INITIATING COVERAGE
INOX LEISURE Setting the screen ablaze
India Equity Research| Media
Inox Leisure (INOX), India’s second-largest multiplex operator, is an EDELWEISS 4D RATINGS attractive play owing to its aggressive expansion plans, premiumisation, Absolute Rating BUY and ramp-up of margin-accretive ad and F&B revenues, not to mention the closing gap with market leader PVR. With a healthy balance sheet and Rating Relative to Sector Outperform Risk Rating Relative to Sector Medium negative working capital, the company is well placed to expand. We Sector Relative to Market Overweight estimate INOX would clock CAGRs of 19% in revenue and 35% in EPS over FY19–21, and are initiating coverage on the stock with a ‘BUY’ at a PE of
20x (33% discount to PVR) December 2020E EPS (ex-IND AS 116), which MARKET DATA (R: INOL.BO, B: INOL IN) yields a target price of INR475. CMP : INR 334 Target Price : INR 475 Blockbuster prospects: Low penetration, robust expansion 52-week range (INR) : 382 / 189 Share in issue (mn) : 102.9 Given the low multiplex screen penetration in India – 8 per million against 37 in China M cap (INR bn/USD mn) : 34 / 482 – multiplexes account for only about 30% of the screen count (25% in CY15), implying Avg. Daily Vol.BSE/NSE(‘000) : 246.2 ample scope for expansion. Moreover, a robust content pipeline (India produces the highest number of movies in the world), rapid urbanisation, and the ongoing shift SHARE HOLDING PATTERN (%) from unroganised to organised retail provide strong tailwinds to the multiplex industry. Current Q4FY19 Q3FY19 We expect INOX to add 80 screens each in FY20 and FY21 (574 in FY19). The Promoters * 51.9 51.9 51.9 company’s low gearing implies ample firepower for its expansion plans. MF's, FI's & BK’s 19.5 19.5 21.0
Higher-margin businesses likely to grow faster FII's 12.2 12.2 12.1 Others 16.4 16.4 15.1 F&B and advertisement revenue streams deliver superior margins and are likely to * Promoters pledged shares : NIL outgrow net box office revenue. F&B contributes 26% to revenue, yielding a gross (% of share in issue) margin of 72–75%. Ad revenue, which makes up 10% of total revenue, too generates a superior margin of 85–90%. We estimate revenue CAGRs of 26% in F&B and 18% in ad RELATIVE PERFORMANCE (%) Stock over over FY19–21E would drive margin growth. Moreover, we expect a profitable scale-up Sensex Stock Sensex of the premium format (from 4% in FY17 to about 9% in FY19) going ahead. 1 month 2.8 8.4 5.6 Outlook and valuation: Bright prospects; initiate with ‘BUY’ 3 months (1.6) 5.2 6.7 12 months 9.8 50.6 40.9 We estimate INOX would clock revenue, EBITDA and EPS CAGRs of about 19%, 24% and
35%, respectively, over FY19–21 underpinned by: i) aggressive expansion; ii) uptick in
F&B and ad revenues; and iii) ramp-up of premium formats. Key risks: i) slower commercial real-estate development; and ii) shrinking time windows between theatrical and digital releases. We value the stock at 20x (33% discount to PVR)
December 2020E EPS (ex of IND AS 116 impact), which yields a TP of INR475. Currently, the stock trades at ~16x/13x FY20/FY21E EPS (ex-IND AS 116 adjustment). Financials
Year to March FY18 FY19 FY20E FY21E Abneesh Roy
Revenues (INR mn) 13,481 16,922 20,831 24,127 +91 22 6620 3141 (Click on image [email protected] to view video) EBITDA (INR mn) 2,104 3,092 6,508 7,641 Adjusted Profit (INR mn) 1,263 1,393 1,470 1,848 Prateek Barsagade Adjusted Diluted EPS (INR) 13.7 13.6 14.3 18.0 +91 22 4063 5407 [email protected] Diluted P/E (x) 24.3 24.6 23.3 18.5
EV/EBITDA (x) 15.8 11.4 8.8 7.5 ROAE (%) 20.7 17.1 17.0 21.5 October 16, 2019 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Media
Story in charts Chart 1: Eyeing cross 700-screen milestone by FY21 Chart 2: Revenue growth momentum to sustain 900 25,000
720 20,000
540 15,000 (No.) 360 mn) (INR 10,000
180 5,000
0 FY17 FY18 FY19 FY20E FY21E 0 FY17 FY18 FY19 FY20E FY21E No. of screens Net revenues Chart 3: F&B and ad revenue growth to drive margins Chart 4: EBITDA growth to transpire with margin expansion 100% 5,000 20.0 8% 10% 10% 10% 10% 80% 4,000 16.0 23% 23% 26% 27% 29% 60% 3,000 12.0
40% (%)
(INR mn) (INR 2,000 8.0
20% 1,000 4.0 0%
FY17 FY18 FY19 FY20E FY21E 0 0.0
FY17 FY19
Net Box office collection Net Food & Beverages FY18
FY20E FY21E Advertising revenue Other operating revenue EBITDA EBITDA margin Chart 5: Secular growth to translate in robust earnings Chart 6: Returns profile to improve going ahead 3,000 30.0
2,400 24.0
18.0
1,800 (%) 12.0
(INR mn) (INR 1,200 6.0 600 0.0 0 FY17 FY18 FY19 FY20E FY21E FY17 FY18 FY19 FY20E FY21E Return on Average Equity (ROAE) (%) PAT Pre-tax Return on Capital Employed (ROCE) (%) Source: Edelweiss research
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Executive Summary
Highly under-penetrated industry implies huge untapped opportunity India has more than 9,500 multiplex screens with only 30% (25% in CY15) being multiplexes; balance 70% are fragmented single screens. This implies huge untapped opportunity. The market share of multiplexes has been on the rise over the years and we expect this trend to gather further steam over the coming years. In this backdrop, we are positive on INOX’s plan to ramp up screen count going ahead.
Ample firepower to expand screen count INOX set an industry record in FY19 by opening the highest number of screens in a year—85. We expect the company to add about 80 screens each in FY20 and FY21, in spite of setbacks “We are looking for aggressive due to competition, real estate challenges and regulatory delays. Nevertheless, compared growth – both organic and with competitors, the company has a strong balance sheet, which implies ample firepower inorganic – and are always open to boost the screen count organically as well as inorganically. We estimate INOX would for acquisitions.” increase its screen count by about 28% by FY21–from 574 in FY19 to 734 by FY21.
Siddharth Jain Superior margin segments on a roll; more cheer in store Director The company’s efforts to revamp food menus, diversify offerings, bundle F&B products with online ticket sales, among others, have paid rich dividends. We expect INOX’s SPH to post ~9% CAGR over FY19–21E with 12% footfall CAGR enabling net F&B revenue to jump ~26% over FY19-21. With the multiplex industry gaining steam and deepening penetration across India, it is becoming a steady advertisement avenue for advertisers. INOX’s ad revenue shot up about 27% YoY, accounting for ~10% of total FY19 net revenue. Considering the company’s growing presence, we expect its ad revenue to increase at a CAGR of ~18% over FY19-21 riding benefits derived from scale-up increasing the ad revenue per screen.
