INOX Leisure

Investors with short-term trading perspective can buy the stock of Inox Leisure. The stock was in a medium-term downtrend slipping incessantly from the February peak of Rs 92. This slide halted at Rs 54 towards the end of May and a short-term uptrend is in progress since then. Within this uptrend, the stock was stuck in a range between Rs 60 and Rs 63 over the last three weeks. The strong uptrend recorded in the last trading session helped the stock close above the upper boundary of this short-term trading zone.

Inox Leisure

Inox Leisure

Inox snaps up Fame India

Inox Leisure approved the purchase of 43.28% in Shroff family promoted, Fame India for an all-cash deal of Rs664.8mn. Inox bought up to 1,50,57,760 shares of Rs 10 each of Fame India, by way of a series of block trades. Inox Leisure bought an additional 7.21% stake in Fame India, taking its total shareholding in the later to 50.48%. The transaction through a block deal in the Bombay Stock Exchange (BSE) represents 2.5 million shares in Fame for a consideration of Rs50.75 a share, totaling Rs127.7mn, Inox said in a statement. The deal takes Inox's total investment at Fame to Rs792.5mn, it said. The acquisition would be funded through a loan from Inox's founders, Gujarat Fluorochemicals Ltd. This acquisition will be followed by an open offer to buy another 20% in Fame. This acquisition will create the largest multiplex networks with a total of 55 multiplexes, 204 screens and 57,891 seats. Enam Securities was the investment banker and Khaitan & Co. was the legal advisor to Inox. Yes Bank was the investment banker for Fame India and Naik & Co. was the legal advisor.

Inox Leisure

We recommend a buy in the stock of Inox Leisure from a short-term perspective. It is evident from the charts of the stock that following a medium-term correction between early June and mid July from Rs 71 to Rs 37, it found key support around Rs 40. Later, it resumed its intermediate-term uptrend that has been in place from March low of Rs 18.9. Since July, it has been on a medium-term uptrend too. Recently, the stock surpassed its 21-day moving average and is trading well above 21 and 50-day moving averages. On September 18, it breached its near-term resistance at Rs 55 by gaining 5 per cent with good volume. The daily relative strength index (RSI) has entered in to the bullish zone and weekly RSI is on the brink of entering this zone. The daily moving average convergence and divergence indicator has signalled a buy and is hovering in the positive region. We are bullish on the stock from a short-term horizon. We anticipate it to rally until it hits our price target of Rs 63. Traders with a short-term perspective can buy the stock while maintaining a stop-loss at Rs 54.

via BL

Inox Leisure

Inox Leisure

Inox Leisure

Inox Leisure

INOX

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.

On track 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).

Grim numbers? 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.

Valuation 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.

Madhucon Projects - BUY, Inox Leisure - SELL, IVRCL - BUY

Madhucon Projects - BUY, Inox Leisure - SELL, IVRCL - BUY

Edelweiss - INOX Leisure, SSKI - Geodesic, Dalal & Broacha - Precision Wires

Edelweiss - INOX Leisure, SSKI - Geodesic, Dalal & Broacha - Precision Wires

Karvy - INOX Leisure

Karvy - INOX Leisure

Edelweiss - INOX Leisure

Edelweiss - INOX Leisure

Multi flex

Aggressive expansion into non-metro markets will turn the wheels of fortune for the multiplex industry.

Five years back, it would have been a job of a visionary to imagine large format retail malls, hypermarkets and multi-screen film exhibition theatres or multiplexes all at one place, in all the prime locations of every city. Today with most prime locations in the metros boasting of multiplexes, the spotlight is on the film exhibition industry.

The cinema exhibition segment has traditionally been the dominant contributor to the rising prosperity of Indian film entertainment industry, the size of which is estimated to be about Rs 8,400 crore currently.

According to a recent FICCI-Pricewaterhouse Coopers report titled Frames 2007, this industry is expected to grow at a compounded annual rate of 16 per cent over the next five years, roughly doubling to Rs 17,500 crore by the year 2011. Exhibition of films contributes over 85 per cent to this kitty, with the domestic box office revenues bringing in about 75 per cent plus, traditionally.

