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.