Tuesday, December 25, 2007
|The Inox stock has gained almost 60 per cent in one month. Can it hold up the trend?|
|The Indian entertainment industry has just about started evolving into an organised value chain, with a demarcation of the producer from the distributor, and further, the latter from the exhibitor.|
|It may so happen that few businesses attempt to capture more than one of these stages of the value chain, depending upon their business mix.|
|Despite this, whether it is Bhool Bhulaiya, Om Shanti Om or Saawariya, there is one common benefactor of each of such blockbusters who reaps the rewards long after the producers have moved on to their newer ventures and the distributors start hunting for the next big thing.|
|Ideally, it would be a multiplex that can screen all the three flicks together! However, the tide is strong enough to sweep gains to the feet of all the theatres, single screen or multiplexes, dabbling in these waters.|
|Inox Leisure, one of the four strong contenders in the organised movie exhibition business, has been aggressively opening new multiplexes. It also has a robust pipeline of signed properties that should help it in having about 170-180 screens by FY09.|
|Although competitors are scaling up fast, there still appears plenty of headroom for multiplex players to increase their spread in tier-II and tier-III cities where the middle class is burgeoning with ever fatter pockets full of rising disposable incomes.|
Inox has tied up over 45 properties for its outlined expansion plan of increasing the number of screens to 170-180 by FY09, from 76 screens at 22 properties currently. Besides enhancing its footprint in tier-I cities, the company’s focus has also been on a number of tier-II and tier-III cities in order to maintain an even spread across the vast geography.
|After being signed up, these properties may take anywhere between 6-24 months to be ready for operations. Alok Tandon, chief operating officer at Inox Leisure outlines the benefit of this lead time: “Since we sign up our properties at the early stages of a mall, Inox does not only get lower rentals, but also is an anchor tenant.”|
|Unlike its peers such as Cinemax or Adlabs, Inox has a low exposure to Mumbai with just two properties in the city, comprising of six screens. Mumbai earns the highest box-office revenues, which pumps up the fortunes for other players.|
|However, as movie-going culture spreads across the country, other territories too are likely to match up the box office contribution from the financial capital, thus putting Inox in a better position to compete at a pan-India level.|
|More in store|
In order to spread its foothold in quality locations, Inox has signed an exclusivity agreement with Pantaloon Retail. This agreement entitles Inox with a right of first refusal for setting up a multiplex at those properties where a Pantaloon outlet is being set up.
|At its existing multiplexes, in order to attract higher realisations, Inox plans to convert a row or two of its seats to recliners. This would help the company catch up with its competition, of which a couple of players already offer recliner-seats at their multiplexes, raising the average ticket price (ATP).|
During the second quarter of FY08, Inox’s financials included the results of the amalgamated entity, Calcutta Cine, which rendered the consolidated numbers incomparable with the previous quarters.
|However, occupancy rates fell q-o-q – from 39 per cent in Q1 FY08 to 37 per cent in Q2 FY08 -thus suggesting that revenue growth came only from the rise in the number of seats.|
|But, the lower occupancy rates in the last quarter was due to an increase in total number of seats consequent to the launch of two new properties; occupancy rates at new multiplexes typically take some time to take-off.|
|Operating margins too, remained subdued due to an overall increase in entertainment tax, as the tax exemption tenure for a number of its properties ended.|
|“As new tax-exempt properties will be added, the increase in entertainment tax is likely to be nullified,” claims Tandon. Going by the expansion plans, this appears likely to take effect.|
|Although the numbers of Calcutta Cine have not been published, analysts believe that it operated at lower margins compared to Inox. This too, could be one of the reasons behind lower operating profits of Inox during the last quarter. However, expanding its profitability hereon may be a tough cookie for the company as it may be vulnerable to higher lease rentals at new properties.|
|On the positive side, the contribution from food and beverages has been high for the company, which takes its spend per head (SPH) to about Rs 150, which is toward the higher end, by industry trends.|
|Again, its multiplexes are located at prime locations in the cities it is present, which attracts a higher income consumer footfall, thus providing it a potential cushion in the event of an economic downturn.|
After trading flat at around Rs 116, the Inox stock has risen 63.7 per cent in a month, to Rs 194.15. The spurt is likely to have come due to rumours of the Reliance ADA group, which owns Adlabs, intending to make a bid for the company.
|Reliance Capital has increased its stake in Inox from 7 per cent to 9 per cent this month, thus providing additional fuel to the fire.|
|Rumours aside, the company has charted out its growth plan for an aggressive expansion. It has also witnessed an appreciation in the value of its two owned properties owing to the real estate boom, which has increased the value of the company. However, the extent of the increase in the value of its real estate remains to be estimated.|
|At Rs 194.15, the stock trades at a price-earnings multiple of 34.7 times and 27.3 times estimated FY08 and FY09 earnings respectively. Over the past year, Inox has been underperforming the sector consistently. Merely going by the fundamentals, the counter still appears to have quite some steam left in it.|
|If the rumours materialise, they may provide important triggers for a further rise. Long term investors may however want to keep an eye on the counter and enter at dips, considering Inox’s ambitious plans vis-à-vis the potential of the multiplex sector. Risk takers may want to take a plunge right away.|
What is short-selling?
