COMPANY PROFILE
INOX LEISURE R eady to soar
India Equity Research| Media
Inox Leisure (INOX), the second-largest multiplex operator in India, is EDELWEISS RATINGS gaining palpable momentum underpinned by aggressive expansion plans Absolute Rating NOT RATED and customer-centric innovations. We believe, with a blockbuster FY19 and healthy balance sheet (low net debt equity of ~0.1x and INR1.4bn treasury stock), the company has ample firepower to expand organically as well as inorganically. Given the robust performance and aggression, we perceive INOX to be a formidable player. ‘NOT RATED’. MARKET DATA (R: INOL.BO, B: INOL IN) Expansion on track; Robust F&B and ad revenue potent catalysts CMP : INR 325 Target Price : NA INOX set an industry record in FY19 by opening the highest number of screens in a 52-week range (INR) : 382 / 189 year—85. On the cards is addition of 80 screens in FY20. INOX’s efforts to revamp Share in issue (mn) : 102.9 menus, bundle F&B products with online ticket sales and introducing gourmet offerings M cap (INR bn/USD mn) : 34 / 492 have paid rich dividends. In FY19, company’s food & beverage (F&B) revenue jumped Avg. Daily Vol.BSE/NSE(‘000) : 294.0 ~43% YoY driven by robust footfalls and ~12% improvement in SPH. Moreover, ad revenue grew ~27% YoY, accounting for ~10% of total net revenue in FY19. SHARE HOLDING PATTERN (%)
Current Q4FY19 Q3FY19 Sharpening luxury focus and innovations to enhance value Promoters % 51.9 51.9 51.9
INOX’s ATP and SPH for the premium and luxury screens are typically ~3-4x of normal MF's, FI's & 21.4 21.4 20.9 BK’s ATP and SPH with an average occupancy of ~40%—significantly higher than the normal FII's 11.3 11.3 12.1 26-28%. As of FY19, luxury format constitutes ~9% of total screen count, up from ~4% Others 15.1 15.1 14.8 in FY16 and this increase is likely to continue. INOX is also one of three multiplex * Promoters pledged shares : 0.0 (% of share in issue) chains globally selected to screen ICC World Cup 2019 matches.
RELATIVE PERFORMANCE (%) PVR ahead, but INOX fast catching up Stock over Sensex Stock While PVR continues to lead the race, INOX is posing tough competition. We evaluate a Sensex few parameters for both the players to draw comparisons. As mentioned in our 1 month (0.2) (8.3) (8.1) previous note as well (WatchDog: The multiplex showdown), INOX is fast catching up. 3 months 3.8 1.5 (2.3) 12 months 12.4 25.5 13.1
Outlook and valuation: Blockbuster prospects; ‘NOT RATED’
INOX is headed in the right direction armed with aggressive expansion plans, focus on high-margin segments and unwavering efforts to enhance customer experience. On valuations, INOX currently trades at ~24x FY19 EPS, at a discount to PVR, which trades
~42x FY19 EPS. The stock is ‘NOT RATED’.
Financials (INR mn)
Year to March FY16 FY17 FY18 FY19 Abneesh Roy Revenues (INR mn) 11,589 12,207 13,481 16,922 +91 22 6620 3141 EBITDA (INR mn) 1,899 1,461 2,104 3,083 [email protected]
Adjusted Profit (INR mn) 824 319 1,263 1,385 Prateek Barsagade Adjusted Diluted EPS (INR) 9.0 3.5 13.7 13.5 +91 22 4063 5407
Diluted P/E (x) 35.9 92.7 23.4 23.9 [email protected] EV/EBITDA (x) 17.6 22.3 15.3 11.1 ROAE (%) 17.1 5.9 20.7 17.0 June 28, 2019 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
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What we like…
Aggressive expansion on-track INOX set an industry record in FY19 by opening the highest number of screens in a year— 85. While management’s plan is to add ~80 screens in FY20, we anticipate minor setbacks due to competition, real estate challenges and regulatory delays. These notwithstanding, compared to competitors, the company has a strong balance sheet, lending it ample firepower to boost screen count organically as well as inorganically.
F&B spends to log healthy spurt INOX’s efforts to revamp menus, diversify offerings, bundle F&B products with online ticket sales and fresh-cooked food products in premium formats have paid rich dividends. The company also offers premium and gourmet cuisines at its premium properties, giving patrons a wider variety. INOX’s FY19 F&B revenue jumped ~43% YoY driven by footfall growth and marginal improvement in SPH. F&B revenue continues to remain critical for multiplexes considering the high margins and rising participation of audience in F&B offerings.
Steady growth in ad revenue With the multiplex industry gaining steam and deepening penetration across India, it is becoming a steady advertisement avenue for advertisers. INOX’s ad revenue grew ~27% YoY, accounting for ~10% of total FY19 net revenue. Ad revenue per screen, as of FY19, stands at INR3.1mn, significantly higher than INR2.3mn in FY16, growing at a CAGR of ~10%.
Luxury/differentiated formats spurring ARPU INOX has premium format screens housed under the Insignia brand, which provides customers a luxury movie-viewing experience along with gourmet food offerings. It’s pertinent to note that ATP and SPH dynamics herein are superior—~3-4x—than normal screen formats.
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Screen expansions to ramp up market share
Screen expansion robust in FY19; screen strategy changing FY19 proved to be a blockbuster year for INOX, not just in terms of footfall and revenue, but also on the screen expansion front. The company added 85 screens (82 screens on net basis), indicating its aggressive expansion stance. Though seats per screen have dipped to 236 in FY19 from 270 in FY14 (down 13%), the number of screens per property is likely to increase. The latter offers multiplexes additional screen inventory, hedge against content risk, potential for higher footfalls as well as occupancy.
Major expansion plans on the anvil INOX set an industry record in FY19 by opening the highest number of screens in a year—85. While management’s plan is to add ~80 screens in FY20, we anticipate minor setbacks from competition, real estate challenges and regulatory delays. These notwithstanding, compared to competitors the company has a strong balance sheet, lending it ample fuel to boost screen count organically as well as inorganically.
Tweaking screen strategy Though INOX’s seats per screen have dipped to 236 in FY19 from 270 in FY14 (down13%), the number of screens per property is likely to increase. The latter offers multiplexes additional screen inventory, hedge against content risk, potential for higher footfalls as well as occupancy.
Enhanced reach and rise in movies breaching the INR1bn box office collection Higher number of multiplex screens has not only changed the mix of movies being screened at cinema halls, but also reduced the number of days to achieve INR1bn box office collection. Also, improving multiplex penetration in tier-II towns and transparency will result in better ticket collection for movies.
Fig. 1: Break down of screens across regions
Source: Company
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Inorganic expansion entails synergistic benefits India’s multiplex industry underwent significant consolidation in the past decade and four players—PVR, INOX, Cinepolis and Carnival Cinemas—currently dominate the market. Though significant consolidation hereon appears low as multiplexes have already spread their reach across different pockets in the country, we do expect some activity. Additionally, with commercial malls and other real estate properties coming up at a slower-than- expected pace, we envisage acquisitions in the multiplex industry.
In CY18, PVR acquired SPI Cinemas (76 screens) to gain entry and establish a footing in the South market. CY14-15 also saw a couple of rounds of consolidation with Carnival Cinema’s entry in to the big league through three major acquisitions—HDIL Broadway (33 screens), Reliance-owned Big Cinemas (258 screens) and Stargaze Entertainment (30 screens). Other prominent acquisitions include INOX buying Satyam Cineplexes (38 screens) and Cinepolis acquiring Fun Cinemas (83 screens).
Table 1: Past deals in the multiplex industry Number of screens EV/screen EV/EBITDA Deal Date Status acquired EV (INR mn) (INR mn) (trailing) PVR - SPI Cinemas Aug-18 Completed 76 10,000 132 15.8x PVR - DT Cinemas Jun-15 Completed 32 4,330 135 NA Carnival - Glitz Jan-15 Completed 30 900 30 NA Carnival - Big Cinemas Dec-14 Completed 258 7,000 27 29x Cinepolis-Fun Dec-14 Completed 83 5,400 65 13.5x Carnival - HDIL Jul-14 Completed 33 1,100 33 NA Inox - Satyam Jul-14 Completed 38 2,200 58 15.7x PVR - Cinemax Nov-12 Completed 139 5,700 41 9.0x Inox - Fame Feb-10 Completed 95 1,880 20 10.6x Source: Edelweiss research
Previously, INOX had expanded its footprint in North India, particularly Delhi, with the acquisition of Satyam Cineplexes. This was the company’s third acquisition after the acquisition of Fame in 2010 and 89 cinemas in 2006. Currently, the company’s screen portfolio is West-heavy with 42% of screens in the region; only 16% screens are in the East. With these acquisitions, the company gained access to cities where it was not present earlier. Following are the synergy benefits of inorganic acquisitions:
Revenue enhancement: INOX, being the second-largest multiplex player in India, can derive synergy in advertising and F&B revenues. Apart from increased ad inventory due to inorganic expansion, it can command better price compared to a standalone entity. Further, it can increase menu options in the acquired entity, leading to higher F&B revenue.