Catalysts in place for blockbuster profitability Factoring the broad-based revenue growth across segments, aggressive screen expansion plan and benefits from the anticipated increase in scale, we estimate INOX’s revenue, EBITDA and PAT to clock 19%, 24% and 35% CAGR over FY19–21, implying 35% EPS CAGR. Given the favourable business dynamics and our robust estimates for the business, we expect INOX to post 25% ROCE and 20% RoE each in FY20E and FY21E, respectively. “Watching a movie is in the DNA of all of us. We Indians, we love our movies and that will never go out Outlook and valuation: Closing the gap with biggest rival of style.” We envisage INOX to emerge as a dominant force in the multiplex space over the medium term owing to strong management, aggressive expansion plans, focus on high-margin Alok Tandon segments and unwavering efforts to enhance customer experience. Chief Executive Officer We value the stock at 20x (~33% discount to PVR) December 2020E EPS (ex of IND AS 116 impact), which yields a TP of INR475. The stock is trading at ~16/13x FY20/FY21E EPS, which is at a significant discount to PVR (trading at ~32/25x FY20/21E EPS).
In the current scenario, while we are seeing slowdown pan across the consumption sector, strong box office collections and content response to enable multiplex chains such as INOX to outshine. Hence, we are assigning a higher multiple relative to most companies in our media coverage, though at a discount to PVR.
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Key risks Competition from other multiplex chains such as PVR, Cinepolis, small-scale multiplex operators and single screens remains a concern. Besides, the advent of digital release on OTT platforms, not to mention their affordable pricing and shortening time windows from theatrical releases, poses a reasonable threat. That said, quality content is the primary driver of footfalls at multiplexes. However, mediocre or inferior quality content could hurt footfalls. Any extended supply of below-average content could hurt INOX’s revenue and bottom line. An overall weak macroeconomy could lead to muted growth in the commercial property market, impacting mall development and, hence, screen openings. Lastly, since the business is a part of the larger INOX group, concerns in other group entities can result in an overhang on the INOX Leisure stock.
“Cinema journey would be more entertaining in the time to come with technology evolvement and will become closer to the moviegoer.”
Kailash Gupta Chief Financial Officer
4 Edelweiss Securities Limited Inox Leisure
From a broader lens…
INOX Leisure is the second-largest multiplex operator in India with a pan-India presence across 67 cities and 595 screens (574 as on FY19), and is a key player in a multiplex industry along with PVR (largest multiplex chain in India). The company sets up, operates and manages a national chain of multiplexes under the ‘INOX’ brand. It commenced operations in May 2002 and has made three acquisitions –Calcutta Cine, Fame India and Satyam Cineplexes – over the past few years seeking to build scale.
Over FY19, INOX had a scintillating run owing to gripping content, commendable execution towards screen openings and broad-based revenue growth leading to robust earnings growth. However, before we delve into details, let’s understand the evolving dynamics of the Indian movie exhibition industry.
What fed multiplexes’ growth? India has more than 2,900 multiplex screens, representing about 30% of the Indian screen count and ~55% of the domestic box office collection share. Over the recent years, the We have seen multiplexes increase multiplex count has been increasing due to a mix of the following factors: their screen count share over the increasing urbanisation and development of commercial real-estate/malls; years, and expect this trend to pick up pace over the coming years. tailwind from uptick in organised retail; robust content performance;
increased ticketing convenience;
higher disposable incomes; and
significant improvement in customer experience (over single screens).
That said, we believe the industry has a long way to go given low multiplex screen penetration in India of 8/mn (China’s 37/mn, 4.5x India’s), high movie churn (with India producing the highest number of movies in the world) and evolving customer demands, which prefer the overall experience that multiplexes offer.
We perceive this under-penetration as a huge opportunity. Besides, multiplexes’ market share has increased over the years and expect this trend to pick up pace over ensuing years.
In this backdrop, we are positive on INOX’s plan to add 80 screens each in FY20 and FY21, thereby crossing the 700-screen benchmark. However, the grim health of real estate developers and the ongoing slowdown in commercial activity could delay screen openings.
What makes multiplexes different from single screens? While single screens currently outnumber multiplexes, from a profitability perspective, multiplexes churn out higher returns owing to their pricing power in ticketing and F&B, F&B sale and advertising are key brand loyalty, locations, and economies of scale, which gives them more bargaining power profitability drivers and therefore in negotiating the exhibition cost and advertising rates. critical components for multiplexes. Though single screen tickets cost much less, given their fragmented nature, they lose out on significant advertisement revenue and also pricing potential of their F&B offerings. INOX, for instance, derived about 26% of its total net revenue from F&B sales in FY19, which
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typically yield a 72–75% gross margin due to higher pricing. Similarly, advertising constituted about 10% of the company’s total net revenue with ~85-90% directly contributing to operating profit.
For any multiplex, it is the content that drives the footfall (net box office collections); however, profitability is driven by F&B revenue and advertising income.
Will it stand the test of time?
Revenue for movie creators We expect the multiplex industry to sustain its growth momentum over the coming years primarily comes from box office led by expansion/consolidation, tailwind to organised retail and burgeoning content collections due to better popularity and penetration. We believe, the need for escapism is bound to remain, which is monetisation, rendering what multiplexes offer and this relatively safeguards them in times of a slowdown in multiplexes/cinemas the preferred discretionary consumption. Besides, we do believe that for a large part of the Indian avenue for initial release audience, multiplexes are a part of a day’s outing with family/friends along with shopping or dining in the mall.
Multiplexes too are upping the ante to retain their audience by improving the experience, e.g. INOX opened India’s first ScreenX offering a 270-degree viewing experience. Such technological improvements are aimed at retaining the high-risk customer demographic.
Having outlined our stance on the multiplex industry (covered in further detail at the back) and INOX’s position in the overall scheme of things, we spell out the reasons for our ‘BUY’ on the company.
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What makes INOX Leisure a ‘BUY’?
We remain positive on the stock owing to the favourable push to the industry from broader factors such as: multiplexes are replacing single screens – shift towards organised market; tailwind from demand – growing footfall/content consumption; growing disposable incomes and urbanisation; and a favourable tax environment – GST rate cut from 18% to 5% on F&B sales; GST rate cut of 10% on movie tickets priced above INR100 (at 18%) and 6% on movie tickets priced below INR100 (at 12%). corporate tax cut announcement to bode well for expansion plans
We further evaluate pertinent company-specific questions to explain our stance.
a) What has stood out for INOX Leisure so far? What can we expect? Factoring in broad-based revenue growth across segments, Given the company’s historical performance and plans for growth ahead, we believe aggressive screen expansion plan there are a multitude of factors which bolster our thesis on the business. and benefits from anticipated Record screen openings – FY19 proved to be one of the most eventful years for increase in scale, we estimate INOX Leisure. It set an industry record by opening 85 screens in one year, taking its INOX’s revenue, EBITDA and PAT to total screen count to 574 in FY19. We expect INOX to add 80 screens each in FY20 post CAGR of ~19%, 24% and 35%, and FY21. respectively, over FY19–21, Robust footfall growth – Robust content performance and increased presence led implying 35% EPS CAGR to ~17% YoY footfall growth in FY19, taking the FY17-19 footfall growth CAGR to ~8% (LTL footfall CAGR stood at ~5%). Over FY19–21, we estimate the footfall to grow at a ~12% CAGR supported by content and screen expansion. With average ticket price (ATP) ranging from 199–202, we expect NBOC to expand at a CAGR of about 17% over FY19–21E. Improved pricing power driving F&B and ad revenue growth: Given the focus on promoting F&B offerings and revamping menus, INOX’s spend per head (SPH) grew ~12% YoY in FY19 (CAGR of 9.2% over FY17–19), which was higher than ATP growth (YoY as well as CAGR) and PVR’s SPH growth in FY19. We estimate INOX’s SPH to post ~9% CAGR over FY19–21 with anticipated footfall CAGR of about 12%, enabling net F&B revenue to jump ~26% on an average over FY19–21E.