Macro optimism In 2006, domestic box office revenues grew by about 21 per cent, as blockbusters like Dhoom 2, Lage Raho Munnabhai, Krrish, Fanaa and Rang De Basanti amassed over Rs 300 crore. At present, the domestic box office market is pegged at Rs 6,400 crore, and is expected to grow at a compounded rate of 13.5 per cent.

At this rate, the market would double in size to Rs 11,900 crore by 2011. With the multiplex boom, the average ticket prices (ATPs) on an all-India basis have grown from Rs 20 to Rs 35 per ticket, and close to Rs 100 per ticket in metro cities.

On the flipside, it is expected that the share of box office revenues will reduce in the overall entertainment business, considering the growth of home video and exhibition of films over broadcast networks.

However, the segment will remain strong, contributing nearly 70 per cent, due to increasing demand in Tier II and Tier III cities where multiplexes are just being rolled-out.

“Tier II and Tier III cities would now be the new playground to compete on, for almost all the multiplex companies,” claims Sanjeev Hota of Emkay Shares and Stockbrokers. “Over 65 per cent of the total box office collections in the country come from non-metros,” he adds.

The boom in the sector will not just ride on high demand. The advent of digitisation of cinema exhibition too, will help a great deal. More and more producers and distributors are emphasising on digitisation to combat piracy.

Digital prints are less prone to illegal duplication as well as cheaper compared to their analogue counterparts. In addition to this, satellite delivery of prints too, will help curb piracy, thus attracting higher footfalls in theatres.

Reaching out In order to reach out to a wider geography all the players are aggressively expanding into new locations. Adlabs, the largest player by market capitalisation and revenues, currently operates 13 multiplexes in eight cities with 50 screens and over 16,000 seats.

It plans to set up another 200-plus screens by 2010. PVR Cinemas too, is looking at adding about 50-60 screens in 8 locations in east India within the next five years.

“We expect to exceed our projections and launch about 100 screens at 32 locations, taking the count of seats to around 25,000 by the end of FY08,” says Rasesh Kanakia, chairman, Cinemax India.

Inox too, plans to launch about 10-12 new multiplexes in tier II cities such as Lucknow, Raipur and Faridabad in FY08. Pyramid Saimira, a dominant player in south India, is planning to set up around 300 mall-cum-multiplex projects over the coming few years.

Among the unlisted players, Apollo Group’s United Film Organisers (UFO) has about 585 digital cinemas, which it plans to increase to 2000, at an investment of Rs 300 crore. Essel Group’s E-city Ventures which operates Fun Cinemas and Fun Republic projects to increase its current count of 125 screens to 150 by December 2008, thus boasting of over 35 multiplexes across the country.

Micro pessimism Indeed, for multiplex companies to flourish, it is necessary that they roll-out new multiplexes on a continual basis. Rising interest rates and sky-high real estate prices pose a roadblock to expansion.

“Since the existing multiplex companies have by and large tapped the equity markets, they now need to procure debt in order to make capital expenditure. This would raise the cost of their projects due to high interest rates,” says Gaurav Chugh, analyst, IL&FS Investsmart.

A delay in execution too, could postpone the launches of new multiplexes. “Inability to execute projects in time would further delay the break even of projects, and thus hold back the company’s future earnings,” says Chugh. Here, companies with experience in developing their own properties will have an edge over the rest.

“Therefore, players like Cinemax, Inox and PVR will manage to ride the tide of high real estate prices and delays in execution,” points out an analyst. On the other hand, players like Shringar Cinema, which have less experience in real estate as compared to peers, may take a hit.

“We have already tied up all the properties required for our expansion until the year 2009, and hence are almost immune to high real estate prices currently,” claims a confident Rasesh Kanakia, Cinemax.

Alok Tandon, chief operating officer, Inox Leisure says: “Most of our properties are on a long lease of around 20-24 years. Four out of 14 of our properties are owned. In addition, in the new properties that we sign, we get considerably lower rentals as compared to other occupants of a mall or a property being the anchor tenant.” An anchor tenant is the main tenant in a shopping centre.

Besides, there are certain state governments, which pose regulatory restrictions in terms of capping of ticket prices for multiplexes. “At present, Rajasthan does not allow multiplexes to increase ticket prices for more than once a year, and not more than 15 per cent, while Tamil Nadu has capped the price to Rs 120 per ticket,” says Tandon of Inox.

