Introduction

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Noteworthy Observations

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INOX Leisure Ltd.

• The background of the promoters is quite clean and they have created a lot of wealth for the public through their flagship company, Gujarat Fluorochemicals Ltd.
• Although the image of the promoters is clean, but the promoter family does not attend Annual General Meetings and even most of the Board Meetings.
• The promoter group increased their shareholding in Inox Leisure from 48.70% held previously to 51.89% held now. This was largely done in order to square off 10% interest bearing Inter Corporate Deposits, thus, mitigating investor communities concern on high interest outgo.
• INOX Leisure took off its cinemas from the site of online aggregator, Book My Show, after a disagreement over payments. But the matter was amicably resolved after 3 weeks and INOX was listed again on the book my show’s site. The company did not inform the Stock Exchanges about the same.
• Deepak Asher, director in INOX Leisure is also INOX Group’s head for corporate finance. He usually attends the conference calls on the behalf of the promoters. In one instance, Mr.Siddharth Jain (whole time director) had said that the company is transforming single screen properties into Multiplex, but on the other hand Deepak Asher in the conference call had declined the same.
• Usually, the management gives some big guidances in the quarter but in the next quarter defends its actual results v/s guidance.

PVR Ltd.

• The promoter Mr. Ajay Bijli, his wife Selena & their son Aamer Krishan Bijli were named under Panama Papers, since they beneficially owned an offshore company that was setup to hold property in UK.
• In Dec 2017, Promoters were accused of fraudulently planning & selling stocks of the company at higher price to Elan Builders. For this, a criminal case was registered against the promoters. But the matter was solved in February, 2018.
• In Nov 2016, SEBI asked PVR promoters to explain a profit sharing deal with the Private Equity Investors, which entitled the promoters of Incentive Fee Agreement. SEBI specifically questioned why the deal was not disclosed with the shareholders. In Jan 2018, SEBI passed a consent order against Ajay Bijli, wherein he was required to pay Rs 20.4 lakhs & PVR Ltd was ordered to pay Rs 2.8 Lakh.
• PVR Ltd has made strategic investment in US based company, iPic Gold Class Entertainment. With an investment of $4 million, PVR Ltd gained 2% stake. The investment is made in order to learn from its business model which is restaurant cum theatres and bring the same sort of model in India.
• The company has given a guidance to increase its premium screens, which is ~10% currently, to 20% of the portfolio within 2 years.
• The company has had grown a lot through inorganic opportunities. The management guides that more & more opportunities shall arise in the coming years. The company forecasts that there will be lot of consolidation, as small players will find it difficult to operate.
• The company earns its EBITDA largely from the sale of Food & Beverages, Advertisements, otherwise, it incurs operational loss from the sale of tickets.

Comparative View of the Players

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Shareholding Pattern

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The promoters holding is more in INOX (recently Gujarat Fluorochemicals, the promoter co. increased its stake in the company via preferential allotment of shares).

While in PVR the promoter holding is less, but the company has more stake of institutional investors in it.

Capacity

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The capacity of multiplexes is usually reported in terms of the number of screens & number of seats. PVR Ltd. has been high on increasing their numbers through both organic & inorganic ways. While INOX Leisure has been expanding organically.

INOX Leisure has a total of 542 screens pan India, while PVR has 711 screens. The maximum screens of both INOX & PVR are in the Western region. PVR since last few years has specifically focussed itself on opening screens in South, it even acquired SPI Cinemas to further strengthen its hold over the region.

INOX has expanded its screens at a CAGR of 12.24% over the past four years, and PVR has expanded at a rate of 7.73%. (HY19 figures not considered to calculate CAGR)

INOX has added seats at the rate of 9.75% and PVR has expanded its seats at a CAGR of 8.38% over past four years. (HY19 figures not considered to calculate CAGR)

Footfalls

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Footfalls refer to the number of tickets sold or the patrons that entered the premises of theatre. They are also referred as ‘Admits’. The footfall of INOX increased at a CAGR of 8.40% over the past four years, while that of PVR increased by 6.17% in the same period. (HY19 figures not considered to calculate CAGR)

Occupancy Rate

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Occupancy is described as the portion of seats occupied in the theatres. While the average occupancy of PVR has been at 33% and that of INOX has been at 27%. Occupancy Rate is impacted by the content of the movies and is somewhat also affected by the Ticket Price (specifically for the Price Sensitive people).

Spend Per Head

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The major portion of earnings of a multiplex theatre is from the sale of Food & Beverages. The revenues from Food & Beverage as well as Advertisement generate Operating Profits, otherwise the multiplexes would have earned Operational Loss from the sale of tickets. While, INOX has been able to improve its Spend per Head at a CAGR of 7.73%, PVR has grown by 13.3%. An average person spends Rs 75/- on him/her in Inox while in PVR a person spends average Rs 89/-. (HY19 figures not considered to calculate CAGR)

Average Ticket Price

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A Ticket on an average costs Rs 197/- in INOX, while it is priced at Rs 206/- in PVR. The average ticket prices have been computed considering the premium seats & the normal seats, the prices during weekdays & weekends.