Content cost synergies: The company can negotiate better content rates with producers due to larger procurement base. Rising screen count will impart INOX better bargaining power with content producers.
Reduction in overhead costs: Consolidation always results in reduction of overheads. Certain functions like accounting and human resources can be consolidated and replica costs can be reduced.
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Marginalisation of smaller & regional players and higher content cost are driving consolidation. For big operators like INOX it makes sense to acquire smaller multiplexes and gain scale (translating in to higher ad and F&B revenues, lower content costs) and access key locations. Consolidation enhances influence over strategic decisions in the industry. It also leads to sharing of best practices across industries and imparts superior pricing power.
Moreover, a low net debt-equity ratio of 0.1x and INR1.4bn in treasury stock lends INOX the firepower to achieve its aggressive expansions plans. The company’s current screen count stands at 583.
Chart 1: INOX added 85 screens in FY19 (82 on net basis) 750
600
450 (No.) 300
150
0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
No. of screens
Source: Company, Edelweiss research
Table 2: Screen presence by zone Inox Leisure - Screen presence FY14 FY15 FY16 FY17 FY18 FY19* East 70 67 69 72 72 87 West 116 134 170 206 219 247 North 45 82 86 94 102 123 South 79 89 95 100 99 126 Total 310 372 420 472 492 583
Inox Leisure - Screen presence (%) FY14 FY15 FY16 FY17 FY18 FY19* East 23 18 16 15 15 15 West 37 36 40 44 45 42 North 15 22 20 20 21 21 South 25 24 23 21 20 22 Total 100 100 100 100 100 100 Source: Company, Edelweiss research Note – FY19 figures represent screen count as on May 2019
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F&B spends to log healthy spurt
Robust growth seen in FY19 F&B revenue accounted for ~26% of INOX’s net FY19 revenue, ~18% CAGR over FY16-19. Though the F&B segment’s revenue growth had slowed down in the past years owing to stagnant footfalls, it catapulted to ~43% YoY in FY19. This spurt was spearheaded by strong growth in footfall, revamp of menus, diversifying offerings, bundling F&B products with online ticket sales and introduction of fresh-cooked food in premium formats.
F&B revenue continues to remain critical for multiplexes considering the high margins and rising participation of audience in F&B offerings. The company also offers premium and gourmet cuisines at its premium properties, giving patrons a wider variety. Cut in GST from 18% to 5% on F&B products also contributed to the growth. With the company’s efforts to promote its F&B offerings, the SPH grew ~12% YoY to INR74 in FY19.
In the recent past there have been issues regarding F&B pricing in multiplexes. However, so far the concerned bodies have ruled in favour of multiplexes, thereby reducing risk to the revenue stream. Amidst the ongoing pricing issues, gross margin of INOX’s F&B revenue stood at ~74% (PVR’s F&B gross margin at ~73%), a 150bps YoY dip.
Chart 2: Net F&B revenue and footfall trend – INOX 5,000 70.0
4,000 56.0
3,000 42.0 (mn) (INR mn) (INR 2,000 28.0
1,000 14.0
0 0.0 FY15 FY16 FY17 FY18 FY19
Net F&B revenue Footfall
Source: Company, Edelweiss research
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Chart 3: SPH and footfall trend – INOX 80 80
70 70
60 60 (mn) (INR) 50 50
40 40
30 30 FY15 FY16 FY17 FY18 FY19
SPH (INR) Footfall (mn)
Source: Company, Edelweiss research
In terms of F&B revenue growth, PVR (including SPI Cinemas) and INOX have been very close to one another, with INOX experiencing a steady growth trajectory in the past quarters and in instances being marginally ahead of PVR.
Chart 4: Net F&B revenue growth comparison – PVR versus INOX
56.0
44.0
32.0 (%) 20.0
8.0
(4.0) Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 PVR INOX Leisure Source: Company, Edelweiss research
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Chart 5: SPH comparison – PVR versus INOX 105
90
75
(INR) 60
45
30 FY15 FY16 FY17 FY18 FY19
PVR Inox Source: Edelweiss research
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Expansion to boost ad revenue
Scale benefits to spur ad revenue With the multiplex industry gaining steam and deepening penetration across India, it is becoming a steady advertising avenue for advertisers. Ad revenue grew ~27% YoY accounting for ~10% of the total net revenue for INOX in FY19. Ad revenue per screen, as of FY19, stands at INR3.1mn, significantly higher than INR2.3mn in FY16, growing at a CAGR of ~10%. It’s pertinent to note that margin on ad revenue is typically ~95-97% for multiplex industry. However, it is ~99% for INOX, which directly flows to EBITDA. With aggressive expansion plans in place along with an in-house ad sales team, the ad revenue growth momentum is likely to sustain.
Advertisements: Key revenue churner INOX’s ad revenue has clocked ~25% CAGR over FY16-19 to INR1,760mn in FY19, up ~27% YoY. Ad revenue contributed significantly to the ~46% YoY jump in FY19 EBITDA. Its margin on ad revenue is typically ~99% of ad revenue.
Ad revenue per screen (excluding non-managed screens), as of FY19, stands at INR3.1mn, significantly higher than INR2.3mn in FY16 (calculation based on closing screen count for the period). Though INOX’s ad per screen (annualised) has grown considerably, it lags PVR’s (including SPI Cinemas), whose ad per screen as of FY19 stood at 4.6mn (INR4.2mn in FY16).
INOX is planning to narrow the huge ad revenue disparity with PVR via sound marketing initiatives. Accordingly, it has been experimenting by advertising at various in-house locations like lobbies, pillars, etc. Moreover, a dedicated in-house ad sales team provides creative inputs to advertisers in production of ads.
INOX’s ad revenue per screen has posted ~10% CAGR over FY16-19. Over the years, the company’s per screen metrics pertaining to ad revenue have improved. With expanding presence and bargaining power, INOX could benefit from working with national-level advertisers, thereby boosting its ad revenue.
Chart 6: Ad revenue improving for INOX 4.0 12.5
3.4 10.0
2.8 7.5 (%)
(INR mn) (INR 2.2 5.0
1.6 2.5
1.0 0.0 FY15 FY16 FY17 FY18 FY19
Ad revenue per screen Ad revenue (% of revenue)
Source: Company, Edelweiss research
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Focus on enhancing experience through luxury/differentiated formats
Hedging the migration risk To counter the rising risk from OTTs, multiplexes are focusing on improving the customer experience in order to remain relevant in the value chain. INOX has premium format screens housed under the Insignia brand, which provides customers a luxury movie- viewing experience along with gourmet food offerings. While introduction of luxury offerings in tier-I cities is not new, multiplexes are now investing in new innovative technologies as well to offer more value to patrons.
The key point to note here is that this format’s ATP and SPH dynamics are typically superior than normal screens. INOX has been aggressive in opening luxury properties as well and investing in innovations. Recently, it inked a MoU with an international firm to import the ‘ScreenX’ technology to India to give viewers a differentiated offering.
While OTTs have grabbed eyeballs due to differentiated content and the convenience they offer at competitive prices, multiplexes are also working towards upping their game to keep customers coming in. Luxury format screens are targeted at tier-I markets and high-end customers, who also happen to be the highest at-risk group for multiplexes from OTTs.
INOX has brand Insignia which houses premium formats to offer enhanced movie and dining experience to customers. Additionally, its IMAX screen format attracts huge footfalls for visually intensive movies. The ATP and SPH for the premium/luxury screens are typically 3- 4x normal ATP and SPH with an average occupancy of ~40%, significantly higher than the normal average occupancy of 26-27%.
The company has been giving a higher import to technology in order to differentiate itself. In 2019, INOX inked a deal with CJ 4DPLEX for importing the latter’s ‘ScreenX’ technology to India. The technology offers patrons a 270-degree view entailing a more immersive movie experience. We perceive this as a positive for INOX in terms of gaining footfalls as theatres only have limited differentiating factors over one another and any factor which adds to the experience will be critical.
As of FY19, the luxury format constitutes ~9% of the company’s total screen count, up from ~4% in FY16, reflecting INOX’s appetite to focus on this format. We believe, such screens will largely be opened in metro cities where the appetite for luxury format theatres has been higher and expect multiplexes to continue to focus on premium offerings. Additionally, such measures will be conducive to keep multiplexes relevant in the value chain and mitigate the risk from OTTs. A few more of INOX’s customer-centric innovations are: Screening of select ICC World Cup 2019 matches on INOX screens – one of three multiplex chains in the world having rights to screen live matches from the World Cup Installed Onyx LED screens in select cinemas. Permitting cancellation on advance bookings. Ticketing at INOX has been GST compliant from the beginning; no impact on INOX from GST e-ticketing rules
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Fig. 2: INOX properties’ visuals
Source: Company, Edelweiss research
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PVR still ahead, but INOX catching up fast
Phenomenal content performance helped PVR and INOX in FY19. While footfalls rose ~17% for INOX, PVR’s (including SPI Cinemas) jumped ~31%. The ATP gap between the two players narrowed to INR10 in FY19 (PVR at INR207, INOX at INR197) from INR17 in FY18.