Similarly, robust footfalls enabled INOX’s ad revenue to jump about 27% in FY19, accounting for ~10% of total net revenue for the year. Considering INOX’s expanding presence, we expect its ad revenue to log CAGR of about 18% over FY19–21E owing to its rising presence and benefits derived from ramp up, uplifting ad revenue per screen.
b) What’s the strategy? How’s the business positioned? INOX has positioned itself as a INOX’s has been considerably aggressive recently. The team successfully opened 85 formidable No.2 by narrowing the screens in a year, setting an industry record. We have highlighted the steps taken by gap with PVR across key the management which reflect the company’s aggression in terms of growing the INOX parameters brand.
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Along with opening industry-record number of screens, INOX revamped its menus, increased its social media presence and formed alliances with ICC and NBA to
screen alternate content as a hedge to the usual content and for better utilisation Compared with Carnival Cinemas of screen inventory. and Cinepolis, INOX stands out due With a sharper focus on scaling up its premium format, the company increased its to its sheer scale, customer-centric premium screen portfolio from 4% in FY17 to about 9% in FY19. Premium formats innovations and strong typically have ATP/SPH 3–4x the normal format, with a higher average occupancy management rate as well. We expect INOX to scale up its INOX Insignia format aggressively over theC coming years in viable locations. o We anticipatem management to adopt a similar approach over the coming years, thereby cementingp INOX’s position in the multiplex industry.
a c) How rare profitability and financial health of the business? Stronge performance enabled INOX post EBITDA CAGR of ~45% (revenue CAGR of ~18%)d over FY17–19 with ~620bps margin expansion. Going ahead (not adjusting The business clocked ROCE of for Ind AS 116), we estimate EBITDA margin to increase gradually driven by rising 22.2% in FY19, improving F&Bw and ad revenue (margin-accretive) and cost efficiencies due to the expanding considerably from 15% in FY18 scale.i We estimate EBITDA to clock ~24% CAGR over FY19–21. Coret net working capital for the business has remained negative due to its nature ofh business, wherein almost all payments are made upfront (tickets, F&B), while A strong balance sheet lends inventory is a relatively small portion of the working capital investment. ample firepower for aggressive Givenp the favourable dynamics and our estimates of the business, we expect the expansion, organic and inorganic busl iness to register ROCE of ~25% and RoE of ~20% in FY20 and FY21, respectively. aC Gross debt/EBITDA is about 0.4x, a multi-year low, with gross debt/equity of ~0.1x yo in FY19, indicating ample room to gear up em
r d) How isp the management quality? How do we view the company? sa Currently, r the business is headed by Mr. Alok Tandon, CEO, who has more than 30 years’ sexperiencee across entertainment, hospitality and pharmaceutical industries. He has beenud part of INOX’s startup team and has helped build and develop the company since inception.c The business is also overseen by Mr. Siddharth Jain in the capacity of non-executivehw director. i Lately, atINOX has become more aggressive in eyeing prime properties, bringing in new technologysh and exhibiting pricing power while sharpening focus on revamping and promoting the F&B portfolio. We anticipate management to maintain aggression and continueCp to chart strong growth going ahead. We share our view on the company as a whole athroughl SWOT analysis as depicted below. ra ny ie vr as l s Cu ic nh e 8 ma Edelweiss Securities Limited as s C aa Inox Leisure
Fig. 1: SWOT analysis
Strengths Weakness Strong balance sheet Low presence in Customer-centric southern India innovations Underlying content Focus on premium risk properties
Opportunities Threats Low multiplex OTTs penetration in India Unpredictable nature of Scope to increase SPH content Intensifying competition Improving experience for properties through innovations Slowdown in discretionary and technology consumption
Source: Edelweiss research
e) How does the valuation look? While valuation is at a discount to INOX, the second-largest multiplex operator in India, is headed in the right direction PVR, it is higher than rest of our with aggressive expansion plans, focus on high-margin segments and unwavering media coverage entities owing to efforts to enhance the customer experience. Given its unlevered balance sheet (D/E at favorable business scenario, 0.1x in FY19), INOX Leisure has firepower to expand organically and inorganically. structural growth story and ample scope for growth Going ahead, INOX could emerge as a dominant force in the multiplex space owing to strong promoters, steady expansion and healthy balance sheet. In terms of valuation, we peg INOX at 20x (33% discount to PVR) EPS December 2020E (ex of IND AS 116 impact), which yields a TP of INR475. The stock is trading at ~16x/13x FY20/FY21E EPS, which is at a significant discount to PVR (trading at ~32/25x FY20/21E EPS). Our EPS estimates (excluding IND AS 116 impact) for FY20 and FY21 stand at – INR20.8 and INR24.7.
f) What are the risks? Competition from other exhibitors and OTTs
Competition from other multiplex chains such as PVR, Cinepolis, small-scale multiplex Content performance is the operators and single screens remains a concern. In addition, the advent of digital highest risk for the business release on OTT platforms along with affordable pricing and pressure on time windows poses a reasonable threat to multiplexes.
Time windows between theatrical and digital release to be a key Content uncertainty monitorable to understand the risk Differentiated content is the primary driver of footfalls at multiplexes. However, from OTTs mediocre or inferior quality content could hurt footfalls. Any extended supply of below- average content could hurt INOX’s revenue and bottom line.
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Slowdown in real estate development along with rising rentals Multiplexes are generally located in malls. An overall weak macroeconomy 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 slowdown in real estate development over the next few quarters could be a major impediment to the company’s screen addition plans. Additionally, with other exhibitors and businesses vying for space in malls, elevated rentals are a cause for concern.
Local body tax levied by state governments The contagion risk of entertainment tax (over and above GST), currently levied by local bodies in a few states, overhangs multiplexes. Such taxes are currently levied in Madhya Pradesh, Kerala and Tamil Nadu.
Regulation on pricing and anti-profiteering Recently, two other multiplex operators have come under the scanner of anti- profiteering authorities for not slashing the ticket prices in line with the GST rate cut on movie tickets. While this probe involves only two operators as of now, it is likely that it could be expanded to other multiplex operators. Previously, we had seen that companies such as Jubilant Foodworks, Hindustan Unilever and ITC getting embroiled in similar issues and facing litigation and fines. Though, this is preliminary as of now, we would watch out for any further developments on this front.
10 Edelweiss Securities Limited Inox Leisure
Investment Rationale 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 As of FY19, INOX Leisure had 574 While management’s plan is to add ~80 screens in FY20, we do not rule out minor setbacks screens spread across all regions from competition, real estate challenges and regulatory delays. These notwithstanding, and major cities in India. compared to competitors the company has a strong balance sheet, lending it ample fuel to
boost screen count organically as well as inorganically.