However, considering the increasing contribution of food and beverage sales and other revenue streams such as gaming which provide higher margins, lower ticket prices would be compensated. Usually, food and beverages contribute around 30 per cent of the total revenues of a multiplex player.

Some players are going a step further to augment revenues and margins. For instance, Cinemax launched Red Lounge in Mumbai, a premium multiplex in an exclusive lounge format with reclining seats, massage chairs and karaoke facilities which commands an ATP of around Rs 350 and above, along with launching Giggles Gaming Zones at all its multiplexes to augment footfalls. SHOW ME THE MONEY Rs crore Revenue Net Profit EPS (Rs) PE(x) FY08E FY09E FY08E FY09E FY08E FY09E FY08E FY09E Adlabs Films 365.30 413.00 73.10 82.60 18.40 20.80 23.50 20.70 Cinemax 182.00 206.00 32.60 37.10 11.60 13.20 11.00 9.70 Inox Leisure 185.80 209.90 30.30 34.20 5.10 5.70 23.00 20.60 PVR 195.00 220.40 13.70 15.40 5.40 6.00 32.50 29.30 Pyramid Saimira 131.10 157.30 12.50 15.30 4.40 5.40 68.80 56.00 Shringar Cinema 69.30 78.30 11.40 12.90 3.60 4.00 14.80 13.30

Adlabs is making a foray in the content production business, by picking up stakes in companies like Synergy Communications (and plans to pick up a stake in Miditech), which have a proven track record. Players like Shringar and Inox have forayed into film production and distribution.

Inox is also setting up low-cost multiplexes, in order to tap growth in smaller towns. Pyramid Saimira has plans to set up retail malls and budget hotels along with multiplexes in partnership with Baderwals Infraprojects and Shriram Malls.

Compete more Even as there seems to be huge demand for multiplexes, increasing competition is a concern. In order to woo higher footfalls and augment occupancy levels some multiplexes are offering discounts on ticket prices, which may hold back a rise in ATPs and margins, in turn.

“The differences in ticket prices are too specific to various locations. Similar is the case for our costs,” says Alok Tandon, Inox, adding that it is not a serious threat.

“ATPs are rising steadily in metros. In non-metros, although ATPs are low, they are compensated by high incremental demand,” says Hota of Emkay. IL&FS’ Chugh is optimistic suggesting that, “newer players entering the business confirms the healthy state of the sector for the coming years.”

Valuations Over the past year, all the players in the segment have taken a beating. The valuations of Inox and PVR, for instance, eroded more than 40 per cent over the year. Adlabs however has managed to stay afloat riding on a fairly diverse composition of business, with forays in film production, distribution and FM radio. FRESH BLITZ Multiplexes Current Screens Seats Projected in next 5 years PVR 17 67 16,578 208 Inox Leisure 11 41 12,299 165 Cinemax 9 29 8,260 141 Shringar 7 30 9,051 168 Adlabs 7 26 9,146 225 Source: FICCI-PwC Report: Frames 2007

Due to varied composition of businesses, it is difficult to compare these companies going solely by price-earnings multiple. In spite of this, Adlabs and Inox at about 23 and 20 times their expected FY08 and FY09 earnings, respectively, appear to be reasonably valued considering their expansion plans and their proven ability to execute their plans. Adlabs however has a significant upside potential, in case it hives-off its radio business into a separate unit, thus unlocking value.

In comparison, Cinemax appears cheap, but it has to improve its operating margins from around 14 per cent currently to about 18 per cent, which is normal across the industry. The upside from Pyramid Saimira’s aggressive expansion and diversification plans appears to be already factored in its valuation.

On the other hand, even though Shringar Cinema appears fairly valued, concerns loom large over its turnaround efforts as well as its ability to execute its expansion plan. With continuing uncertainty prevailing across the board in broader markets, investors may want to bet on this sector as it offers enough variety to suit different tastes.

Karvy - Various Recos

PRECOT Mills

PolyMedicure

Sun Pharma

Hindalco

Astra Microwave

Inox

The on-screen multiplier effect

Three leading multiplex operators — Shringar Cinemas, PVR and Inox Leisure — have entered the listed space over the past two years. The promise of a superior experience relative to other entertainment options; the ability to charge higher admission rates than single-screen theatres; rapid expansion plans; and the onset of a "new and improved" Indian film industry that focuses on content, were factors that helped these companies trade at a premium valuation, post-listing, along the lines of retailing majors.