While PVR continues to lead INOX in terms of SPH, the latter has managed to bridge the difference on this front as well—down from INR23 (PVR at INR89 and INOX at INR66) in FY18 to INR18 in FY19. While INOX’s SPH grew ~9% in FY19, PVR’s inched up ~2%. By ad revenue/screen, PVR continues to be ahead of INOX.
With over 1,350 screens (~46% of total multiplex screens) across India, PVR and INOX dominate the multiplex business. In FY19, 15 bollywood movies crossed the coveted INR1bn plus mark in box office collections.
Phenomenal content performance during the year played a big role in multiplex operators’ performance. PVR (consolidated) recorded growth of 32%, 46% and 47% in revenue, EBITDA and adjusted PAT, respectively. INOX posted growth of 26%, 47% and 10% (INR537mn of tax benefits in base) in revenue, EBITDA and adjusted PAT, respectively. The strong content pull lifted footfalls by ~17% YoY for INOX and ~31% for PVR (including SPI Cinemas).
PVR’s FY19 consolidated (including SPI Cinemas) net box office collection (NBOC) revenue grew about 31% compared with ~22% for INOX. The ATP gap between the two players narrowed in FY19 with INOX closing in on PVR—FY19 difference of INR10 (PVR at INR207, INOX at INR197) compared with INR17 in FY18 (PVR’s FY18 ATP stood at INR210, INOX’s at INR193). Q4FY19 saw the ATP declining YoY due to transmission of GST rate cut to movie ticket prices, which we believe will temper gross ATP growth for multiplexes.
In terms of net F&B revenue, INOX posted growth of 42% YoY and PVR 39% YoY. Though PVR continues to be ahead of INOX in terms of SPH, the latter has managed to bridge the difference in FY19 on this front as well—from INR23 in FY18 (PVR at INR89 and INOX at INR66) to INR17 in FY19 (PVR at INR91 and INOX INR74).
SPH growth for INOX in FY19 was ~9%, whereas PVR’s SPH grew ~2%. On the ad revenue front, PVR grew 20%, thereby lagging INOX’s ~27% in FY19. However, on ad revenue per screen, PVR continues to be ahead of INOX, in fact, 51% higher in FY19.
Overall, FY19 proved to be a robust year for INOX on three counts: i) reduced the gap with PVR; ii) successful expansion—opened 85 screens; and iii) considerable improvement in metrics through increase in pricing power.
Comparing PVR and INOX Given the good run both players have had in FY19, we look at their operational trends and see how they compete on various fronts:
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ATP differential has reduced considerably; INOX fast catching up
Chart 7: Average ticket price trend – PVR versus INOX 220
212
204 (INR) 196
188
180 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 PVR INOX Leisure
Source: Company, Edelweiss research
In Q1FY18, PVR’s ATP was about 11% higher than INOX; this gap narrowed considerably to ~3% by Q4FY19. In our view, this signals an increase in INOX’s relative pricing power and sustained customer demand. An increase in INOX’s premium properties also helped.
INOX’s SPH rose by 12% over eight quarters versus 5% for PVR
Chart 8: Spend per head trend – PVR versus INOX 100
90
80
(INR) 70
60
50 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19
PVR INOX Leisure
Source: Company, Edelweiss research
In Q1FY18, PVR’s SPH was about 34% higher than INOX; this difference narrowed considerably to ~25% by Q4FY19. INOX is being equally aggressive and focused in terms of promoting its F&B offerings.
The F&B pricing issues in the past have made multiplex operators cautious. Subsequently, PVR is experimenting with differential F&B pricing for different timings. Although court
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rulings have favoured multiplexes to date, implying minimal risk to F&B revenue, we that F&B growth is likely to stem from increased footfall participation and a greater mix of premium offerings.
Over the past few quarters, PVR’s net F&B revenue growth on a YoY basis has been higher than INOX’s; however, the latter is catching up fast.
Chart 9: Net F&B revenue growth comparison – PVR versus INOX
56.0
44.0
32.0 (%) 20.0
8.0
(4.0) Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 PVR INOX Leisure
Source: Company, Edelweiss research
Overall ARPU for PVR has declined and increased marginally for INOX
Chart 10: ARPU comparison – PVR versus INOX 325
300
275 (INR) 250
225
200 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 PVR INOX Leisure
Source: Company, Edelweiss research ` While PVR’s total ARPU (ATP + SPH) has fallen ~5% over the past eight quarters, INOX’s has inched up by about 2%. PVR’s ARPU has fallen from INR301 in Q1FY18 to INR286 in Q4FY19. This decline is attributable to lower ATP for SPI screens and lower ticket prices in the wake of the GST rate cut.
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Occupancy rates for PVR remain higher than INOX
Chart 11: Occupancy rate comparison – PVR versus INOX 40.0
36.0
32.0 (%) 28.0
24.0
20.0 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 PVR INOX Leisure
Source: Company, Edelweiss research
PVR has traditionally enjoyed higher occupancy rates than INOX owing to its screen locations and strong push through online ticket aggregators. However, in recent quarters, the difference in occupancy rates has widened. We believe, this is largely due to PVR’s acquisition of SPI Cinemas, which has made its screen portfolio more South-heavy than INOX (~33% for PVR, ~21% for INOX). This translates in to higher occupancy as multiplexes and single screens in South have 50–60% occupancy rates. It also implies higher per screen revenue and footfall for PVR than INOX (refer to charts below).
Chart 12: PVR has higher footfall per screen than INOX (excl non managed screens) 40
36
32
(Mn) 28
24
20 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19
PVR INOX Leisure
Source: Company, Edelweiss research
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Chart 13: NBOC per screen for PVR and INOX (excl non managed screens) 8.0
7.0
6.0 (INR) 5.0
4.0
3.0 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 PVR INOX
Source: Company, Edelweiss research
PVR’s EBITDA per footfall continues to be greater than INOX
Chart 14: PVR has higher EBITDA per footfall 66.0
58.0
50.0
(INR) (INR) 42.0
34.0
26.0 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 PVR INOX
Source: Company, Edelweiss research
The chart above indicates that PVR’s EBITDA per footfall has been higher than INOX’s given the former’s superior pricing power and higher proportion of ad revenue. In Q1FY18, PVR’s EBITDA per footfall was 11% higher than INOX, while on average over the past eight quarters, it was higher by 33% than INOX. However, in Q4FY19, PVR’s EBITDA per footfall was only 8% higher than INOX’s.
Ad revenue provides superior margin benefits to multiplexes (given 95–97% margin), feeding directly in to EBITDA. A look at their EBITDA excluding advertising revenue shows that at times INOX’s EBITDA (ex-advertising revenue) per footfall has been higher than PVR’s for the past few quarters. We attribute this to ad revenue making up a larger portion of PVR’s overall net operating revenue than INOX’s.
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Chart 15: EBITDA (ex of ad revenue) per footfall 38.0
31.0
24.0
(INR) 17.0
10.0
3.0 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19
PVR INOX
Source: Company, Edelweiss research
PVR benefits from scale, thereby fetching higher ad revenue per screen than INOX (excluding non-managed screens for INOX). In Q4FY19, PVR’s ad revenue per screen stood at INR1.1mn versus INOX’s INR0.75mn. However, given the latter’s aggressive expansion plans and the significant gap, this gap is likely to reduce going ahead.
Chart 16: PVR’s ad revenue per screen superior to INOX 2.0
1.6
1.2
(INR mn) (INR 0.8
0.4
0.0 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 PVR INOX Leisure
Source: Company, Edelweiss research
PVR and INOX: Revenue mix trend PVR and INOX have similar revenue profiles, apart from certain differences: NBOC constitutes about 58% of total operating revenue for INOX and about 53% for PVR (based on an eight-quarter average). Net F&B revenue constitutes about 24% of total operating revenue for INOX and about 27% for PVR (based on an eight-quarter average). Ad revenue constitutes about 10% of total operating revenue for INOX and about 12% for PVR (based on an eight-quarter average).
