Institutional Equities Mukta Arts 18 January 2017 Reuters: MUKR.BO; Bloomberg: MKTA IN Looking To Attain Critical Mass In Its ‘Affordable’ Positioning NOT RATED We had a meeting with Mr Rahul Puri, CEO of Mukta Arts (MAL) to understand its plans in Sector: Film Exhibition the film exhibition business. Despite starting out as a film production house of Mr. Subash Ghai in 1982, in FY16 its consolidated revenues were dominated by film exhibition CMP: Rs97 (50%) and education (31%). The film exhibition business was started in 2011. While players like PVR, Inox Leisure and Cinepolis cater to the mid to premium end customers Girish Pai in Tier-1 and Tier-2 cities, MAL is focused on providing affordable movie viewing in Tier-2 Head of Research and Tier-3 cities (as well as in Tier-1 cities selectively). While PVR’s current average ticket [email protected] +91-22-3926 8017 price (ATP) is ~Rs200 and average F&B spend per head (SPH) is Rs85, the corresponding numbers for MAL are ~Rs120 and Rs33, respectively. While annual revenue per screen was ~Rs35mn for PVR it was ~Rs13mn for MAL in FY16. With EBITDA margin indicated to Key Data be broadly similar, EBITDA/screen difference between the two will mirror revenues. The Current Shares O/S (mn) 22.6 scale-up, which has been slow so far, has picked up considerable pace with likely doubling of screens by the end of FY17 from 36 screens (as of FY16-end). MAL is planning Mkt Cap (Rsbn/US$mn) 2.2/32.4 Update to hive off its film exhibition business into a 100% subsidiary and intends to scale up the 52 Wk H / L (Rs) 133/40 screen number to 200-250 in three years. We do not believe MAL will be a M&A candidate Daily Vol. (3M NSE Avg.) 139,482 for PVR, Inox Leisure or Cinepolis over the next three to five years as the latter are focused on premiumisation. It, however, could be an organic growth story that helps single-screen players convert to smaller multiplexes (two to three screens per property) One -Year Indexed Stock Performance Meet and address a large segment of the population that thirsts for affordable but quality movie 220 200 viewing experience. Scope for margin expansion exists as advertisement revenues have a 180 very low share in its mix (~3% versus 12% of PVR). 160 140 Revenue streams of the consolidated entity: MAL is into: (1) Film exhibition under the banner 120 100 MuktaA2 Cinemas and currently has 51 screens, (2) Screen programming – acting as a 80 middleman between distributors and exhibitors, (3) Film production, (4) Film school viz. Whistling 60 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Woods, (5) Real estate and Equipment Rentals, and (6) Film library (see the revenue mix in MUKTA ARTS LTD Nifty 50 Exhibit 1). It is currently focusing on film exhibition and film school because: (1) There is a huge amount of risk involved in film production, and (2) Screen programming is a low-margin business. Price Performance (%) Management Management Focus on Tier-2 and Tier- 3 cities: MAL is concentrating on film exhibition predominantly in Tier 1 M 6 M 1 Yr 2 cities such as Nainital, Dehradun, Baroda, Ahmedabad, Pune, Gurgaon etc. & Tier 3 cities such as Gulbarga, Banswara, Selu, etc. Having been in the movie production, distribution and Mukta Arts 9.9 55.1 53.5 programming business for the past few decades, MAL believes that it understands audience Nifty Index 3.2 (1.7) 12.9 tastes, paying capacity, etc in Tier-2 and Tier-3 cities well which will help it in its film exhibition Source: Bloomberg business. In a move that does not seem to gel with its core strategy, it has ventured overseas with a functional six-screen property in Bahrain. However, we understand that because of absence of entertainment tax, value added tax or VAT and service tax, the operating margin in Bahrain is twice that in India on much higher ticket prices. MAL hopes to end FY17 with a screen number of 70. It believes that there is massive scope for expansion of screens in line with the view we have held in our earlier report Indian Film Exhibition Sector- Oligopolistic Business In Its Infancy; GST To Lift Margins And RoIC. Key metrics of its film exhibition business: MuktaA2 Cinemas has a revenue mix comprising: (1) Box office collection–~70%, (2) F&B–~27%, (3) Advertisement & others –~3%. As per the management, MuktaA2 Cinemas has a higher system-wide occupancy rate of ~35%-40% in comparison to the multiplex industry average of 28%-35% as it has:(1) Less number of shows/screen in a day (<5 shows/screen/day against PVR’s ~5.2), and (2) It has on an average 500 seats/property or ~175 seats/screen which is much less than the industry average of ~245 seats/screen. A typical property