Pick of AIM by James Crux

The movie and home entertainment markets, so the theory holds, tend to do well when times get tough, since the cinema is a cheap evening out and cash-strapped consumers like to stay in and watch films when they need to save some money. If investors want additional insulation, they should seek exposure to India’s fast-growing entertainment sector.

One option is India-based DQ Entertainment, DQE for short, an expert in the field of animation for TV, film and computer games presently seeing high demand for its services. Floated on AIM at 136p, its shares have fallen back to 80p, where the entire business is worth only

£28.7 million. To me, that looks an ungenerous rating for a group that has swiftly emerged as India’s leading animation house, producing 2D and 3D animation for Walt Disney, Marvel, Turner Entertainment and Nickelodeon among others.

Frugally run by CEO Tapaas Chakravarti, DQ is benefiting from Western media giants’ desire to outsource content creation to capable players in emerging markets in order to improve production efficiency.

Shrugging off the downturn, DQE delivered eye-catching 62 per cent sales growth to US$14.4 million (£10.5 million) for the half to September and converted losses of $100,000 into profits of $400,000. DQE also closed the half with $8.5 million cash and is forecast to deliver a rise in profits from $3 million to $5.9 million

this year on improved sales of $35.3 million. On an expected earnings rise from 7.85 cents to 15.75 cents or 11.5p, shares in this resilient venture are selling for only seven times forward earnings and I think a rerating is due.

Eros – a lovely proposition

Investors have irrationally fallen out of love with another counter, the Bollywood film star Eros International, which has met all targets outlined at the time of its 2006 float yet seen its shares drop from a 2007 peak of 545p to 146p. At these levels, the shares trade on a historic p/e of six times, based on last reported annual earnings of 24p.

Eros not only produces and commissions films like a studio, but also distributes and exploits its library of 1,900 plus films via offices in India, the UK, USA, Dubai and Australia.

Late last year Eros announced forecast-busting half-time figures to September, showing profits increased 119 per cent to US$29.8 million, on a sales leap from $35 million to $73 million. Given that the well-worn maxim ‘cash is king’ has never been more appropriate, the fact that some $46.2 million of cash was generated by the business’s operations should provide nervous investors with extra comfort.

Robust of balance sheet – the half-year cash coffers were flush with $52 million (£38 million) – I believe Eros will thrive as others struggle to survive.

IFC – looks fighting fit

Recently premiering on my radar screen was specialist fund The Indian Film Company, launched onto AIM in 2007 and which appears to be making good progress by investing in a diverse portfolio of Indian movies.

IFC had a highly successful 2008, with films released since last April having racked up more than £69 million in global box office takings. In August, Singh Is Kinng racked up new opening week records in India, which were then beaten in December by another IFC release, Ghajini, released on 1,500 screens and taking a staggering £9.55 million in its opening weekend.

Bulls argue that the company, which reported net assets of 99.4p per share at the halfway stage (compared with today’s 28.5p market price), is maximising rights revenues from its film slate through canny marketing and distribution. I’ll certainly be keeping an eye on developments, and so long as the recent positive news flow continues, the company’s lowly valuation of £15 million should have further to go.