Enhanced reacho and rise in movies breaching the INR1bn box office collection Higher numberm of multiplex screens has not only changed the mix of movies being screened at cinema halls,p but also reduced the number of days to achieve INR1bn box office collection. Also, improvinga multiplex penetration in tier-II towns and transparency will result in better ticket collectionr for movies. e Fig. 2: Break down of screens across regions d Fig. 3: India produces the highest number of films in the world
w i t h
p l a y e r s
s u Source: Company Inorganic expansionc entails synergistic benefits
India’s multiplexh industry underwent significant consolidation in the past decade and two Traditionally, growth in the players—PVR and INOX—currently dominate the market. Though significant consolidation multiplex industry has been hereon appearsa low as multiplexes have already spread their reach across different pockets acquisitive and INOX is perfectly in the country,s we do expect some activity. Additionally, with commercial malls and other poised to play that game real estate properties coming up at a slower-than-expected pace, we envisage acquisitions
in the multiplex industry. F C a a r 11 c Edelweiss Securities Limited t n o i r v i a l Media
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 Marginalisation of smaller & acquisition of Satyam Cineplexes. This was the company’s third acquisition after the regional players and higher acquisition of Fame in 2010 and Calcutta Cine in 2007. Currently, the company’s screen content cost are driving portfolio is West-heavy with 42% of screens in the region; only ~15% screens are in the East. consolidation. 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, Consolidation enhances influence it can increase menu options in the acquired entity, leading to higher F&B revenue. over strategic decisions in the industry. It also leads to sharing of Content cost synergies: The company can negotiate better content rates with producers best practices across industries and due to larger procurement base. Rising screen count will impart INOX better bargaining imparts superior pricing power. 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 beC reduced. o A low net m debt-equity ratio of 0.1x and INR1.4bn in treasury stock lends INOX the firepower top achieve its aggressive expansions plans. With INOX’s aggressive expansion plans in placea and potential acquisitions, INOX could bridge the gap with PVR in a short span of time. r e
d
w
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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.
Chart 7: INOX added 85 screens in FY19 (82 on net basis) 900
750
600
450 (No.)
300
150
0 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E
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 99 138 Total 310 372 420 472 492 595
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 23 Total 100 100 100 100 100 100 Source: Company, Edelweiss research Note – FY19 figures represent screen count as on reported in Q1FY20 earnings presentation
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F&B spends to log healthy spurt
Robust growth 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, 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, its SPH grew ~12% YoY to INR74 in FY19. Going ahead, we expect INOX to focus on promoting its F&B offerings and revamp the product mix to boost SPH and bridge the gap with PVR.
Chart 8: SPH comparison – PVR versus INOX – Opportunity to close the gap 105
We see the SPH gap between INOX 90 and PVR as an opportunity for INOX to capitalize. 75
(INR) 60 Burgeoning pricing power, diverse & gourmet offerings and uptick in 45 footfalls to lend tailwind to INOX’s F&B revenue 30 FY15 FY16 FY17 FY18 FY19
PVR Inox Source: Edelweiss research
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.
We expect INOX’s SPH to grow at a CAGR ~9% over FY19-21 with an anticipated footfall CAGR of ~12%, enabling the net F&B revenues to grow at ~26% over FY19-21.
Issues pertaining to F&B pricing in multiplexes had taken the center stage last year owing to a few PILs raised in various high courts. Subsequent to petitions filed by complainants in various high courts to allow outside food in multiplexes, pertinent judicial bodies have asked multiplex-goers to abstain from carrying outside food.
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Table 3: SPH comparison – PVR versus INOX – Opportunity to close the gap Date F&B issue Authority Verdict Impact Feb-19 PIL to allow movie goers to carry their own food in cinemas Madras High Court Dismissed 1-Sep PIL procedings in Bombay HC allowing movie goers to carry their own food Supreme Court Stayed Proceedings Aug-18 Bombay HC questions the state over prohibitng own food in cinemas Maharashtra Govt. Cited secutiry issues Aug-18 J&K HC allows movie goers to carry own food in cinemas Supreme Court Stayed Proceedings Jul-18 Madhya Pradesh HC moves over a PIL on high prices charged by multiplexes for food Supreme Court Stayed Proceedings Jul-18 Telangana Legal Metrology Dept. warns multiplexes over F&B pricing Hyderabad High Court Dismissed Source: Media, Edelweiss research
Currently the matter is pending for hearing in the Supreme Court sine die and hence we do not anticipate any significant risks to the F&B revenues owing to the previous precedents.
Chart 9: Net F&B revenue and footfall trend – INOX 7,500 90.0
6,000 72.0
4,500 54.0 (mn)
(INR mn) (INR 3,000 36.0
1,500 18.0
0 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E Net F&B revenue Footfall
Source: Company, Edelweiss research
Chart 10: SPH and footfall trend – INOX 100 100
86 86
72 72 (mn) (INR) 58 58
44 44
30 30 FY15 FY16 FY17 FY18 FY19 FY20E FY21E SPH (INR) Footfall (mn)
Source: Company, Edelweiss research
15 Edelweiss Securities Limited Media
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.
Chart 11: Recent net F&B revenue growth comparison – PVR versus INOX 70.0
55.0
40.0 (%) 25.0
10.0
(5.0)
Q2FY18 Q3FY18 Q1FY19 Q2FY19 Q4FY19 Q1FY20 Q1FY18 Q4FY18 Q3FY19 PVR INOX Leisure Source: Company, Edelweiss research
16 Edelweiss Securities Limited Inox Leisure
Expansion to boost ad revenue
Advertisements: Key revenue churner; Scale benefits to spur growth 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. With aggressive expansion plans in place along with an in-house ad sales team, we expect the ad revenue growth momentum to sustain.
INOX’s ad revenue has clocked ~25% CAGR over FY16-19 to INR1,760mn in FY19, up ~27% INOX’s advertising revenue YoY. Ad revenue contributed significantly to the ~46% YoY jump in FY19 EBITDA. Its margin contributed significantly to the on ad revenue is typically ~85-90% of ad revenue. ~46% YoY jump in FY19 EBITDA owing to superior margins of 85- Ad revenue per screen (excluding non-managed screens), as of FY19, stands at INR3.1mn, 90% significantly higher than INR2.3mn in FY16 (calculation based on closing screen count for the period).
With expanding presence, INOX Though INOX’s ad per screen (annualised) has grown considerably, it lags PVR’s (including could benefit from working with SPI Cinemas), whose ad per screen as of FY19 stood at 4.6mn (INR4.2mn in FY16). INOX is larger corporate/national-level planning to narrow the huge ad revenue disparity with PVR via sound marketing initiatives. advertisers, thereby boosting its ad revenue. 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. W INOX’se 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. We expect the ad revenuee to grow at a CAGR of ~18% over FY19-21 owing to the increasing screen count andx benefits derived from scale-up increasing the ad revenue per screen. p Chart 12: Momentum to continue e Chart 13: Ad revenue improving for INOX 3,000 c 4.0 12.5 t
2,400 3.4 10.0 t h 2.8 7.5 1,800 e (%)
(INR mn) (INR 2.2 5.0 (INR mn) (INR 1,200 a d 1.6 2.5 600 r 1.0 0.0 e 0
v
FY19 FY16 FY17 FY18
FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY15 FY21E e FY20E Ad revenues (INR mn) Ad revenue per screen Ad revenue (% of revenue) n u Source: Company, Edelweiss research e
t o 17 Edelweiss Securities Limited
g r o w Media
Focus on enhancing experience through luxury/differentiated formats
Hedging the migration risk To counter the rising risk from OTTs and other entertainment options, 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.
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 Luxury format screens are targeted customers, who also happen to be the highest at-risk group for multiplexes from OTTs. at tier-I markets and high-end customers, who also happen to be INOX has brand Insignia which houses premium formats to offer enhanced movie and dining the highest at-risk group for experience to customers. Additionally, its IMAX screen format attracts huge footfalls for multiplexes from OTTs. visually intensive movies. Currently, INOX has over 50 premium screens: ~9% of total screen portfolio in FY19, and aims to take this to 13-14% in the coming years.
ATP and SPH for premium/luxury The company has been giving a higher import to technology in order to differentiate itself. screens are typically 3-4x normal In 2019, INOX inked a deal with CJ 4DPLEX for importing the latter’s ‘ScreenX’ technology to ATP and SPH with an average India. The technology offers patrons a 270-degree view entailing a more immersive movie occupancy of ~40%, significantly experience. We perceive this as a positive for INOX in terms of gaining footfalls as theatres higher than the normal average only have limited differentiating factors over one another and any factor which adds to occupancy of 26-27%. the experience will be critical.
