines. He modeled song acquisition costs using management's stated target of 20,000 new songs bringing the total catalog to 150,000, then accounted for depreciation over a five-year schedule as disclosed by the company.

Working capital, fixed asset schedules, and cash flow projections were built from the ground up. Terminal value was calculated using India's nominal GDP growth rate of approximately 11%. He then ran a sensitivity analysis across bull, base, and bear cases.

The model produced a fair value estimate of 520 rupees per share. The stock was trading at approximately 323 at the time of investment. It subsequently moved past the 520 target and reached 600.