of MAL is a two-three screen one. Other operational metrics of MuktaA2 Cinemas are: (1) ATP of Rs120, and (2) SPH of Rs33. High margin generating advertisement business is low because of: (1) Presence in less premium locations, and (2) Presence of small advertisers in Tier 2 & Tier 3 cities. It has not been able to attract large pan India advertisers as it does not have a large network currently. Rentals tend to be about 13%- 14% of total revenues and EBITDA margin is about 15%-18%, according to the management. Institutional Equities Business economics focuses on keeping costs variable and capex low: It involves acquiring ‘modest’ properties: (1) With variable rentals i.e. no ‘minimum guarantee (MG)’ for most properties which were either not in use or whose audience size cannot be estimated in advance, or (2) With fixed rentals for properties which have been in use for a long period of time and have a loyal audience. For example, it is paying Rs0.3mn/month for Ramakrishna in Hyderabad, an old but apparently a historical movie hall. Overall, MuktaA2 Cinemas aims to have a pan India presence with 200-250 screens in three years and believes that it has the necessary resources (team) for the same. We believe for an expansion of this sort it could potentially require capital. MuktaA2 Cinemas believes that it is very difficult to build new screens in already saturated Tier-1 cities and it is not in a position to enter into a bidding war with big players such as PVR and Inox Leisure. MuktaA2 Cinemas plans to enter into projects mostly in Tier 2 & 3 cities which have a payback period of 18-24 months. However, certain properties in Baroda and Ahmedabad have taken 36-48 months for payback. Expansion plan: MuktaA2 Cinemas is in talks for acquiring properties in cities such as Kolkata (9 screens), Gurgaon (3 screens), Ahmedabad (2 screens), Nainital (2 screens), Pune (3 screens) and Rajasthan (5 screens). MuktaA2 Cinemas has an average management contract period of 9 years and rental contract periods of 9, 12,15 and 19 years for its properties. Its capex/screen stands at Rs2mn-Rs3mn for existing properties and ~Rs10mn-Rs15mn for new properties which is much less than the Rs25mn capex/screenin case of PVR and Inox Leisure because MuktaA2 Cinemas does not have any standard design for its multiplexes and the design depends on: (1) Location of property, (2) Ticket price affordability of local population, and (3) Prospects of scaling up advertisement business. Its investment is typically only in movable parts - like chairs, screens, projection system, etc while the investment in immovable parts like toilets, lobby area, etc has to be done by the property owner - who gets between 12%-14% of the revenues as his take home with no fixed rental being guaranteed. Film, television, animation & media school could see expansion: Whistling Woods, the film school, currently has 1,000 students. It is a premium film school with premium education fee structure for a three-year course. It charges Rs500,000/year from each student. The present infrastructure can accommodate ~1,200 students and it currently has some problems with the government over further land acquisition. The land on which the school was built is under litigation. Any adverse outcome of the litigation will be detrimental for MAL. It believes the problem will be resolved within four to five months and the school capacity can be doubled with some more land acquisition. The school is able to place 70%-75% of its students across various segments such as film, television, advertisement, digital, public relations, journalism etc. Other points discussed Demonetisation: It had a big impact as the management indicated a heavy footfall decline because of the event compounded by indifferent content over the past few months. Apparently, both have led to a situation where the occupancy level has fallen by as much as 8ppt-10ppt. Licencing reforms: MuktaA2 Cinemas believes there is a need for licencing reforms (it sometimes takes around three years in Maharashtra to get all the licences – apparently 28 of them are required to start a multiplex) and it is in talks with state governments for reducing this as well as removal of the cap on ticket prices in areas such as Hyderabad and Chennai. Separation plan: MuktaA2 Cinemas plans to separate its film exhibition business from film production and equipment rental business to provide cleaner and transparent information to investors and also to turn the other part of the portfolio viable. De-emphasing screen programming: It was involved as a middleman in 750 screens for all big exhibitors such as PVR, Inox Leisure, Cinepolis etc.