As of FY19, the luxury format constitutes ~9% of the company’s total screen count, up from ~4% in FY17, 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 Screening of Pro Kabaddi League matches at select locations 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
18 Edelweiss Securities Limited Inox Leisure
Fig. 2: INOX properties’ visuals
Source: Company, Edelweiss research
19 Edelweiss Securities Limited Media
Financial Outlook
Revenue growth momentum to sustain
We expect INOX’s net revenue to grow at a ~19% CAGR over FY19-21, driven by strong double-digit growth across the key revenue segments – box office collection, food and beverage and advertisement revenue.
Superior margin segments to drive profitability
We expect operating leverage benefits to continue to play in FY20 and FY21 in the wake of scale economies towards the fixed costs, higher bargaining power with distributors/content creators and online ticketing players, better rates for advertising. We anticpate the EBITDA to grow at a CAGR of ~24% over FY19-21 with the EPS growing at CAGR of ~35%.
Return ratios
We anticipate INOX Leisure to register ~25% RoCE in FY20 and FY21 respectively improving against 22.2% in FY19 on account strong revenue growth and EBITDA expansion. We envisage RoE for FY20 and FY21 to be ~20% respectively for each year.
Broad based revenue growth to transpire We expect the net revenues (post box office and F&B GST) to grow at a ~19% CAGR bolstered by a broad-based revenue growth. We expect ~23% YoY revenue growth in FY20 and ~16% revenue growth in FY21.
We expect the company to report Chart 14: Revenue growth 70 mn and 78.5 mn footfall in FY20 25,000 and FY21, respectively, with ~1% 30.0 YoY and ~2% YoY growth in the 20,000 ATP. 22.0
15,000 14.0
Over FY19–21, we estimate (%) (INR mn) (INR 10,000 footfalls to post ~12% CAGR 6.0 supported by content and screen expansion. 5,000 C (2.0) o 0m (10.0) With average ticket price (ATP) p FY15 FY16 FY17 FY18 FY19 FY20E FY21E ranging from INR199–202, we a Net revenues (INR mn) YoY growth (%) estimate NBOC to post ~17% CAGR r Source: Company, Edelweiss research over FY19–21 e
d We expect revenues to get a boost from robust growth across all revenue segments -
advertising, net box office collections (NBOC) and F&B revenue. Though, ATP growth would w be slow due to the price cuts taken in light of GST cut transmission, net box office revenue i growth to remain strong going ahead. We anticipate the NBOC (Net box office collection t revenue) to grow at a CAGR of ~17.5% over FY19-21. h C o mp 20 pl Edelweiss Securities Limited a ry e dr Inox Leisure
Chart 15: NBOC revenue growth 15,000 30.0
12,000 20.0
9,000 10.0 (%)
(INR mn) (INR 6,000 0.0
3,000 (10.0)
0 (20.0) FY15 FY16 FY17 FY18 FY19 FY20E FY21E Netbox office collection revenue (INR mn) YoY growth (%)
Source: Company, Edelweiss research
We expect INOX’s SPH to grow at a CAGR ~9% over FY19-21 with an anticipated footfall CAGR of ~12%, enabling the net F&B revenues to grow at ~26% over FY19-21. With INOX’s increasing pricing power, increased offering and uptick in footfalls owing to strong content to lend tailwind to the F&B revenue.
On the F&B front, we anticipate Chart 16: Net F&B revenue growth the SPH to grow ~10% and ~8% in 6,500 50.0 FY20 and FY21 respectively, enabling net F&B revenue to grow 5,200 40.0 at ~26% CAGR over FY19–21E
3,900 30.0
(%) (INR mn) (INR 2,600 20.0
C 1,300 o 10.0 m 0 p 0.0 a FY15 FY16 FY17 FY18 FY19 FY20E FY21E r Net F&B revenue (INR mn) YoY growth (%) e Source: Company, Edelweiss research d
Ad revenue per screen to increase We expect the ad revenue to grow at a CAGR of ~18% over FY19-21 owing to the increasing ~4% YoY in FY20 and FY21 each w screen count and benefits derived from scale-up increasing the ad revenue per screen. leading to ~18% CAGR for i advertisement revenues over t
FY19-21. h
p
Cl a o y m pe r 21 a Edelweiss Securities Limited s r e s d u
c Media
Chart 17: Advertisement revenue growth 3,000 70.0
2,400 56.0
1,800 42.0 (%)
(INR mn) (INR 1,200 28.0
600 14.0
0 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E Ad revenue (INR mn) YoY growth (%)
Source: Company, Edelweiss research
EBITDA poised to grow at ~24% CAGR along with robust margin improvement FY19 was a fantastic year for the domestic multiplex industry, on the back of strong content performance and hence INOX saw an EBITDA growth of ~45% YoY. As the screen expansion takes place along with rise in footfall, we are likely to see margin expansion through a combination of growth in margin additive segments (F&B and advertising) and scale economies. We might see an upside in the EBITDA in case content performance betters the previous year with higher footfall translating in greater F&B and advertisement revenues which provide superior margins.
Chart 18: Secular growth to translate in margin expansion 5,000 20.0
4,000 16.0
3,000 12.0 (%)
(INR mn) (INR 2,000 8.0
1,000 4.0
0 0.0
FY15 FY16 FY17 FY18 FY19
FY20E FY21E EBITDA (INR mn) EBITDA margin (%)
Source: Company, Edelweiss research
We expect PAT CAGR of ~35% over FY19-21, bolstered by secular growth across revenue segments and sharpened focus on margin-accretive segments.
22 Edelweiss Securities Limited Inox Leisure
Chart 19: PAT to grow steadily 3,000 20.0
2,500 16.0 2,000 12.0
1,500 (%)
(INR mn) (INR 8.0 1,000
500 4.0
0 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E PAT (INR mn) PAT margin (%)
Source: Company, Edelweiss research
23 Edelweiss Securities Limited Media
Outlook and Valuation
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.
In terms of valuations, we peg INOX at 20x (~33% discount to PVR) December 2020E EPS (excluding the IND AS116 impact), which yields a TP of INR475. At CMP, the stock trades at ~16x/13x FY20/FY21E EPS. We initiate coverage with ‘BUY/SO’. Our EPS estimates (excluding IND AS 116 impact) for FY20 and FY21 stand at – INR20.8 and INR24.7.
While the stock has traded at significant discount to PVR (in the past, we had seen the stock trade at 20x 1-year forward EPS) we do expect the multiple gap with PVR to be bridged with improvement in metrics, increase in scale and strong governance. Given that INOX Leisure is part of the larger INOX group, any issues in other promoter entities could lead to an overhang on INOX Leisure.
Chart 20: 1-year forward PE band 900 35x 720 30x
540 25x
20x (INR) 360 15x
10x 180
0
17 18 19
16 17 18 19
- - -
- - - -
Oct Oct Oct Oct
Apr Apr Apr
Source: Edelweiss research
24 Edelweiss Securities Limited Inox Leisure
Key Risks
Competition from other exhibitors, OTTs, Sports Competition from other multiplex chains such as PVR, Cinepolis, remains a concern. In addition, the advent of digital release on OTT platforms along with affordable pricing and pressure on time windows poses a threat to multiplexes. 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.
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. Majority of the 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.
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.
25 Edelweiss Securities Limited Media
Where does INOX stand against PVR?