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Chart 17: PVR—Revenue mix trend 100%
80%
60%
40%
20%
0% Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19
Net box office (INR mn) F&B revenue (INR mn) Ad revenues (INR mn) Other operating income
Source: Company, Edelweiss research
Chart 18: INOX—Revenue mix trend 100%
80%
60%
40%
20%
0% Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Net box office (INR mn) F&B revenue (INR mn) Ad revenues (INR mn) Other operating income
Source: Company, Edelweiss research
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Rental costs (as % of sales) lower for INOX
Chart 19: Rental costs (including common area maintenance) comparison 29.0
26.0
23.0 (%) 20.0
17.0
14.0 FY15 FY16 FY17 FY18 PVR INOX Leisure
Source: Company, Edelweiss research
In the past, rent and common area maintenance expenses as a % of sales have been lower for INOX compared to PVR. Though PVR was a tad higher, the rent and common area maintenance expenses as a % of sales had been declining—from ~24% in FY15 to ~22% in FY18. For INOX, this expense has been ~20% of net sales in FY17 and FY18. The differential between PVR and INOX stood at ~4% in FY15, which has dipped to 2.8% in FY18. Additionally, this also implies that PVR has been present in leading properties in respective cities, thereby incurring higher rentals, but also achieving higher footfalls on a per screen basis.
Payroll costs (as % of sales) lower for INOX, overall employee costs higher
Chart 20: Payroll costs (excluding off-roll employee costs) comparison 12.5
11.0
9.5 (%) 8.0
6.5
5.0 FY15 FY16 FY17 FY18 PVR INOX Leisure
Source: Company, Edelweiss research
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While the chart above indicates that PVR’s payroll costs have been considerably higher than INOX, this does not include off roll (outsourced) employee costs, which is a significant component for INOX and has increased significantly over the past few years. INOX’s outsourced employee expense to the payroll employee expense stood at ~40% in FY15 and jumped to 55% in FY18.
Overall employee costs, including outsourced personnel cost (not including security and housekeeping), indicate that employee cost as a percentage of sales has been marginally higher for INOX than PVR. The chart below, however, does not include outsourced personnel cost for PVR due to non-availability of exact figures. We have not included housekeeping and security expenses for both the players in overall employee expenses.
Chart 21: INOX’s employee cost including outsourced employee cost (as % of sales) higher 11.5
11.0
10.5 (%) 10.0
9.5
9.0 FY15 FY16 FY17 FY18 PVR INOX Leisure
Source: Company, Edelweiss research Note: Outsourced personnel cost for PVR are not included; housekeeping and security expenses are not included for both PVR and INOX
Return metrics for PVR and INOX
Chart 22: Return on average equity comparison 24.0
20.0
16.0 (%) 12.0
8.0
4.0 FY16 FY17 FY18 FY19 PVR INOX
Source: Company, Edelweiss research
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Chart 23: Pre-tax ROCE comparison 24.0
20.0
16.0 (%) 12.0
8.0
4.0 FY16 FY17 FY18 FY19 PVR INOX
Chart 24: Net box revenue— INOX vs PVR Chart 25: F&B revenue— INOX vs PVR 9,000 18,000
7,200 14,400
5,400 10,800 (INR mn) (INR
3,600 mn) (INR 7,200
1,800 3,600
0 0 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 PVR Inox Series1 Series2
Chart 26: Number of screens— INOX vs PVR Chart 27: Footfalls— INOX vs PVR 900 120.0
740 100.0
580 80.0 (mn) 60.0
(screens) 420
260 40.0
100 20.0 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 PVR Inox PVR Inox
Source: Company, Edelweiss research
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Chart 28: ATP— INOX vs PVR Chart 29: SPH— INOX vs PVR
250 105
230 90
210 75 (INR) 190 (INR) 60
170 45
150 30 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19
PVR Inox PVR Inox Source: Company, Edelweiss research
Table 3: Annual comparison - INOX versus PVR PVR Inox Leisure Annual Comarison (Consol.) FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 ATP (INR) 178 188 196 210 207 164 170 178 193 197 Total revenues (INR mn) 14,771 18,811 21,628 23,340 30,856 8,954 11,589 12,207 13,481 16,922 Net box office (INR mn) 8,240 9,948 11,249 12,470 16,357 5,516 7,311 7,128 8,022 9,747 Ad revenues (INR mn) 1,771 2,145 2,518 2,969 3,535 815 910 962 1,389 1,760 F&B revenue (INR mn) 3,853 4,977 5,794 6,250 8,467 1,910 2,656 2,841 3,060 4,366 Footfalls (mn) 59.2 69.6 75.2 76.1 99.3 41.1 53.4 53.7 53.3 62.5 No. of screens 464 516 579 625 771 372 420 468 492 574 SPH (INR) 65 72 77 89 91 55 58 61 66 74 EBITDA (INR mn) 2,008 3,240 3,570 4,018 5,863 1,228 1,899 1,461 2,104 3,083 EBITDA per screen 4.3 6.3 6.2 6.4 7.6 3.3 4.5 3.1 4.3 5.4 % of revenues Net box office 55.8 52.9 52.0 53.4 53.0 61.6 63.1 58.4 59.5 57.6 Ad revenues 12.0 11.4 11.6 12.7 11.5 9.1 7.9 7.9 10.3 10.4 F&B revenue 26.1 26.5 26.8 26.8 27.4 21.3 22.9 23.3 22.7 25.8 YoY growth ATP 6.0 5.6 4.3 7.1 (1.4) 5.1 3.7 4.7 8.4 2.1 Net box office 3.7 20.7 13.1 10.9 31.2 12.5 32.5 (2.5) 12.5 21.5 Ad revenues 16.8 21.1 17.3 17.9 19.1 64.5 11.7 5.7 44.4 26.7 F&B revenue 15.8 29.2 16.4 7.9 35.5 17.7 39.1 7.0 7.7 42.7 Footfalls (1.0) 17.6 8.0 1.2 30.5 6.5 29.9 0.6 (0.7) 17.3 Source: Company, Edelweiss research
22 Edelweiss Securities Limited Inox Leisure
Table 4: PVR (including SPI Cinemas) versus INOX – Quarterly comparison Quarterly comparison - Inox vs PVR PVR Inox (incl. SPI Cinemas) Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Net revenue (INR mn) 6,366 5,554 5,573 5,849 6,963 7,086 8,431 8,376 3,874 3,113 3,259 3,236 4,149 3,653 4,332 4,788 EBITDA (INR mn) 1,120 905 1,015 944 1,372 1,240 1,643 1,608 759 444 463 439 835 448 835 974 PAT (INR mn) 445 259 289 262 522 333 410 467 321 117 132 577 370 120 365 531 ATP (INR) 214 204 212 209 217 211 212 195 193 186 199 193 199 195 206 189 Net box office (INR mn) 3,433 2,993 2,931 3,124 3,849 3,739 4,254 4,514 2,392 1,856 1,879 1,895 2,419 2,064 2,429 2,840 Ad revenues (INR mn) 674 688 867 720 718 811 1,117 881 334 321 403 332 400 378 557 430 F&B revenue (INR mn) 1,646 1,423 1,438 1,571 2,027 1,954 2,167 2,319 882 671 731 777 1,114 949 1,063 1,230 Footfalls (mn) 21.0 18.7 17.4 19.0 22.7 21.4 25.8 27.5 15.8 12.8 12.1 12.6 15.6 13.7 15.3 18.0 No. of screens 587 600 612 625 634 727 748 771 476 481 488 492 512 536 557 583 SPH (INR) 87 91 92 87 94 88 89 91 65 65 70 67 76 73 74 73 Occupancy (%) 35.1 29.6 29.1 31.5 35.9 35.6 34.6 38.6 31.0 25.0 24.0 26.0 29.0 25.0 27.0 31.0 F&B Gross Margin (Standalone) (%) 76.1 73.9 74.2 75.2 75.1 73.3 72.5 72.3 77.0 75.0 75.8 74.9 75.6 73.3 73.4 74.3 Zone wise screen break up (Consolidated) North 197 200 203 203 203 209 216 230 99 99 102 102 109 112 119 123 East 22 22 22 22 22 22 22 30 72 72 72 72 76 76 84 87 West 238 248 245 245 245 250 257 253 206 211 215 219 223 230 236 247 South 130 130 142 155 164 246 253 258 99 99 99 99 104 118 118 126 Total screens 587 600 612 625 634 727 748 771 476 481 488 492 512 536 557 583 Key metrics Ad revenues per screen (INR mn) 1.1 1.1 1.4 1.2 1.1 1.1 1.5 1.1 0.7 0.7 0.8 0.7 0.8 0.7 1.0 0.7 EBITDA margin (ex ad revenues) 7.8 4.5 3.2 4.4 10.5 6.8 7.2 9.7 12.0 4.4 2.1 3.7 11.6 2.1 7.4 12.5 EBITDA margin 17.6 16.3 18.2 16.1 19.7 17.5 19.5 19.2 19.6 14.3 14.2 13.6 20.1 12.3 19.3 20.3 ATP/SPH ratio (standalone) 2.5 2.2 2.3 2.4 2.3 2.4 2.4 2.1 3.0 2.9 2.8 2.9 2.6 2.7 2.8 2.6 Footfalls per screen ('000) 35.8 31.2 28.4 30.4 35.8 29.4 34.5 35.7 33.2 26.5 24.9 25.7 30.5 25.5 27.5 30.9 YoY growth (%) ATP 9.7 1.0 6.5 10.0 1.4 3.4 - (6.7) 10.9 1.6 9.3 10.9 3.1 4.8 3.5 (2.1) Net box office 11.5 6.6 7.7 18.1 12.1 24.9 45.2 44.5 12.0 3.5 6.5 6.0 1.1 11.2 29.3 49.9 Ad revenues 30.9 10.2 10.6 36.5 6.5 18.0 28.9 22.4 56.8 34.9 33.4 58.9 19.8 17.8 38.2 29.5 F&B revenue 11.6 1.9 6.6 22.3 23.2 37.3 50.7 47.6 9.3 (4.4) 8.1 18.4 26.3 41.4 45.4 58.3 Footfalls 1.4 1.1 (2.8) 4.4 8.1 14.4 48.3 44.7 1.7 0.4 (3.0) (2.8) (1.1) 7.2 26.1 42.5 Source: Company, Edelweiss research
