Midvalley Entertainment IPO Analysis

Midvalley Entertainment, promoted by Datuk K. Ketheeswaran, Unigold Pacific Ltd., Kiara Enigma Sdn Bhd. and Global Motion Pictures & Ventures Pte. Ltd., is into film production, distribution and exhibition, actively engaged in the media and entertainment industry in south India. It is present in media and entertainment from concept to completion, i.e., from script to screen. It produces, distributes and exhibits movies both in Indian and foreign languages. It also holds the music, video and television rights of movies, television serials for sales to TV channels and other emerging media sources.



To complement exhibition and production and to have the presence across all segments, it distributes movies from all banners and production houses based on its relationships with producers and also based on trial screenings. It currently acquires and distributes movies in territories where it has an exhibition presence. It aim is to distribute movies throughout southern peninsula in the same territories where its theaters are located and South East Asian Countries. It presently has a library of 651 movies in various South Indian languages, which consist of 417 Tamil movies, 107 Telugu movies, 52 Kannada movies and 75 Malayalam movies.

It has also in the past produced movies like ‘Thambi', a Tamil movie in 2006 and ‘Seena Thaana 001' in September 2007. One of its movies, ‘Alanganallur Kalai', is expected to hit cinema hall soon.

It now intends to emerge as one of the leading theatre chains in southern India. So it has tied up with 46 single screen theaters of which 34 are in Tamil Nadu, 7 are in Karnataka, and 5 are in Andhra Pradesh. The agreement entered into with the theatres is valid for 5 years from the date of the agreement. Further, it also proposes to enter into similar screening agreement with additional 300 theatres. It intends to add 300 screens in the B & C category towns by June 2011 and also modernize 100 theatres.

It is also in the process of venturing into drive-in theaters and combined entertainment plexes by way of organic as well as inorganic growth.

The financial performance is not encouraging. For FY 2010 and FY 2009, net sales came down drastically from its previous year to Rs 12.94 crore and Rs 21.11 crore, respectively, due to nil revenue from production and fall in revenue from distribution and theatre collection. Also, it made just a small profit of Rs 3 lakh for FY 2010 and was in red a year back due to high amortization cost of the satellite and distribution rights. For the three months ended July 2010, net sales stood at Rs 4.83 crore and net profit at Rs 1.43 crore

The company is coming out with an initial public offering (IPO) amounting to Rs 60 crore at a price band of Rs 64 – Rs 70 per share of face value Rs 10 each. The money raised through issue will be used for entering into screening agreements with 300 cinema theatres amounting to Rs 15 crore, renovation and upgrading of cinema infrastructure with digital equipment and other related assets for select 100 screens amounting to Rs 25.95 crore, acquisition of company, acquisition of screen rights of a company in similar line, range and objects of business amounting to Rs 12 crore; and rest for general corporate purpose and IPO expenses.

Strengths

* Media and entertainment is one of the booming sectors in India due to its vast customer reach, the growing middle class with high disposable income, change in lifestyle and spending pattern.

* The company has presence in the entire value chain of the film industry, i.e. production, distribution and exhibition.

* It has a library of 651 movies in various languages, consists of 417 Tamil movies, 107 Telugu movies, 52 Kannada movies and 75 Malayalam movies

Weaknesses

* The exhibition industry is highly competitive. Also the Indian film exhibition sector is highly regulated by both the central and the state governments

* The company's business is seasonal and the results of operations fluctuate from quarter-to-quarter.

* The financial performance is not encouraging. For FY 2010 and FY 2009, net sales came down drastically from the previous year levels due to no revenue from production business, fall in revenue in distribution business, and fall in theatre collection. Also, It has made just a small profit of Rs 3 lakh for FY 2010 and was in the red a year back due to high amortization cost of satellite and distribution rights.

* It has incurred negative operating cash flow of Rs 7.56 crore and Rs 1.46 crore for FY ended 2007 and 2009, respectively.

* It has in past defaulted and failed to pay loan taken from City Union Bank amounting to Rs 3 crore, which was latter settled with one-time settlement. But this can hinder its future fund raising activities.

* It has not paid income tax dues aggregating to Rs 9.14 crore plus interest as per Rule 5 of the IT rules for the Assessment Years 2001-02, 2006-07, 2007-08 and 2008-09 and which are undisputed as on date. In its letter dated June 30, 2010, it has proposed a scheme of deferred payments by way of monthly installments, which is under consideration by the IT department. It has paid a sum of Rs 14 lakh as a part payment towards installment dues. The same is under consideration of the IT department and no written reply or action has taken by the department till date. Returns from FY 2003-04 to 2008-09 were filed after due dates and in some cases with delays of 300-500 days.

* Some of the records relating to corporate, statutory and business requirement have been misplaced.

* There are certain audit qualifications in the auditor's report of its previous financial years. Qualifications for the latest audited financial year ended April 30, 2010, to the extent quantifiable aggregate to Rs 11.2 crore.

* It does not own part of the premises of the Registered and Corporate Office from where it operates. The lease agreement has expired and not renewed due to a dispute with the lessor.

* Promoter company Global Motion Pictures and Ventures Ltd has main objects similar to that of Midvalley Entertainment. Even though this company has not commenced commercial operations in the field of entertainment till date, there can be no assurance that it may not do so in the future and, hence, may pose a potential conflict of interest. Also its independent Director C. Vasan is actively involved in the entertainment business in various capacities. These are similar interests to those of the company and hence may pose a potential conflict of interest in the future.

* The Government of Tamil Nadu has put a ceiling on the maximum price of tickets for a movie shown in single screen theatres, effective from January 2007.

Valuation

At the lower price band of Rs 64 per equity share of Rs 10 face value, the P/E works out to 39 times the annualized EPS of Rs 1.6 (on post-IPO equity) for the quarter ending July 2010 (its year-end is April). At the upper band of Rs 70, P/E works out to 41.8 times the annualized EPS of Rs 1.7 (on post-IPO equity) for the quarter ending July 2010. Asking price is highly unrealistic for such a small player with a pathetic financial and governance record.