The ATP gap between the two With over 1,350 screens (~46% of total multiplex screens) across India, PVR and INOX players narrowed in FY19 with dominate the multiplex business. In FY19, 15 bollywood movies crossed the coveted INR1bn INOX closing in on PVR—FY19 plus mark in box office collections. difference of INR10 compared with INR17 in FY18 Phenomenal content performance helped PVR and INOX in FY19. While footfalls rose ~17% for INOX, PVR’s (including SPI Cinemas) jumped ~31%. PVR (consolidated) recorded growth of 32%, 46% and 47% in revenue, EBITDA and adjusted PAT, respectively. INOX posted While PVR continues to lead in growth of 26%, 47% and 10% (INR537mn of tax benefits in base) in revenue, EBITDA and SPH, INOX has managed to bridge adjusted PAT, respectively. The strong content pull lifted footfalls by ~17% YoY for INOX the gap. While INOX’s SPH grew and ~31% for PVR (including SPI Cinemas). ~9% in FY19, PVR’s rose ~2% 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, On the ad revenue front, PVR grew INOX at INR197) compared with INR17 in FY18 (PVR’s FY18 ATP stood at INR210, INOX’s at 20%, lagging INOX’s ~27% in FY19. INR193). Q4FY19 saw the ATP declining YoY due to transmission of GST rate cut to movie However, on ad revenue per ticket prices, which we believe will temper gross ATP growth for multiplexes. screen, PVR continues to be ahead of INOX—51% higher in FY19 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).
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 aspects:
Chart 21: Net box revenue— INOX improving steadily Chart 22: F&B revenue— INOX grew faster than PVR in FY19 18,000 9,000
14,400 7,200
10,800 5,400 (INR mn) (INR
(INR mn) (INR 7,200 3,600
3,600 1,800
0 0 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 PVR Inox PVR Inox
Source: Company, Edelweiss research
26 Edelweiss Securities Limited Inox Leisure
Chart 23: Number of screens— PVR ahead by 197 screens Chart 24: Footfalls— PVR’s scale gives them benefit 900 120.0
740 100.0
580 80.0 (mn)
(screens) 420 60.0
260 40.0
100 20.0 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 PVR Inox PVR Inox
Chart 25: ATP— INOX bridging gap with PVR Chart 26: SPH – Opportunity for INOX 250 105
230 90
210 75
(INR) (INR) 190 60
170 45
150 30 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 PVR Inox PVR Inox
Chart 27: 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
27 Edelweiss Securities Limited Media
Chart 28: Pre-tax ROCE comparison 24.0
20.0
16.0 (%) 12.0
8.0
4.0 FY16 FY17 FY18 FY19 PVR INOX
Source: Company, Edelweiss research
Table 4: Annual comparison - INOX versus PVR PVR Inox Leisure Annual Comarison (Consol.) FY15 FY16 FY17 FY18 FY19 CAGR (%) FY15 FY16 FY17 FY18 FY19 CAGR (%) ATP (INR) 178 188 196 210 207 3.8 164 170 178 193 197 4.7 Total revenues (INR mn) 14,771 18,811 21,628 23,340 30,856 20.2 8,954 11,589 12,207 13,481 16,922 17.3 Net box office (INR mn) 8,240 9,948 11,249 12,470 16,357 18.7 5,516 7,311 7,128 8,022 9,747 15.3 Ad revenues (INR mn) 1,771 2,145 2,518 2,969 3,535 18.9 815 910 962 1,389 1,760 21.2 F&B revenue (INR mn) 3,853 4,977 5,794 6,250 8,467 21.8 1,910 2,656 2,841 3,060 4,366 23.0 Footfalls (mn) 59.2 69.6 75.2 76.1 99.3 13.8 41.1 53.4 53.7 53.3 62.5 11.0 No. of screens 464 516 579 625 771 13.5 372 420 468 492 574 11.5 SPH (INR) 65 72 77 89 91 8.7 55 58 61 66 74 7.7 EBITDA (INR mn) 2,008 3,240 3,570 4,018 5,863 30.7 1,228 1,899 1,461 2,104 3,083 25.9 EBITDA per screen 4.3 6.3 6.2 6.4 7.6 15.1 3.3 4.5 3.1 4.3 5.4 12.9 % 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
28 Edelweiss Securities Limited Inox Leisure
ATP differential has reduced considerably; INOX fast catching up
Chart 29: Average ticket price trend – PVR versus INOX 220
In Q1FY18, PVR’s ATP was about 11% higher than INOX; this gap has 212 narrowed considerably to ~7% in Q1FY20 204
(INR) 196 In our view, this signals increase in INOX’s relative pricing power and 188 sustained customer demand. Increase in INOX’s premium 180 properties also helped
I
Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q1FY20 n Q4FY19 PVR INOX Leisure
o Source: Company, Edelweiss research u INOX’sr SPH rose by 25% over past nine quarters versus 17% for PVR
Chav rt 30: Spend per head trend – PVR versus INOX i 110 e In Q1FY18, PVR’s SPH was about w 98 34% higher than INOX; this , difference narrowed considerably 86
to ~26% by Q1FY20 t (INR) Nh 74 Oi s X 62
s i 50 si
g
Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 bn Q1FY18 a e PVR INOX Leisure il Source: Company, Edelweiss research ns
g
a en q ui an lc lr ye a as 29 ge Edelweiss Securities Limited g ri en s Media
Chart 31: Net F&B revenue growth comparison – PVR versus INOX
70.0
55.0
Over the past few quarters, PVR’s 40.0
net F&B YoY revenue growth has (%) been higher than INOX’s; however, 25.0 the latter is catching up fast
10.0 I N (5.0) O X
Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q2FY19 Q3FY19 Q4FY19 Q1FY19 Q1FY20 i PVR INOX Leisure s Source: Company, Edelweiss research b INOX’se ARPU grew 8% over past nine quarters versus 4% for PVR i Chartn 32: ARPU comparison – PVR versus INOX g 325
While PVR’s total ARPU (ATP + e 300 SPH) has increased ~4% over the q past nine quarters, INOX’s has u 275
grown ~8% a (INR) l 250 l 225 This increase is attributable to y steady growth in SPH indicating 200 better monetisation and increase a in pricing power g
T
Q2FY18 Q3FY18 Q1FY19 Q2FY19 Q4FY19 Q1FY20 Q4FY18 Q3FY19 g Q1FY18 h r PVR INOX Leisure ei Source: Company, Edelweiss research ss
s
ii vn ec r
e a na
ds e
f f o co ur 30 s Edelweiss Securities Limited eI dN O iX Inox Leisure
Occupancy rates for PVR remain higher than INOX
Chart 33: Occupancy rate comparison – PVR versus INOX 30
PVR has traditionally enjoyed 26 higher occupancy rates than INOX owing to its screen locations and 22 strong push through online ticket
aggregators. (Mn) 18
However, in recent quarters, the 14 difference in occupancy rates has widened. 10 H Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 o PVR INOX Leisure w Source: Company, Edelweiss research e
v PVR’s higher occupancy rate is also due to acquisition of SPI Cinemas, which has made its e screen portfolio more South-heavy than INOX (~33% for PVR, ~21% for INOX). This r 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). i
n Chart 34: PVR has higher footfall per screen than INOX (excl non managed screens)
r 40 e 36 c e 32 n
t (Mn) 28
q 24 u a 20 r
t
Q1FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 e Q2FY18 PVR INOX Leisure r s Source: Company, Edelweiss research ,
t h e
d i 31 f Edelweiss Securities Limited f e r e Media
Chart 35: 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 Q1FY19 Q2FY19 Q3FY19 Q1FY20 Q4FY18 Q4FY19 PVR INOX
Source: Company, Edelweiss research
PVR’s EBITDA per footfall continues to be greater than INOX
Chart 36: PVR has higher EBITDA per footfall 66.0
In Q1FY18, PVR’s EBITDA per 58.0 footfall was 11% higher than INOX, while on average over the past 50.0
nine quarters, it was higher by 31% (INR) (INR) than INOX. However, in Q4FY19, 42.0 PVR’s EBITDA per footfall was only 8% higher than INOX’s. 34.0 H o 26.0 w
e
Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q3FY19 Q4FY19 Q1FY20 Q1FY18 Q2FY19 v PVR INOX e Source: Company, Edelweiss research r
,
i
n
r
e
c
e
n
t
q u a 32 Edelweiss Securities Limited r t e r Inox Leisure
Chart 37: EBITDA (ex of ad revenue) per footfall for PVR and INOX 38.0
31.0
24.0
(INR) 17.0
10.0
3.0
Q1FY0
Q1FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q2FY18 Q3FY18 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).
