Will Karan's Dharma Revive Now?

'What is Balaji without Ekta (Kapoor), what is Dharma without Karan (Johar?)'

Kuch Kuch Hota Hai, Kabhi Khushi Kabhie Gham and Rocky aur Rani Ki Prem Kahani are among film-maker Karan Johar's biggest hits. They are sweet, funny, and romantic. None, however, had an unexpected twist in the tale like the announcement that came last week.

Johar will sell half his stake in Dharma Productions, the company he owns and runs as executive chairperson, to Serum Institute of India's Chief Executive Officer Adar Poonawalla for Rs 1,000 crore (Rs 10 billion).

There had been speculation about Dharma selling to either Saregama, Reliance Industries or the Adani Group. Poonawalla, however, was never in the reckoning, not even by some of the biggest advisory firms representing potential buyers for Dharma.

"This has to be one of the weirdest couplings," says one consultant.

"There is a dearth of strategic capital to fuel this business. What you are seeing is consolidation and external capital coming in. It is a very welcome move," says Vikram Malhotra, founder and CEO of Abundantia Entertainment, the makers of Toilet: Ek Prem Katha and Airlift among others.

That is the first important takeaway from this deal -- the business of making films and TV shows needs capital. And sellers (and their investment bankers) need to cast their net far and wide -- capital could be sitting anywhere.

Dharma logged revenues of Rs 520 crore (Rs 5.2 billion) in the financial year ended March 2024. This deal values Dharma at Rs 2,000 crore (Rs 20 billion), twice the valuation other companies reportedly in talks with Dharma were attaching to it.

A bulk of the Rs 1,000 crore (Rs 10 billion) that Poonawalla's Serene Productions is investing "will go into growth capital", says a person close to the firm.

The press release says the investment is aimed at expanding large-scale, multilingual productions, building franchises, and elevating traditional entertainment formats. The remainder will serve as a nest egg for Johar, who is now in his fifties. He and his mother, Hiroo Johar, own 100 per cent of Dharma, which was set up in 1976 by his father, Yash Johar.

Dharma had some hits like Dostana and Duplicate but never made it to the big league. It was Karan Johar, an English-speaking South Mumbai boy who loved Hindi cinema, who revived the company with his directorial venture Kuch Kuch Hota Hai (1998).

He has since gone on to become one of the most influential figures in Indian cinema, as well as a model and TV host (Koffee with Karan). His studio has launched and nurtured talented young directors such as Shakun Batra, Nikkhil Advani, and Ayan Mukerji.

Its repertoire of 45 films includes Kal Ho Naa Ho, Kapoor & Sons, Two States, Shershah and Raazi, among others. Johar and his close friend Apoorva Mehta, who took over as CEO in 2004, remain the heart and soul of Dharma.

"Poonawalla is a non-strategic investor. Creative freedom with this size of investment is rare," says one observer. "What is Balaji without Ekta (Kapoor), what is Dharma without Karan? This business does not scale," adds a consultant.

And that leads to the second major takeaway -- the quest for scale has begun in earnest among India's one-man, one-woman production houses.

Dharma's revenues, like those of Yash Raj Films, T-Series, Excel Entertainment, and many of the good Indian studios, have always fluctuated. Dharma was at Rs 278 crore (Rs 2.78 billion) in FY22, hit Rs 1,044 crore (Rs 10.44 billion) in FY23, before dropping to Rs 520 crore (Rs 5.2 billion) this year.

The hit-and-miss nature of the movie business makes it impossible for a small production house to hold steady growth, especially in a market that is transitioning. The Rs 19,700 crore (Rs 197 billion) film industry, Rs 31,000 crore (Rs 310 billion) streaming business, and Rs 70,000 crore (Rs 700 billion) television sector continue to see consumption grow.

On the supply side, however, consolidation has meant that the list of buyers for professionally generated content is shrinking -- PVR-Inox, Reliance-Disney, Netflix, and Amazon Prime Video are now among the biggest. The other major players, YouTube and Meta, use billions of hours of user-generated content.

That is why scale is critical, say analysts, it becomes a buffer against the vagaries of the business.

"Fox and Disney are strategic players with economic models built around movies," says Malhotra.

The consultant advocates for a larger, fund-backed play that could aggregate the better production houses, similar to Candle Media. The Blackstone-backed firm, founded and run by Disney veteran Kevin Mayer, owns several smaller production firms like Moonbug Entertainment and Hello Sunshine, which operate independently.

Imagine a Poonawalla-type investor aggregating firms like Excel Entertainment, Roy-Kapur Films, Applause, and Arka Media Works.

That would be another twist in the Indian cinema tale.