Table 5: PVR (excluding SPI Cinemas) versus INOX – Quarterly comparison Quarterly comparison - Inox vs PVR PVR Inox (ex-SPI Cinemas) Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Net revenue (INR mn) 6,366 5,554 5,573 5,849 6,963 6,474 7,060 7,239 3,874 3,113 3,259 3,236 4,149 3,653 4,332 4,788 EBITDA (INR mn) 1,120 905 1,015 944 1,372 1,100 1,459 1,401 759 444 463 439 835 448 835 974 PAT (INR mn) 445 259 289 262 522 309 459 463 321 117 132 577 370 120 365 531 ATP (INR) 214 204 212 209 217 211 220 201 193 186 199 193 199 195 206 189 Net box office (INR mn) 3,433 2,993 2,931 3,124 3,849 3,515 3,691 4,033 2,392 1,856 1,879 1,895 2,419 2,064 2,429 2,840 Ad revenues (INR mn) 674 688 867 720 718 778 1,004 790 334 321 403 332 400 378 557 430 F&B revenue (INR mn) 1,646 1,423 1,438 1,571 2,027 1,778 1,783 1,983 882 671 731 777 1,114 949 1,063 1,230 Footfalls (mn) 21.0 18.7 17.4 19.0 22.7 21.4 21.3 23.7 15.8 12.8 12.1 12.6 15.6 13.7 15.3 18.0 No. of screens 587 600 612 625 634 643 676 691 476 481 488 492 512 536 557 583 SPH (Standalone) (INR) 87 91 92 87 94 88 90 91 65 65 70 67 76 73 74 73 Occupancy (standalone) (%) 35.1 29.6 29.1 31.5 35.9 33.4 33.0 37.1 31.0 25.0 24.0 26.0 29.0 25.0 27.0 31.0 F&B Gross Margin (Standalone) (%) 76.1 73.9 74.2 75.2 75.1 73.3 72.5 72.3 77.0 75.0 75.8 74.9 75.6 73.3 73.4 74.3 Key metrics Ad revenues per screen (INR mn) 1.1 1.1 1.4 1.2 1.1 1.2 1.5 1.1 0.7 0.7 0.8 0.7 0.8 0.7 1.0 0.7 EBITDA margin (ex ad revenues) 7.8 4.5 3.2 4.4 10.5 5.6 7.5 9.5 12.0 4.4 2.1 3.7 11.6 2.1 7.4 12.5 EBITDA margin 17.6 16.3 18.2 16.1 19.7 17.0 20.7 19.4 19.6 14.3 14.2 13.6 20.1 12.3 19.3 20.3 ATP/SPH ratio 2.5 2.2 2.3 2.4 2.3 2.4 2.4 2.2 3.0 2.9 2.8 2.9 2.6 2.7 2.8 2.6 Footfalls per screen ('000) 35.8 31.2 28.4 30.4 35.8 33.3 31.5 34.3 33.2 26.5 24.9 25.7 30.5 25.5 27.5 30.9 YoY growth (%) ATP 9.7 1.0 6.5 10.0 1.4 3.4 3.8 (3.8) 10.9 1.6 9.3 10.9 3.1 4.8 3.5 (2.1) Net box office 11.5 6.6 7.7 18.1 12.1 17.4 25.9 29.1 12.0 3.5 6.5 6.0 1.1 11.2 29.3 49.9 Ad revenues 30.9 10.2 10.6 36.5 6.5 13.2 15.9 9.7 56.8 34.9 33.4 58.9 19.8 17.8 38.2 29.5 F&B revenue 11.6 1.9 6.6 22.3 23.2 25.0 24.0 26.2 9.3 (4.4) 8.1 18.4 26.3 41.4 45.4 58.3 Footfalls 1.4 1.1 (2.8) 4.4 8.1 14.4 22.4 24.7 1.7 0.4 (3.0) (2.8) (1.1) 7.2 26.1 42.5 Source: Company, Edelweiss research
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GST rate cut bodes well for multiplexes; local body tax a risk
Recent GST rate cut on movie ticket prices to be benign for multiplexes over the long term.
The GST Council has slashed the rate from 28% to 18% on movie tickets priced above INR100 and reduced it from 18% to 12% on tickets priced up to INR100.
Though this will force multiplexes to prune ATPs in order to pass on rate cut benefits, we do not foresee any impact on net box office collection revenue.
GST rate cut to reflect in lower ticket prices; multiplexes to gain The GST Council in its 31st meet announced reduction in GST rate on movie tickets—from 28% to 18% on tickets priced above INR100 and from 18% to 12% on tickets priced up to INR100. In our view, this is a favourable development for movie patrons, exhibitors and distributors. However, it will translate in to simultaneous dip in ticket prices going ahead as benefits of the rate cut will have to be passed on to customers in compliance with anti- profiteering guidelines.
Hence, we anticipate ~10% drop in ATPs for multiplex chains as well as single screens to be effective starting 2019, whose biggest beneficiary will be movie goers. We do not expect any material impact on revenue of multiplexes as the cut in ticket prices will be accompanied by reduced tax rates. Therefore, net box office collection revenue of multiplexes will remain intact. In addition, GST rates on F&B revenue have been cut from 18% in FY18 to 5% in FY19.
We believe, with movie tickets becoming more affordable, a sizeable portion of the audience could migrate from single screens to multiplex format theatres, especially in tier-II and III cities. This will be a big positive for multiplexes considering that these markets are price-sensitive where multiplexes have traditionally faced strong competition from single screens. However, the underlying assumption is that content performance remains steady.
State governments’ local body tax a concern In recent past, two states—Madhya Pradesh and Kerala—introduced a local body tax on movie tickets. Currently Madhya Pradesh, Kerala and Tamil Nadu levy entertainment tax over and above the GST rate. While the risk to revenue is minimal as of now, contagion risk due to other states following suit is higher and remains a concern.
Table 6: Local body tax across states State LBT rate (%) Bhopal (Madhya Pradesh) 15.0 Indore (Madhya Pradesh) 5.0 Kerala 10.0 Tamil Nadu (Tamil films) 8.0 Tamil Nadu (Other languages) 15.0 Source: FICCI KPMG Report, Edelweiss research
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Key Risks
Competition from other exhibitors and OTTs Competition from other multiplex chains such as PVR, Cinepolis, small-scale multiplex operators and single screens remains a concern. In addition, the advent of digital release on OTT platforms along with affordable pricing and pressure on time windows poses a serious threat to multiplexes.
Content uncertainty Differentiated content is the primary footfalls driver in multiplexes. However, average content or inferior quality content will hurt footfalls. Any extended supply of below-average content could hurt INOX’s revenue and bottom line.
Slowdown in real estate along with rising rentals Multiplexes are generally located in malls. Weak sentiment in the economy could lead to muted growth in the commercial property market, impacting mall development. Currently, most properties owned by INOX are on lease. We believe, sustenance of this trend over the next few quarters may be a major impediment to the company’s screen addition plans. Additionally, with other exhibitors and businesses vying for space in malls, elevated rentals is also a concern.
Piracy Availability of good quality new movies over the internet could impact footfalls of multiplexes. To mitigate the impact of piracy, production houses mostly release movies worldwide on the same day. Main box office collection happens in the first week and availability of movie on the internet after the first week has minimal impact.
Agreements with industry stakeholders Currently, the net box office collection is shared with distributors at a pre-agreed price. However, any dispute between producers and exhibitors could harm the multiplex business. In addition, the practice of virtual print fee payment by production houses to multiplexes has been protested by the former.
Local body tax levied by state governments Contagion risk of entertainment tax (over and above GST), currently levied by local bodies in a few states, remains a concern for multiplexes. Currently levied in Madhya Pradesh, Kerala and Tamil Nadu.
Sports Huge popularity of IPL and increasing interest of audience in other sports tournaments such as World Kabaddi League, ISL etc. along with national tournaments like World Cup, Indian Badminton League and Hockey India League could affect footfalls.