Chart 38: PVR’s ad revenue per screen superior to INOX 2.0 In Q1FY20, PVR’s ad revenue per screen stood at INR1.2mn versus 1.6 INOX’s INR0.80mn 1.2 However, given the latter’s
aggressive expansion plans and the mn) (INR 0.8 significant gap, this gap is likely to reduce 0.4 I n 0.0
Q
Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q2FY19 Q3FY19 Q1FY20 Q4FY19 1 Q1FY19 F PVR INOX Leisure
Y Source: Company, Edelweiss research 2 0 ,
P V R ’ s
a d
r 33 Edelweiss Securities Limited e v e n Media
Chart 39: INOX—Revenue mix trend 100%
80%
60%
40% NBOC constitutes about 58% of total operating revenue for INOX 20% and about 53% for PVR
0% Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Net F&B revenue constitutes about 25% of total operating revenue for Net box office (INR mn) F&B revenue (INR mn) INOX and about 27% for PVR Ad revenues (INR mn) Other operating income
Source: Company, Edelweiss research
Ad revenue constitutes about 10% Chart 40: PVR—Revenue mix trend of total operating revenue for 100% INOX and about 12% for PVR A 80% d 60% r 40%e v 20%e n 0%u e Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20
Net box office (INR mn) F&B revenue (INR mn) c Ad revenues (INR mn) Other operating income o n Source: Company, Edelweiss research s t i t u t e s
a b o u t
1 0 34 % Edelweiss Securities Limited
o f
Inox Leisure
Rental costs (as % of sales) lower for INOX
Chart 41: Rental costs (including common area maintenance) comparison
Rent and common area 29.0 maintenance expenses as a % of sales have been lower for INOX 26.0 compared to PVR.
23.0
This differential between PVR and (%) INOX stood at ~4% in FY15, which 20.0 has dipped to 1.8% in FY19. d 17.0 r 14.0e v FY16 FY17 FY18 FY19 e PVR INOX Leisure n
u Source: Company, Edelweiss research e
Though PVR was a tad higher, the rent and common area maintenance expenses as a % of c sales had been declining—from ~24% in FY15 to ~21% in FY19. For INOX, this expense has o been ~20% of net sales in FY15 and has come down to ~19% in FY19. It also implies that PVR n has been present in leading properties in respective cities, thereby incurring higher rentals, s but also achieving higher footfalls on a per screen basis. t
i Payroll costs (as % of sales) lower for INOX, overall employee costs higher t
u Chart 42: Payroll costs (excluding off-roll employee costs) comparison t
e 12.5 s
11.0a b o 9.5 u
(%) t 8.0 1 6.50 %
5.0 o FY16 FY17 FY18 FY19 f PVR INOX Leisure t o Source: Company, Edelweiss research t 35 a Edelweiss Securities Limited l
o p Media
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 57% in FY19.
Overall employee costs, including outsourced personnel cost (not including security and housekeeping), indicate that employee cost as a percentage of sales has declined for INOX (lower than PVR in FY19). 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 43: INOX’s employee cost including outsourced employee cost (as % of sales) 11.5
11.0
10.5 (%) 10.0
9.5
9.0 FY16 FY17 FY18 FY19 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
36 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.
Currently, INOX is well positioned in its normal INOX format and is gaining presence in the premium segment through ‘INOX Insignia’, a brand that offers luxurious movie-viewing experience.
The company operates as a subsidiary of Gujarat Fluorochemicals Ltd. (GFL), which owns 51.32%. GFL, the holding entity, is part of the 90-year old INOX Group, which has an established presence across renewables, chemicals, air products and wind energy. While promoters have successfully run and expanded the INOX Group, majority of their experience so far has been in managing B2B businesses.
Fig. 3: SWOT analysis
Strengths Strong balance sheet Weakness Customer-centric Low presence in innovations southern 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, Director, (Chairman, INOX Group): 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 44: 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 45: 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
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.
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Chart 46: 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.
Table 5: 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.
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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 6: 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
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.
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Chart 47: 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
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
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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 11: 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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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
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Table 12: 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
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Financial Statements - Consolidated
Key assumption Income statement (INR mn) Year to March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E GDP(Y-o-Y %) 6.7 7.1 6.3 6.8 Net revenues 13,481 16,922 20,831 24,127 Inflation (Avg) 3.6 3.7 3.7 4.0 Film exhibtion cost 3,673 4,442 5,438 6,263 Repo rate (exit rate) 6.0 6.3 4.8 4.8 USD/INR (Avg) 64.5 70.0 72.0 73.0 COGS of F&B 744 1,125 1,369 1,587 Company assumptions Employee expenses 964 1,152 1,432 1,639 Revenue assumptions Rent expense 2,642 3,186 - - Footfall growth (%) (0.7) 17.3 12.2 12.0 S G &A expenses 3,354 3,925 6,084 6,997 Average Ticket Price (ATP) 193.0 197.0 199.0 202.4 Total operating expenses 11,377 13,830 14,323 16,486 Spend per head (SPH) 66.0 74.0 81.4 87.9 EBITDA 2,104 3,092 6,508 7,641 Net F&B revenue growth (%) 7.7 42.7 30.7 21.0 Depreciation & amortization 867 955 2,548 3,032 Ad revenue growth (%) 44.4 26.7 19.6 16.7 EBIT 1,237 2,137 3,960 4,609 Cost assumptions Exhibition cost (% of NBOC) 45.8 45.6 46.0 46.5 Less: Interest Expense 289 237 2,150 2,300 COGS of F&B (% of F&B rev.) 24.3 25.8 24.0 23.0 Add: Other income 145 149 155 162 Employee cost (% of rev.) 7.1 6.8 6.9 6.8 Add: Exceptional items (116) (50) - - Financial assumptions Profit before tax 977 1,999 1,965 2,471 Debtors days 17 18 16 15 Less: Provision for Tax (170) 656 495 623 Inventory days 8 7 7 7 Add: Share of profit from asso. (0) - - - Payable days 83 89 86 79 Reported Profit 1,146 1,343 1,470 1,848 Cash conversion cycle (days) (59) (65) (63) (57) Less: Excep. Items (Net of Tax) (116) (50) - - Core capital expenditure 1,356 2,323 2,800 2,820 Adjusted Profit 1,263 1,393 1,470 1,848 Tax rate (%) (15.5) 32.0 25.2 25.2 No. of Shares outstanding (mn) 92 103 103 103 Adjusted Basic EPS 13.8 13.6 14.3 18.0 No. of Dil. shares OS (mn) 92 103 103 103 Adjusted Diluted EPS 13.7 13.6 14.3 18.0 Adjusted Cash EPS 23 23 39 48