Ticket Booking

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The tickets of multiplexes can be booked either through the Online Aggregators or through offline mode (i.e. buying from the cinema counter). At INOX ~ 45% of the tickets get booked through the online aggregators, out of which ~30% get booked through BookMyShow, upto 10% through PayTm & the balance of 4-5% through Inox’s own website or their mobile based application. While PVR books ~53% of its tickets through online aggregators, and PVR refrains from disclosing the further breakup in Public Domain.

Revenue from Various Contents

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In Indian Multiplexes, 3 type of contents are screened. These are Bollywood (Hindi Movies), Hollywood (English as well as Dubbed) & Regional Movies.

Film Hire

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The revenue earned from the sale of ticket is shared between the distributor of the movie, and the the theatre owner. The share of the movie distributor is maximum in the first week, and gets reducing in the subsequent weeks, such that the share of cinema owner gets increasing as the movie enters into subsequent weeks. The share depends upon content of the movie and the terms & conditions of the contract between cinema owner & the distributor. The distributor can either charge hire on the Gross Box Office Collection or on the Net Box Office Collection (i.e. revenue generated from the sale of ticket minus payment of entertainment tax to the government).

Revenue Breakup

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The main elements of revenue of a multiplex are:

1. Box Office Collection: the amount of money generated from the sale of movie tickets.
2. Food & Beverages: The revenue collected front the sale of Food & Beverages. E.g. Popcorns, Cold Drinks, Snacks etc.
3. Advertisements: The theatre owners charge advertisers of playing their ads before the screening of the movie & during the intervals. They also charge for the off screen advertisements.Advertisement revenue is a function of the number of screens, content played etc.
4. Other Operating Revenue: This consists of Convenience fee that the cinema earns on booking the tickets over internet, apart from this there is Virtual Print Fee that the cinema owner charges from distributor for the capital investment it has made in various type of projectors etc. Other than this there is management fee, parking fees, rental income etc.

In INOX, the revenue from the box office collections has decreased as a percent of total operating revenue. This decrease has been compensated by an increase in revenue from Food & Beverages, Advertisement.  While in PVR, revenue from the sale of tickets has declined, it has increased in Food & Beverages and Other Operating revenue, while the revenue from advertisement has remained constant.

There has been change in the revenue breakup of the multiplexes over a period of 5 years. The same is depicted in the charts below:-

Overheads

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The overheads of the company are personnel expenses, rent payments (most of the properties are on lease and that too at prime locations), Electricity, Repair & Maintenance charges and other expenses.

In INOX, personnel expenses are 13% but for PVR it is 20%. INOX has balanced out its rest of the expenses, they all account to 29% each. PVR’s maximum expenditure is on account of its Rent, followed by its power, repair & maintenance, Personnel & other expenses.

Debt

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PVR in the last quarter conference call of F.Y. 18 had given a guidance to reduce debt that was present in its balance sheet, but then the company went forward on acquiring the SPI Cinemas, multiplex chain in South India. The net debt increased by ~52%, from Rs. 796.6 crores to Rs. 1,209.04 crores. On the other hand, debt of Inox is very manageable with about Rs. 290 crores.

Subsidiaries

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Contingent Liabilities

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Contingent Liabilities for INOX in their balance sheet of F.Y. 18 amount to nearly Rs. 246.28 crores, while that of PVR are of Rs. 149.18 crores.

Margins

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The margins of both the companies are fluctuating. This is generally, because of the presence of a lot of risks in the form of the quality of the content, impact of piracy, licensing requirements, the release of content on other media etc.

Opportunities for the Industry

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1. Largest Industry: The Indian film industry is one of the largest globally with a history of steady growth. With films being the most popular form of mass entertainment in India, the film industry has witnessed robust double-digit growth over the past decade.
2. Under Screened Market: India continues to be heavily under screened with 8 screens per million available, unlike in the United States, where there are 117 screens per million. The opportunity is huge and the exhibition industry is expanding its supply.
3. Penetration into Tier II & Tier III markets: With metros and most of the tier I markets getting saturated, the focus is now shifting to the tier II and tier III cities which are experiencing rapid urbanisation and greater economic growth. With lower real estate prices in smaller towns and the leeway to launch a no frills cinema, the exhibitors are able to considerably bring down the cost per screen.
4. Favourable Demographics: The population of India comprises of the maximum youth and for youth, the primary activity of recreation is watching movie in a theatre.
5. Rising Income levels: More the number of youth means more earning hands, this implies that the average income level of household shall increase. Thus, becoming an opportunity to cash on for the multiplexes.
6. Digital Dominance: Digitisation has changed the landscape of Indian cinema in several ways. Widespread release of movies across several screens, curtailment of piracy, reduced cost of prints, lower storage and maintenance expenditure and release of small budget films in a cost effective manner are some advantages offered by this technology. Over the past few years the industry has steadily shifted from releasing films with physical prints to digital distribution. The industry achieved around 90-95 percent digitization of screens and almost all commercially viable properties have been covered. Digital distribution has enabled films to broaden their reach and most films now garner about 60-80 percent of their revenue in the first week of release.Digital technology is now enabling reaching the unserved population which sits near the bottom of the pyramid. The key advantages of digital technology are affordability, security and timely access.
7. Shortening of the movie shelf life: First week business has increased, driven by the wider release and number of prints. The first week and weekend contribute almost 60-80 percent of a film’s total collection. Even within the first week, the trend is getting skewed towards the weekend. Considering this, multiplex chains are experimenting with pricing strategies to maximize revenue. By adopting a differential pricing model for weekdays and weekends, they are able to maximize footfalls across the week.

