Shringar Cinemas: Buy

An investment can be considered in the stock of Shringar Cinemas, which runs the Fame chain of multiplexes. The stock is at a deep discount to its peers at about 18 times its financial year 07 per-share earnings; industry leader PVR Cinemas trades at 48 times financial year 07 earnings. Stocks of multiplex majors have been under pressure in recent months. The year, so far, has been a lacklustre one for Indian films, raising concerns about occupancy rates even as markets get overcrowded in some pockets. This, coupled with the growing power of distributors, who are demanding a higher share of ticket revenues, has resulted in a more subdued outlook for multiplexes.

In this backdrop, we tend to view a stock such as Shringar, with its more reasonable valuations, in a favourable light. Investors who wish to capitalise on the long-term potential arising from a growing preference for multiplexes could consider exposure to the stock. The company has about a 10 per cent market share of the multiplex industry (in terms of number of screens) as against that of PVR Cinemas at 20 per cent. About 23 screens are likely to come up in financial year 08 with the properties already handed over to the multiplex operator. With Shringar now firmly in the black, the fundamental picture is looking brighter. Strong revenue growth is likely to continue on the back of screen additions, as new multiplexes tend to draw footfalls. If the second half turns out to be a better period for tinsel town, occupancy rates for Shringar could be much stronger than the current 30 per cent levels. This, in turn, could lead to a strong uptick in earnings. We believe that Shringar's own presence in distribution, which accounts for about 30 per cent of its consolidated revenues, will make it better placed than operators of comparable size in securing good content at reasonable prices.

The stock however is suitable only for those with an appetite for higher risk. The dependence on good content aside, issues such as high rentals (as it continues its expansion in cities such as Mumbai and Bangalore), the need to constantly refurbish theatres to ward off competition and overcrowding in some locations are risks to our recommendation.