Common size metrics- as % of net revenues Year to March FY18 FY19 FY20E FY21E Film exhibtion cost 27.2 26.3 26.1 26.0 COGS of F&B 5.5 6.6 6.6 6.6 Employee expenses 7.1 6.8 6.9 6.8 Rent expense 19.6 18.8 - - S G &A expenses 24.9 23.2 29.2 29.0 Operating expenses 84.4 81.7 68.8 68.3 Depreciation and Amortization 6.4 5.6 12.2 12.6 Interest expenditure 2.1 1.4 10.3 9.5 EBITDA margin 15.6 18.3 31.2 31.7 EBIT margin 9.2 12.6 19.0 19.1 Net profit margins 9.4 8.2 7.1 7.7
Growth metrics Year to March FY18 FY19 FY20E FY21E Revenues 10.4 25.5 23.1 15.8 EBITDA 44.1 46.9 110.5 17.4 PBT 119.3 104.7 (1.7) 25.7 Adjusted Profit 295.7 10.3 5.5 25.7 EPS 295.7 (1.3) 5.5 25.7
50 Edelweiss Securities Limited Inox Leisure
Balance sheet (INR mn) Cash flow metrices (INR mn) As on 31st March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Share capital 962 1,026 1,026 1,026 Operating cash flow 2,111 2,797 2,553 3,112 Reserves & surplus 5,735 8,612 6,642 8,490 Financing cash flow (540) (456) 156 (315) Shareholders funds 6,696 9,638 7,668 9,516 Investing cash flow (1,539) (2,356) (2,675) (2,718) Minority interest - - - - Net cash flow 33 (16) 34 79 Long term borrowings 2,524 550 22,590 22,590 Capex (1,356) (2,323) (2,800) (2,820) Short term borrowings 404 749 950 800 Total Borrowings 2,928 1,299 23,540 23,390 Profitability & liquidity ratios LT Liabilities & Provisions 858 817 882 934 Year to March FY18 FY19 FY20E FY21E Deferred Tax Liability (net) (780) (439) (2,289) (2,289) Return on Average Equity (ROAE) (%) 20.7 17.1 17.0 21.5 Sources of funds 9,702 11,316 29,801 31,551 Pre-tax Return on Capital Employed (ROCE) 15.0 (%) 22.2 19.5 14.9 Gross Block 9,624 11,947 14,747 17,567 Inventory days 8 7 7 7 Net Block 7,427 8,939 27,422 29,175 Debtors days 17 18 16 15 Capital work in progress 539 637 637 637 Payable days 83 89 86 79 Intangible assets 291 286 275 259 Cash Conversion Cycle (59) (65) (63) (57) Total Fixed Assets 8,257 9,861 28,334 30,071 Current Ratio 1.6 1.5 1.5 1.4 Non current investments 12 6 6 6 Gross Debt/EBITDA 1.4 0.4 3.6 3.1 Cash and cash equivalents 274 143 177 256 Gross Debt/Equity 0.4 0.1 3.1 2.5 Inventories 94 122 133 154 Adjusted Debt/Equity 0.4 0.1 3.1 2.5 Sundry debtors 761 882 948 1,075 Interest Coverage Ratio 4.3 9.0 1.8 2.0 Loans & advances 1,478 1,806 1,709 1,661 Other Current Assets 1,162 1,439 1,544 1,629 Operating ratios Total current assets (ex cash) 3,495 4,249 4,334 4,519 Year to March FY18 FY19 FY20E FY21E Trade payable 1,132 1,596 1,611 1,775 Total asset turnover 1.4 1.6 1.0 0.8 Other Current Liab & ST Prov. 1,205 1,348 1,438 1,526 Fixed asset turnover 1.8 2.0 1.1 0.8 Total current liabilities & prov. 2,337 2,944 3,048 3,301 Equity turnover 2.2 2.1 2.4 2.8 Net current assets (ex cash) 1,158 1,305 1,285 1,218 Uses of funds 9,702 11,316 29,802 31,552 Valuation parameters Book value per share 73 94 75 93 Year to March FY18 FY19 FY20E FY21E Adjusted Diluted EPS (INR) 13.7 13.6 14.3 18.0 Free cash flow (INR mn) Y-o-Y growth (%) 295.5 (1.2) 5.5 25.7 Year to March FY18 FY19 FY20E FY21E Adjusted Cash EPS (INR) 23.2 22.9 39.2 47.6 Reported Profit 1,146 1,343 1,470 1,848 Diluted Price to Earnings Ratio (P/E) (x) 24.3 24.6 23.3 18.5 Add: Depreciation 867 955 2,548 3,032 Price to Book Ratio (P/B) (x) 4.6 3.6 4.5 3.6 Interest (Net of Tax) 334 161 1,608 1,720 Enterprise Value / Sales (x) 2.5 2.1 2.8 2.4 Others (341) 250 (3,113) (3,607) Enterprise Value / EBITDA (x) 15.8 11.4 8.8 7.5 Less: Changes in WC (105) (88) (40) (119) Operating cash flow 2,111 2,797 2,553 3,112 Less: Capex 1,356 2,323 2,800 2,820 Free cash flow 755 474 (247) 292
Peer comparison valuation Market cap Diluted P/E (X) P/BV (x) ROAE (%) Name (USD mn) FY20E FY21E FY20E FY21E FY20E FY21E INOX Leisure 482 23.3 18.5 4.5 3.6 17.0 21.5 PVR 1,223 38.1 29.7 9.4 7.2 17.6 22.5 Median - 30.7 24.1 6.9 5.4 17.3 22.0 Average - 30.7 24.1 6.9 5.4 17.3 22.0 Source: Edelweiss research
51 Edelweiss Securities Limited Media
Additional Data
Directors Data Pavan Jain Chairman Haigreve Khaitan Independent Director Vivek Jain Non-Executive Director Amit Jatia Independent Director Deepak Asher Non-Executive Director Kishore Biyani Independent Director Siddharth Jain Non-Executive Director Girija Balakrishnan Independent Director *as per last available data
Auditors - M/s. Kulkarni and Company
Holding – Top10 Perc. Holding Perc. Holding HDFC Asset Management 7.18 Sundaram Asset Management 3.64 Aditya Birla Sun Life Asset Management 2.62 DSP Investment Managers 2.03 TAIYO Greater India Fund 1.66 Dimensional Fund Advisors 1.61 Reliance Capital 1.47 BNP Paribas Asset Management 1.38 ICICI Prudential Asset Management 1.15 Morgan Stanley 0.90 *as per last available data
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*in last one year
52 Edelweiss Securities Limited RATING & INTERPRETATION Inox Leisure
Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk DB Corp HOLD SU M DEN Networks HOLD SU H Dish TV India HOLD SU M Hathway Cable & Datacom HOLD SP M Jagran Prakashan HOLD SU M PVR BUY SO M Sun TV Network BUY SO H Zee Entertainment Enterprises BUY SP M
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
53 Edelweiss Securities Limited Media Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]
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
09 -Oct-19 Media New quarter, same story; Result Preview 24-Sep-19 Sunt TV Beaming bright; 499 Buy Network Company Update 29-Aug-19 PVR A clearer picture; 1,580 Buy Company Update
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
Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11
One year price chart 400
350 300
(INR) 250
200 150
Jul 19 Jul Jan 19 Jan
19 Jun Oct 18 Oct 19 Oct Apr19 Feb 19Feb 19Sep Dec18 Aug 19Aug Nov 18 Nov Mar 19 Mar May 19 May Inox Leisure
54 Edelweiss Securities Limited
Inox Leisure
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