Threats/Risks for the Industry

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1. Piracy: Piracy has been one of the biggest thorns in the flesh for the industry. Can-cording is one of the most common ways of piracy, where pirates illegally record the movie in the theatres and release it online as well as make duplicated DVDs and sell it on the black market. The pirated versions of the movies are released within a day or two of the release of the movie and the DVDs are available the next day in the market. 2014 also saw increased cooperation between the industry and the government to tackle the issue of  piracy on a larger scale.
2. Content Quality: Success in the film exhibition business is heavily dependent on the flow of the content and quality of content being released during the year. The success a release can be highly unstable and seasonal, therefore impacts the performance of the business. With the advent of more and more professional entities into film production, the industry is becoming better and organized and is all set to roll out quality movies on a consistent basis thus producing quality movies for cinema goers. A film that is strong on content is well cast and marketed, can earn good returns.
3. Onset of OTT Services: The arrival of web based channels like Netflix, Amazon Prime Video, Hotstar among others have posed a threat for the multiplex industry. These are cheap in terms of the subscription money and have huge library of movies, serials among other stuffs. In the past few months, it was witnessed that some movies appeared on such platforms within 5 weeks of its release.
4. License Requirement: The multiplexes require a list of regulations that it has to comply with. The licenses vary from state to state and leads red tapism.
5. Slow Development of Malls: The slow development of malls reduce the new screen addition. Sometimes, it happens that the multiplex is ready to operate but the mall is yet not complete that leads to delay in the opening of the multiplex also.
6. Rising cost of talent: One of the unique characteristics of Indian film industry is the concentration of power in the hands of top few actors, and now directors and technicians. Until a couple of decades ago, actors did not pay much attention to the business aspect of cinema. Many actors now have their own production and mostly enter into co-production deals with studios. Industry sources continue to emphasis that the current system is unsustainable from a long term perspective as the high talent acquisition costs lead to higher risk and in certain cases impact the return.
7. Slow uptake of merchandising in India: Unlike other countries, India’s merchandising market is still not mature. Most Indian filmmakers have a relatively limited reach across the globe with piracy having its spillover effects on film merchandising as well. Also due to diverse audience, the ‘one size fits all’ approach does not hold true for India. Absence of iconic figures, compromising product quality, limited popularity period and demand of film’s merchandise are various other factors.
8. Ticket price controls: In certain states there is capping on the maximum ticket price that can be charged from the viewer. Thus, restricting the decision making related to price to be charged of the multiplexes.
9. Higher Tax Regime: While the onset of GST has brought the entire nation into the engulf of entertainment tax, without any exception. In December 2018 amendment to GST rates, the government has reduced the rate of GST from earlier 18% to 12% for tickets below Rs. 100/- and for the tickets above Rs. 100/- rates have been reduced from 28% to 18%. But there has been ruckus relating to some states imposing Local Body Entertainment Tax (LBET) over & above the gst, leading to double taxation. These states are of Madhya Pradesh & Tamil Nadu.
10. Confusion over Entertainment tax exemptions: States of Rajasthan & Uttar Pradesh in order to boost investment & employment opportunities in their states had provided certain exemptions on new screen addition for a specific period. But after the implementation of GST there has been confusion over the exemptions as States did not announce any stand of their on the same.
11. Litigation of bringing food inside Theatres: In 2018, share prices of both PVR & INOX fell sharply on account of Maharashtra Government allowing to carry outside food products inside the premises of theatre. In J&K the same was allowed, so the companies appealed in Supreme Court on the same. If Supreme court allows patrons to carry home made food, it will have a drastic impact on the revenues of multiplexes.

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References:  Companies' Annual reports, Media reports, Investor presentations, Industry reports. (We have taken the most recent published details of the companies and the latest investors' meet)

Disclaimer:  The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. The report & references mentioned are only for information of the readers about the industry stated.

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