Short-selling, in the context of the stock market, is the practice where an investor sells shares that he does not own at the time of selling them. He sells them in the hope that the price of those shares will decline, and he will profit by buying back those shares at a lower price. In India, there is no prohibition on short-selling by retail investors. Institutional investors —domestic mutual funds and foreign institutional investors registered with the Securities and Exchange Board of India (Sebi), banks and insurance companies — are prohibited from short-selling and are mandatorily required to settle on the basis of deliveries of securities owned and held by them.
How is short-selling beneficial?
Short-selling is considered an essential feature of the securities market not just for providing liquidity, but also for helping price corrections in over valued stocks. Supporters of short-selling claim its absence distort efficient price discovery, gives promoters the unfettered freedom to manipulate prices and favours manipulators than rational investors. Securities market regulators in most countries, and in particular, all developed securities markets, recognise short-selling as a legitimate investment activity. The International Organisation of Securities Commissions (IOSCO) has also reviewed short-selling and securities lending practices across markets and has recommended transparency of short-selling, rather than prohibit it.
Are there any drawbacks of short-selling?
Critics of short-selling feel selling, directly or indirectly, poses potential risks and can easily destabilise the market. They believe that short-selling can exacerbate declining trend in share prices, increase share price volatility, and force the price of individual stocks down to levels that might not otherwise be reached. They also argue that declining trend in the share prices of a company can even impact its fund raising capability and undermine the commercial confidence of the company. In a bear market in particular, short-selling can contribute to disorderly trading, give rise to heightened short-term price volatility and could be used in manipulative trading strategies.
Will institutional investors in India be allowed to short-sell securities?
Sebi is working on a proposal to introduce a stock borrowing and lending mechanism. This will allow institutional investors to short-sell by borrowing shares. Under this arrangement, an investor A, who feels that a certain stock is overpriced, borrows those shares for a charge from investor B, who is willing to lend those shares. Investor A then sells those shares in the market, hoping that the price declines so that he can buy cheap and return them to investor B.
What is the difference between covered short sales and naked short sales?
Covered short sales are those in which the seller arranges for the delivery of shares he has sold by borrowing them. Naked short sales are those in which the seller does not intend to provide for the delivery of shares he has sold. Most international securities market regulators have prohibited naked short-selling and require the client to have documentary evidence of borrowing/tie-up with lenders before executing the sale transaction. This is because naked short sales in huge quantities can destabilise the market.
How does the stock lending and borrowing mechanism function in other markets?
World over, securities lending and borrowing transactions are, by and large, over-the-counter (OTC) contractual obligations executed between lenders and borrowers. International securities market regulators do not directly regulate the lending and borrowing transactions. In many international markets, entities like custodians and depositories run the lending and borrowing scheme and have their own screens for meeting the demand and supply of securities from their clients.
Outflow of Rs 515.80 on 20 December 2007
Foreign institutional investors (FIIs) sold shares worth net Rs 515.80 crore on Thursday, 20 December 2007, compared to their selling of Rs 1092.50 crore on Wednesday, 19 December 2007.
FIIs outflow of Rs 515.80 crore on 20 December 2007 was a result of gross purchases of Rs 2561.20 crore and gross sales Rs 3077 crore. The 30-share BSE Sensex rose 70.61 points or 0.37% to 19,162.57 on that day.
FII inflow in December 2007 totaled Rs 906.30 crore (till 20 December 2007). FII inflow in calendar 2007 totaled Rs 66,813.60 crore (till 20 December 2007).
There are a total of 1,213 FIIs registered with the Securities & Exchange Board of India (Sebi).
Turnover in F&O segment rises
Nifty December 2007 futures were at 6009.50, at a premium of 24.40 points as compared to the spot closing of 5985.10.
The NSE's futures & options (F&O) segment turnover was Rs 80,577.10 crore, which was higher than Rs 73,067.55 crore on Thursday 20 December 2007.
Reliance Energy (REL) December 2007 futures were at premium, at 2071, compared to the spot closing of 2063.
Reliance Petroleum (RPL) December 2007 futures were at premium, at 217.85, compared to the spot closing of 216.55.
Reliance Natural Resources (RNRL) December 2007 futures were at premium, at 168.90, compared to the spot closing of 168.10.
In the cash market, the S&P CNX Nifty gained 218.60 points or 3.79% at 5985.10.