New accounting standard Ind AS 116 Commencement of new accounting standard Ind AS 116, applicable from April 1, 2019, will impact reported (unadjusted) return and profitability ratios. The new standard will enforce companies to recognise off-balance sheet lease liabilities and assets on their books. However, there will be no impact from an economic standpoint.
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Outlook and Valuation
Blockbuster prospects; NOT RATED INOX, the second largest multiplex operator in India, is headed in the right direction with aggressive expansion plans, focus on high-margin segments and unwavering efforts to enhance the customer experience.
Given its unlevered balance sheet (D/E at 0.1x in FY19), INOX has the firepower to expand organically and inorganically, leading to higher bargaining power in terms of ad and F&B revenues and content costs.
Going ahead, INOX could emerge as a dominant force in the multiplex space drawing on strong promoters, steady expansion and healthy balance sheet. In terms of valuations, INOX currently trades at ~24x FY19 EPS, at considerable discount to PVR which trades at ~42x FY19 EPS.
26 Edelweiss Securities Limited Inox Leisure
Company Description
INOX is a film exhibition company which is in the business of setting up, operating and managing a national chain of multiplexes under the INOX brand. The company commenced operations in May 2002. It acquired 50.5% stake in Fame India in February 2010. INOX is a subsidiary of GFL. The first multiplex was set up in Pune on May 11, 2002. As of FY19 end, it had presence across 67 cities with 141 properties with 574 screens. Underpinned by strong corporate ethos and financial backing, INOX has established its credentials in the entertainment industry in a short span.
Fig. 3: SWOT analysis
Strengths Strong balance sheet Weakness Customer-centric Presence in southern innovations India Focus on premium Underlying content risk properties
Threats Opportunities OTTs Multiplex penetration in India Unpredictable nature of content Scope to increase SPH Intensifying Capitalise on cutting competition for edge technology properties
Source: Edelweiss research
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Management Overview
Mr. Pavan Jain, Chairman: Mr. Pavan Jain is a Chemical Engineer from IIT, New Delhi, and an industrialist with over 40 years of experience. With over 30 years’ experience as the Managing Director of INOX Air Products, he has steered the company’s growth from a single plant business to one of the leading domestic players in the industrial gases business. In addition, he has been instrumental in diversifying the INOX Group in to various industries such as refrigerant gases, chemicals, cryogenic engineering, entertainment and renewable energy.
Mr. Vivek Jain, Director: Mr. Vivek Jain has graduated in Economics from St. Stephens, New Delhi, and did his post-graduation in business administration from IIM, Ahmedabad, where he specialized in finance. He has over 35 years of business experience and is currently the Managing Director of Gujarat Fluorochemicals.
Mr Siddharth Jain, Director: Mr. Siddharth Jain earned a Bachelor’s Degree in Mechanical Engineering at The University of Michigan, US, and an MBA from INSEAD, France. He is currently a Whole-Time Director of INOX Air Products and also a Director in other group companies. He has over 16 years’ experience in working with various business units across the group.
Mr Deepak Asher, Director: A commerce and law graduate, Mr. Deepak Asher is also a Fellow Member of the Institute of Chartered Accountants of India and an Associate Member of the Institute of Cost and Works Accountants of India. He has >25 years’ experience in corporate finance and business strategy. Mr. Asher is President of the Multiplex Association of India and member of the FICCI Entertainment Committee. In 2002, he won the Theatre World Newsmaker of the Year Award for his contribution to the multiplex sector.
Mr. Alok Tandon, Chief Executive Officer: Mr. Alok Tandon is a Graduate in Mechanical Engineering with over 30 years’ experience across entertainment, hospitality and pharmaceutical industries. He has been part of INOX’s startup team and has helped build and develop the company since inception. Mr. Tandon played a very active role in all the three mergers & acquisitions made by the company—Calcutta Cine in 2007, Fame India in 2010 and Satyam Cineplexes in August 2014. Spearheading INOX’s expansion and consolidation, Mr. Tandon has been successfully steering the company’s growth momentum over the years and by being true to its motto of ‘LIVE THE MOVIE’.
Mr. Mr. Kailash B. Gupta, Chief Financial Officer: Mr. Kailash B. Gupta has over 21 years of experience in business strategy, commercials, fund raising, financial planning & analysis, accounting, MIS, IFRS, budgeting, controlling, treasury & taxation functions & commercial negotiations. Prior to joining INOX, Mr. Gupta worked with Entertainment Network (India) (ENIL) since 2011 as the Vice President where he was heading the overall finance, accounting, controlling and taxation. At INOX, he is responsible for strategic planning, finance & accounts, legal & compliances and investor relations. He led numerous initiatives including planning, investments / treasury, finance & accounting, budgeting & MIS, regulatory reporting and taxation. Recently, he has been awarded the best ‘CFO in the Media & Entertainment sector’ for exceptional performance & achievements by The Institute of Chartered Accountants of India (ICAI) and has also been identified among the Top 20 CFOs in India in the 12th edition the CFO Leadership Summit.
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Industry Overview
India favourably placed compared to global players
India is nowhere close to global players in terms of screens / mn population—around eight screens / mn population and even fewer multiplex screens compared to the US’ 125 screens / mn population. India’s screen density is lower compared to even developing nations such as Brazil and China.
India remains heavily under screened India’s film industry is the largest world over in terms of the number of films produced. However, it is nowhere close to being a world leader in terms of screens/ mn population. There are around eight screens / mn population in India compared to the US’ ~125.
This under penetration is expected to lend big boost to the multiplex industry. Though addition of multiplex screens over the past few years has dramatically changed the film exhibition space in India, there still exists huge opportunity to rapidly increase the number of cinema screens over the next decade sans oversupply situation. We expect the increase in multiplex screens (not single screens) in India to address the issue.
Chart 30: Number of screens per mn population 150
120
90
60
30 (Screens / Mn population) (ScreensMn /
0
us
UK
India
Spain
Brazil
China
Japan
France
Taiwan
S Korea S Thailand Germany Source: Company Presentation, Edelweiss research
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Chart 31: India produces highest number of movies 2,250
1,800
1,350
(Nos.) 900
450
0
US
UK
Italy
India
Spain
China
Japan
France S KoreaS
Germany Source: Company Presentation, Edelweiss research
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Growth in in-cinema advertising and regional movies to sustain
The industry’s in-cinema advertising is estimated to post ~14% CAGR over CY18-21 to INR11bn by CY21. Multiplexes offer national advertisers far greater reach and impact bolstered by their pan-India presence. Blockbuster weekends attract premium pricing where the premium can be in the 25-30% range above the average ad rate, thus boosting in-cinema advertising.
Development of regional content will reduce dependence of multiplexes on bollywood and provide cushion if any Hindi movie fails at the box office. Additionally, with audiences opening up to differentiated and regional content, multiplexes’ dependence on perceived stars has reduced, which is a positive in the long run.
Cinema ads getting into radar for advertisers Over the years, proliferation of multiplexes and digitisation of screens have lured the audience back in to theatres. This has led to monetisation of in-cinema advertising at multiplexes, which is estimated to post ~14% CAGR to INR11bn over CY18-21. While on- screen advertising can guarantee undivided attention of a captive audience, off-screen promotions enable brands to leverage walls, seats, doors, interactive/entertainment zones, etc., within a theatre’s premises.
Major spenders include sectors such as FMCG, banking, automobile, local real estate and local retail. The ratio of local versus national advertisers is ~75:25. Blockbuster weekends attract premium pricing where the premium can be in the 25-30% range above the average ad rate, thus boosting in-cinema advertising.
Chart 32: In-cinema advertising to grow to INR11bn by CY21E 12.5
10.0
7.5
(INR bn) (INR 5.0
2.5
0.0 2017 2018 2019E 2021E In-cinema advertising (INR bn)
Source: FICCI KPMG report, Edelweiss research
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Contribution from regional and hollywood movies on the rise A positive development over the past few years has been the development of regional film industries like Bengali and Marathi. While Hindi and Telugu movies are driven by content, genre and stars, Bengali, Marathi and Malayalam movies are more content driven. Development of regional content will reduce INOX’s dependence on bollywood and provide a cushion in case any Hindi movie fails at the box office.
Further, increase in the number of multiplex screens has changed the mix of movies being screened in cinema halls. This has led to increase in regional and hollywood content. Multiple screens cater to more niche tastes as well as demand for regional and hollywood content, while also showing bollywood content. In fact, most regional and hollywood content is being released in Hindi also to reach the Hindi-speaking audience.
Table 7: Box office collections across languages (INR bn) CY17 CY18 Bollywood films 48 49 Hollywood films 10 12 South Indian films 40 39 Other languages 11 10
Source: FICCI KPMG report, Edelweiss research
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Potent kickers for ATP growth
Multiplexes in India have lower average ticket prices (ATP) compared to the US. However, ATP of Indian multiplexes to per capita GDP ratio is higher than global standards (although absolute ATP is much lower), leaving limited room for rapid growth in ATP. However, the share of 3D and hollywood movies, which usually fetch higher ticket prices, is on the rise, which is likely to push up ATP. Additionally, innovative theatre formats introduced by multiplexes will enable them to command a higher ATP.