Post the correction in mid-caps, the stocks of Shringar Cinemas and PVR are now trading at levels closer to their offer price, even as Inox Leisure has fallen significantly from its earlier high.

While valuations have corrected, they remain on the high side. Although the demand for multiplexes from the cinema-going public shows no signs of weakening, problems in execution of expansion plans, coupled with the high risks associated with the business, could temper valuations. We analyse the performance of multiplexes in the post-offer period and provide an outlook for the stocks in the sector.

Robust revenue growth

Multiplex operators have recorded strong growth in revenues in the range of 40-60 per cent in the first half of FY-07, on the back of new multiplex additions. It has also been an exceptionally good year for the Indian film industry, which saw the release of a slew of successful films. High occupancy rates have persisted, allowing theatres to hike rates in the first few weeks of a film's release. Profit growth has outpaced sales growth, as overheads such as personnel and maintenance costs have been spread over a larger base.

The robust performance cannot eclipse the risk of sudden knocks in performance if the content suffers. Strong inflows from box office collections have, however, so far reduced the impact of a slower-than-expected rollout of theatre chains.

Problems in execution

The market has been factoring in a multi-fold expansion in properties across theatre chains. However, delays in receiving Government approvals and handover of properties from developers have slowed down the roll-out of theatres. A large portion of offer proceeds remain unutilised for most players, although this has not stopped Shringar Cinemas from raising foreign convertible debt of about Rs 90 crore to fund its expansion plans.

The stated expansion plans across the three contenders continue to be ambitious; companies expect to double and triple the number of screens they operate over the next two to three years. Screen additions are likely to bunch up in some quarters, which could skew the quarterly performance picture in a manner similar to what is being witnessed in the retail industry.

PVR appears to have managed a faster rollout than its peers and now appears to be fairly ahead of Inox Leisure when it comes to screen presence. This could be why it continues to trade at a premium to the other players.

Tussle with distributors

Scale is becoming increasingly important for multiplex operators. While a good box-office year has had cash registers ringing, distributors are not too happy with exhibitors walking away with a greater share of the profits. Multiplexes account for barely 5 per cent of the total screens in India but are estimated to rake in 30-40 per cent of box-office revenues every year, thanks to their ability to charge higher ticket rates.

Big banner productions such as Fanaa, Dhoom-2 and Baabul have had distributors demanding more favourable terms in the revenue-sharing agreements. Those who have succumbed to their pressure have seen pressure on margins. The distributor's share is one of the more significant expenses borne by operators, accounting for more than 20 per cent of revenues. Inox Leisure, for instance, has seen a rise of 700 basis points in distributor's share in the first half of FY-07.

Such instances are likely to crop up till multiplexes gain scale; operators now see merit in consolidating their presence in certain distributor territories to improve their bargaining power with distributors. They are also getting into distribution themselves to ensure supply of content for their exhibition business.

Stock view

Given that expansion plans were at an early stage, we had maintained that it would be difficult to pick one of the three as a superior exposure and had earlier recommended holding at least two of the three stocks. We remain positive on the sector and maintain our stance. Despite execution problems, we believe that the ramp up in revenues and earnings would be significant.

Among the three players, PVR is more expensively valued. Its larger scale and better execution capabilities appears to drive its premium valuation. Its foray into co-production for two films with Aamir Khan Productions, due for release in 2007, also appears promising. Higher share of theatres that carry tax benefits could also help scale up margins. However, given the stiff valuation, tolerance to poor quarterly performance would be low. Shareholders can hold the stock and investors can consider accumulation on declines.

While Inox Leisure is relatively more attractive, concerns stem from the steep decline in margins it has witnessed recently, on account of rising payout of entertainment tax and distributors' share. Inox has enjoyed higher-than-average operating margins thanks to its operating from locations that are exempt from tax. Sustaining this advantage might prove difficult. Retain holdings of the stock.

Shringar Cinemas' performance appears to be turning the corner, reversing losses in the first two quarters. Additional screens could result in a substantial improvement in revenues and earnings. Shringar's long experience in the distribution business will also be to its advantage once it gains scale. Execution, however, continues to be an issue as the company has been slow to roll out properties. Investors with an appetite for risk can consider exposure in the stock.

IL&FS - INOX & Shringar Cinema

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