An investment can be considered in the initial public offer of Cinemax India. The company operates a chain of multiplexes, and has a presence mainly in Mumbai. Cinemax is now looking at aggressively expanding its national footprint, as are other multiplex chains. The rapid addition of screens is likely to ramp up revenues, provided the quality of film releases remains good. The valuation of the offer appears to be in line with that of peers such as PVR and Inox Leisure on a one-year forward basis. However, execution risks are high.
Exposures can be considered from a one-year perspective. We believe investors can hold a clutch of multiplex operators in the near term, since all of them are on an expansion spree and there are few parameters that differentiate one from the other. Over a longer period, concerns such as oversupply in some cities, the phasing out of entertainment tax exemptions and inability to create a sustainable competitive advantage could dampen prospects; that would require investors to be more selective.
Widening presence
Cinemax India is the latest multiplex operator to join the expansion bandwagon. Promoted by Kanakia Group, a real-estate developer, the chain with about 33 screens in 10 properties is smaller relative to other listed players. However, it has a fairly strong presence in Mumbai with 30 screens in nine locations.
With the money raised from the offer, the company intends to add 108 screens by 2008-09, taking the total to 141 screens.
Cinemax reported consolidated revenues of Rs 75 crore in 2005-06. About 65 per cent of its revenue is derived from box-office collections. The company has undertaken a mall development project in Thane and Nagpur, which also contributed to the revenue stream. However, it has decided now to focus only on multiplexes.
Its decision to move outside Mumbai is a positive, as the city continues to attract more players with fresh expansion plans. Cinemax has had the advantage of owning properties in the city, thus saving on steep rental costs. However, its new properties will be taken on lease to save on capital outlay. As the company is expanding in several Tier-II cities, rentals are likely to be more moderate.
Cinemax has opened a gaming centre, Giggles, at its mall in Thane and intends to open seven more such centres in various multiplexes. We have not factored the revenues from this business in our recommendation. Given the dearth of such entertainment options, it is likely to draw crowds.
Outlook
In terms of scale, Cinemax would be behind PVR and Adlabs even after expansion.
Scale ensures that the multiplex operator enjoy greater bargaining power with distributors/producers. Cinemax is focused on being a pure-play exhibitor even as peers foray into distribution to secure some control on content. Content screened is likely to be the deciding factor in driving occupancy rates in the long-term when supply catches up with demand.
Concerns remain on its ability to draw crowds in smaller towns and cities; it might have to lower entry prices to ensure occupancy levels. There also does not appear to be great scope on the margin front, as rentals would take a greater share of expenses going forward. Entertainment tax is likely to be a major component of expenses, as only about 40 per cent of its properties are likely to enjoy an exemption going by the information in the offer document.
Revenue growth from screen additions is likely to drive earnings growth. Execution, however, is a big risk. Multiplexes across the board have witnessed delays due to failure by the developers to handover properties in time and delays in getting approvals.
The impact of poor execution compounded with a string of failures in the box office would have an adverse impact on revenues and earnings and is the major risk to our recommendation.
Offer details: On offer are 89 lakh shares, including an offer-for-sale by the promoters of 19 lakh shares. The offer will raise Rs 108 crore on the upper end of the price band of Rs 135-155. The offer closes on January 24. The lead managers are Enam, JM Morgan Stanley and Edelweiss Capital.