India has very few entertainment options with movies and shopping in malls being high on the list. Other options like theatre and stand-up comedy, which fetch high ATP, cater to niche audiences. Hence, we believe, there is ample scope to hike ticket prices in the medium term.
Online contribution, which was minuscule in initial years, ramped up significantly in FY16. Even a 10% convenience fee charged by online platforms has had no major impact on demand, which implies that customers are ready to pay extra for convenience.
Lower ATP (absolute) leaves room for hike ATP of Indian multiplexes to per capita GDP ratio is higher than global standards, leaving limited room for growth in ATP. However, in absolute terms, India’s ATP is much lower. Compared to US’ ATP of USD8.4, India’s ATP (absolute) of USD2.3 is quite low. Also, with gradual shutdown/conversion of single screens and large-scale industry-wide consolidation, bargaining power of national multiplex chains is increasing.
Moreover, strong content also empowers multiplexes to command higher prices on an opening weekend. Though there is immense scope to further increase ticket prices, especially in tier II and III cities, the recent GST cut of 10% on movie ticket prices has slowed down ATP growth. Over the long term, however, we expect the inflationary impact to grow the ATP by 5-6% p.a. as in the past. While we believe multiplexes wield the power to increase ATP, we would be watchful of the threat from OTTs which could dent footfalls.
Table 8: ATP - India versus US (adjusted for GDP) Country ATP (USD) GDP per capita (USD) ATP/GDP per capita (%) Japan 12.8 41,418.0 0.0308 Canada 8.1 48,601.0 0.0167 US 8.1 65,062.0 0.0125 Spain 8.5 31,906.0 0.0268 UK 10.9 42,036.0 0.0259 UAE 11.3 42,384.0 0.0266 India - Multiplex 2.3 2,188.0 0.1051
India - Single Screen 0.8 2,188.0 0.0366 Source: Worldatlas, World Bank, Edelweiss research
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Dearth of alternative entertainment avenues to boost ATP India lacks entertainment options, with movies and shopping at malls being high on the list. Options such as theatre and stand-up comedy are for niche audiences. Besides, we believe ticket prices of multiplexes should be compared with other outdoor entertainment options like plays, live shows and concerts. Also, there is a huge price difference between theme parks and multiplexes and people prefer visiting the latter rather than theme parks.
Comparing multiplex ticket costs with indoor entertainment options like TV will also be unfair. We believe, family outings to Indian multiplexes are turning in to a lifestyle product with the cinema experience enhanced by a variety of food offerings, superior audio & visual technology and premium “viewing” environment. Taking in to consideration these aspects, we believe multiplexes have ample scope to hike ticket prices in the medium term.
Table 9: Prices of different entertainment options Entertainment options Prices (INR) Amusmement parks 1000-1500 Music Concerts (Basic Pass) 500-2000 Live Plays 250-500 Stand-up comedy 300-500 Source: Industry, Edelweiss research
Online ticketing spurring growth Online contribution, which was minuscule in initial years, has increased significantly over the past few years. Price transparency and hassle-free ticket booking have spurred demand for online ticket booking. Patrons are increasingly availing the convenience of evolving technology in movie viewing experience.
For instance, just by showing an SMS received on confirmation of a ticket booking a patron can enter a theatre. Even a 10% internet handling fee on online booking has failed to dent demand, which implies people are ready to pay that extra buck for convenience and ease.
Table 10: 10% convenience fee charged by multiplex players Online booking Price per ticket (INR) Movie price 250.0 Internet handling fees (10%) 25.0 CGST and IGST (18%) 4.5
Total price (INR) 279.5 Source: Industry, Edelweiss research
34 Edelweiss Securities Limited Inox Leisure
Burgeoning multiplexes edging out single screens
With burgeoning of multiplexes (~31% of total screens in India), single screens are fast losing ground. The latter are finding it tough to manage challenges posed due to: i) high real estate costs; ii) multiplexes’ focus on delivering superior customer experience via better technology & offerings; and iii) negligible bargaining power compared to multiplex chains. Single screens are struggling to remain profitable as occupancy levels have been dwindling due to the audience migrating to multiplexes.
Onslaught of multiplexes mowing down single screens We expect robust growth in multiplex screens in India (single screens dwindling in numbers). Multiplex operators are adding ~250-300 screens per year amidst real estate situation and regulatory concerns in India. They are also rolling out interesting theatre formats—MX4D, IMAX, Gold Class and ScreenX—to enhance the customer experience.
Single screen players have been lagging in terms of technology upgradation and keeping pace with the evolving industry, largely due to limited access to capital and reluctance to change. Most importantly, with rising presence of multiplex chains, location and rental costs have become a serious issue for smaller players. Consequently, single screens’ market share in terms of screens has declined to 69% in CY18 from ~78% in CY15.
Chart 33: Multiplex screens edging out single screens 10,000
8,000
6,000 (%) 4,000
2,000
0 CY15 CY16 CY17 CY18 Single Screen Multiplexes
Source: FICCI KPMG Report, Edelweiss research
Achieving breakeven tough for single screens Seating capacity is a major differentiator between multiplex and single screens. A typical single screen theatre houses 500-1,000 seats compared to 150-250 seats per screen for a multiplex. Hence, single screens require higher occupancy rate to break even. This, along with higher revenue share to distributors, lower ticket prices, cheaper F&B pricing and lower advertising income render the economics of single screens extremely challenging.
Multiplex chains have increased revenue per footfall by exploiting F&B and advertising opportunities and improved their economics over the past two decades. These factors will accelerate market share gain for multiplexes from single screen theatres.
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Table 11: Multiplexes offer better experience Parameters Multiplex Single screen No of screens 5 1 No. of seats/screen 150-250 500-1000 Technology Higher investments towards screens, sound and Digital screens present, picture quality, Innovation quotient higher innovation quotient low Comfort Better seating, air conditioning Lesser comfort Convenience Online booking of tickets, food and seats Lesser facilities Food & Beverages High variety, Premium offerings Limited offerings, Cheaper price Ticket prices (INR) 200-250 30-100
Source: Edelweiss research
The convenience provided by multiplexes—F&B offerings, experience, online ticketing, location—has led to shift in consumers’ preference from single to multi-screens, especially in tier-I and II markets.
Single screens a long term opportunity for multiplexes Intensifying competition from multiplexes, low occupancy rates, piracy and high operational costs are spelling doom for single screen theatres in tier II and III cities. Multiplexes are giving single screens a run for their money and compelling many to convert their 500-1,000 seats single screens to two-three screens with ~250 or less seating capacity.
Though this is likely to reduce the operational cost per show and allow greater programming flexibility to single screen owners, we believe converting single screens in to a multiplex is not an easy task. This is because the single screen has to be entirely demolished and altered to provide the convenience and comfort of a multiplex to the audience. We expect multiplexes to adopt the policy of retrofitting existing single screens, especially in tier II and III markets where location is a major concern, considering the absence of malls and commercial zones.
Table 12: Leading multiplex screen presence pan India Screen Count PVR Cinemas 771 Inox Leisure 574 Carnival Cinemas 425 Cinepolis India 350 Total 2,120 Source: Industry, Edelweiss research Note – Screen count for PVR and INOX are as on FY19; Screen count for Carnival Cinemas and Cinepolis India are as on CY18
36 Edelweiss Securities Limited Inox Leisure
Appendix
INOX Group The INOX Group, set up over 90 years ago, is an USD3bn group diversified across seven business units. Currently, the Group's business includes leadership in industrial gases, fluorocarbons, multiplexes and cryogenic engineering. It has three highly successful listed companies and alliances with global majors including Fortune-500 companies. Together, group companies employ more than 10,000 employees nationwide across 150+ business units in India. Fig. 4: INOX Group Listed on BSE and NSE A subsidiary of Gujarat Fluorochemicals Ltd. (GFL) Of the 51% stake owned by GFL in INOX Leisure, 98.9% is locked-in as of now 141 properties in 67 cities comprising of 583 screens Listed on BSE and NSE A subsidiary of INOX Leasing and Finance Limited – owns 52.5% stake Largest producer of chloromethanes, refrigerants and Polytetrafluoro-ethylene (PTFE) in India Pioneer of carbon credits in India 50:50 joint venture with Air Products and Chemicals Inc(USA) One of the largest manufacturers of industrial gases in India with 39 plants spread throughout the country and has a turnover in excess of $100 Million.
INOX India (INOXCVA) is a privately held company of the INOX Group Largest manufacturer of Cryogenic liquid storage and transport tanks in India and a reputed supplier to leading international Gas Companies worldwide INOXCVA has its offices and manufacturing plants in USA, India, Brazil and Europe Listed on BSE and NSE 57% subsidiary of GFL, with a total promoter shareholding of 75% INOX Wind is India’s leading wind energy solutions provider servicing IPPs, Utilities, PSUs, Corporates and Retail Investors. 100% subsidiary of GFL INOX Renewables is engaged in the business of wind energy generation Owns and operates 259 MWs of operational capacity across Maharashtra, Rajasthan and Tamil Nadu. Source: Company, Edelweiss research
INOX Leisure’s first multiplex was set up in Pune on May 11, 2002. As of March 2019 end, the company had presence across 67 cities with 574 screens (583 screens as of May 2019). With strong corporate ethos and financial backing, the company has established credible presence in the entertainment industry in a short span. It is also involved in the prestigious International Film Festival of India (IFFI) held every year.
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Fig. 5: INOX’s footprint in FY19
Source: Company, Edelweiss research
The company is actively involved in acquisition or expansion opportunities. In 2007, it acquired Calcutta Cinema (CCPL), a multiplex cinema theatre company based in West Bengal. In 2011, it acquired Fame India, another leading multiplex chain. Further, INOX acquired Satyam Cineplexes in FY15.
Fig. 6: INOX’s screen expansion trend
Source: Company, Edelweiss research
38 Edelweiss Securities Limited Inox Leisure
Table 13: Expected opening schedule in FY20 FY20 Screen Pipeline - Cities Properties Screens Seats Lucknow (Opened) 1 4 803 Vadodara (Opened) 1 5 976 Hyderabad 1 8 1,678 Gurugram 2 8 970 Kolkata 1 2 342 Bengaluru 2 9 1,357 Gorakhpur 1 4 761 Lucknow 2 9 1,817 Jalandhar 1 3 822 Indore (existing) - 6 403 Pune 1 5 1,160 Delhi 2 6 498 Tumkur 1 5 1,000 Vijaywada 1 3 1,022 Salem 1 3 803 Total 18 80 14,412 Source: Company, Edelweiss research
39 Edelweiss Securities Limited Inox Leisure
Financial Statements - Consolidated
Income statement (INR mn) Balance sheet (INR mn) Year to March FY16 FY17 FY18 FY19 As on 31st March FY16 FY17 FY18 FY19 Net revenues 11,589 12,207 13,481 16,922 Share capital 962 962 962 1,026 Film exhibtion cost 3,253 3,453 3,673 4,442 Reserves & surplus 4,261 4,564 5,735 8,612 COGS of F&B 661 681 744 1,125 Shareholders funds 5,223 5,526 6,696 9,638 Employee expenses 747 864 964 1,152 Minority interest - - - - Rent expense 2,071 - - - Long term borrowings 2,169 2,919 2,524 550 S G &A expenses 2,958 5,749 5,996 7,120 Short term borrowings 694 360 404 749 Total operating expenses 9,690 10,746 11,377 13,838 Total Borrowings 2,863 3,279 2,928 1,299 EBITDA 1,899 1,461 2,104 3,083 LT Liabilities & Provisions 932 929 858 817 Depreciation & amortization 803 841 867 955 Deferred Tax Liability (net) (539) (452) (780) (439) EBIT 1,096 620 1,237 2,129 Sources of funds 8,479 9,283 9,702 11,316 Less: Interest Expense 244 253 289 237 Gross Block 6,955 8,268 9,624 12,074 Add: Other income 43 91 145 149 Net Block 6,181 6,728 7,427 8,911 Add: Exceptional items (50) (13) (116) (50) Capital work in progress 557 626 539 637 Profit before tax 846 445 977 1,991 Intangible assets 304 299 291 312 Less: Provision for Tax 71 140 (170) 656 Total Fixed Assets 7,042 7,653 8,257 9,861 Add: Share of profit from asso. - 1 (0) - Non current investments 13 12 12 6 Reported Profit 775 306 1,146 1,335 Cash and cash equivalents 424 239 274 143 Less: Excep. Items (Net of Tax) (50) (13) (116) (50) Inventories 69 91 94 122 Adjusted Profit 824 319 1,263 1,385 Sundry debtors 516 466 761 882 No. of Shares outstanding (mn) 96 92 92 103 Loans & advances 1,167 1,455 1,478 1,806 Adjusted Basic EPS 8.5 3.5 13.8 13.5 Other Current Assets 727 1,041 1,162 1,439 No. of Dil. shares OS (mn) 92 92 92 103 Total current assets (ex cash) 2,479 3,053 3,495 4,249 Adjusted Diluted EPS 9.0 3.5 13.7 13.5 Trade payable 733 884 1,132 1,596 Adjusted Cash EPS 17 13 23 23 Other Current Liab & ST Prov. 746 792 1,205 1,348 Total current liabilities & prov. 1,479 1,676 2,337 2,944 Common size metrics- as % of net revenues Net current assets (ex cash) 1,000 1,378 1,158 1,305 Year to March FY16 FY17 FY18 FY19 Uses of funds 8,479 9,283 9,702 11,316 Film exhibtion cost 28.1 28.3 27.2 26.3 Book value per share 57 60 73 94 COGS of F&B 5.7 5.6 5.5 6.6 Employee expenses 6.4 7.1 7.1 6.8 Free cash flow (INR mn) Rent expense 17.9 - - - Year to March FY16 FY17 FY18 FY19 S G &A expenses 25.5 47.1 44.5 42.1 Reported Profit 775 306 1,146 1,335 Operating expenses 83.6 88.0 84.4 81.8 Add: Depreciation 803 841 867 955 Depreciation and Amortization 6.9 6.9 6.4 5.6 Interest (Net of Tax) 225 176 334 154 Interest expenditure 2.1 2.1 2.1 1.4 Others (130) (17) (341) (16) EBITDA margin 16.4 12.0 15.6 18.2 Less: Changes in WC (18) 225 (105) (461) EBIT margin 9.5 5.1 9.2 12.6 Operating cash flow 1,691 1,080 2,111 2,888 Net profit margins 7.1 2.6 9.4 8.2 Less: Capex 1,528 1,313 1,356 2,450 Free cash flow 163 (233) 755 438 Growth metrics Year to March FY16 FY17 FY18 FY19 Cash flow metrices Revenues 29.4 5.3 10.4 25.5 Year to March FY16 FY17 FY18 FY19 EBITDA 54.7 (23.1) 44.1 46.5 Operating cash flow 1,691 1,080 2,111 2,888 PBT 428.8 (47.3) 119.3 103.8 Financing cash flow 6 244 (540) (1,548) Adjusted Profit 299.5 (61.3) 295.7 9.7 Investing cash flow (1,568) (1,453) (1,539) (2,331) EPS 280.2 (59.3) 295.7 (1.9) Net cash flow 129 (129) 33 (991) Capex (1,528) (1,313) (1,356) (2,450)
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Profitability & liquidity ratios Valuation parameters Year to March FY16 FY17 FY18 FY19 Year to March FY16 FY17 FY18 FY19 Return on Average Equity (ROAE) (%) 17.1 5.9 20.7 17.0 Adjusted Diluted EPS (INR) 9.0 3.5 13.7 13.5 Pre-tax Return on Capital Employed (ROCE) 15.2 (%) 8.4 15.0 22.2 Y-o-Y growth (%) 299.4 (61.3) 295.5 (1.8) Inventory days 7 7 8 7 Adjusted Cash EPS (INR) 16.9 12.6 23.2 22.8 Debtors days 17 15 17 18 Diluted Price to Earnings Ratio (P/E) (x) 35.9 92.7 23.4 23.9 Payable days 77 70 71 71 Price to Book Ratio (P/B) (x) 5.7 5.4 4.4 3.4 Cash Conversion Cycle (53) (49) (47) (46) Enterprise Value / Sales (x) 2.9 2.7 2.4 2.0 Current Ratio 2.0 2.0 1.6 1.5 Enterprise Value / EBITDA (x) 17.6 22.3 15.3 11.1 Gross Debt/EBITDA 1.5 2.2 1.4 0.4 Gross Debt/Equity 0.5 0.6 0.4 0.1 Adjusted Debt/Equity 0.5 0.6 0.4 0.1 Interest Coverage Ratio 4.5 2.5 4.3 9.0
Operating ratios Year to March FY16 FY17 FY18 FY19 Total asset turnover 1.5 1.4 1.4 1.6 Fixed asset turnover 1.8 1.8 1.8 2.0 Equity turnover 2.4 2.3 2.2 2.1
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Aditya Narain Head of Research [email protected]
Coverage group(s) of stocks by primary analyst(s): Media DB Corp, DEN Networks, Dish TV India, Hathway Cable & Datacom, Jagran Prakashan, PVR, Sun TV Network, Zee Entertainment Enterprises
Recent Research
Date Company Title Price (INR) Recos 06 -Jun-19 Media WatchDog: Can the disruptor get disrupted?; Sector Update 06-Jun-19 Media Q4FY19 conference call highlights compendium; Conference Call Compendium
03-Jun-19 Media Momentum to accelerate; Result Preview
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period * 1stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn 743 Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11 594
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