22 April 2009 | Multiplex

EVENT UPDATE √ Multiplex Industry

Deadlock between multiplex owners, producers…

Bollywood film producers have gone on an indefinite strike from April 4 2009 Naval Seth
after they failed to resolve their differences with multiplex owners over the naval.seth@icicidirect.com
revenue sharing agreement. This deadlock would result in significant revenue Karan Mittal
losses for both sides. However, given the fixed operating cost nature of the karan.mittal@icicidirect.com
multiplex industry (property rental, staff cost, etc.), we expect this to be more
detrimental for multiplex owners. With only Hollywood and regional movies
and theatrical plays on offer we expect the occupancy across multiplex
companies to fall to as low as 15-18% in Q1FY10E as compared to 26-32% in
Q1FY09E. We do not see any near term trigger for multiplexes and rate the
sector as UNDERPERFORMER.

FY09 one of the worst years so far…

FY09 has been one of the worst years for the multiplex industry with daunting
concerns staring from all sides. The industry started FY09 with very low
occupancy due to the IPL season in the first quarter. Due to the economic
slowdown it was also hit by a severe funding crunch and huge interest payouts Price performance (%)
in the year. This, along with the real estate slowdown, resulted in property roll 1M 3M 6M 12M
out delays on part of almost all players. To top it all, the content in this fiscal PVR 15.2 -21.1 -18.3 -57.1
was also inferior as compared to that in FY08. This led to lower-than-average INOX 44.7 5.9 -11.7 -69.8
occupancy throughout the year for multiplex companies. Cinemax 29.7 24.7 -5.7 -55.8

FY10 – not better either…

Being hit from all sides, multiplex owners had taken the fight to the movie
producer’s fraternity by demanding higher revenue share and movie
performance linked revenue sharing arrangement. Movie producers, on the
other hand, are demanding a more equitable revenue sharing agreement. With
the ongoing tiff between the two sides, IPL season 2 in Q1FY10, a weak movie Price chart
pipeline for the next few months and further delays expected in property
rollouts we do not see FY10E providing any breather to multiplexes. 400
300
Recently, all the media stocks have appreciated significantly. The rise in 200
valuation is not supported by fundamentals, which continue to remain weak on 100
a near term basis. In light of the current events we have revised our estimates 0
downwards for all the companies in the I-direct multiplex universe coverage and
believe they are very expensively valued. We value these companies on an
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FY10E EV/EBITDA basis. Assigning a multiple of 7x to PVR, 6.25x to INOX and

7.5x to Cinemax, we arrive at a target price of Rs 66, Rs 27 and Rs 36 for PVR,
Inox and Cinemax, respectively. We are downgrading PVR Ltd and Cinemax PVR INOX Cinemax
India to UNDERPERFORMER from HOLD. We maintain our UNDERPERFORMER
rating on INOX Leisure.

Exhibit 1: Key Financials

CMP M Cap EPS (Rs) P/E (x) EV/EBIDTA (x) RoCE (%) RoNW (%)
(Rs) (Rs Cr.) FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E
PVR 84.0 193.3 9.4 3.1 3.3 8.9 27.0 25.1 5.9 7.5 7.8 10.8 8.5 6.5 10.4 8.4 4.7
INOX 34.0 208.7 4.3 2.2 1.9 7.9 15.2 17.8 5.3 7.0 7.4 13.3 6.6 6.0 10.2 5.0 4.1
Cinemax 47.0 131.6 4.9 4.3 2.7 9.6 10.9 17.5 7.4 7.0 8.4 10.3 8.3 5.6 9.3 7.7 4.7

Source: ICICIdirect.com Research, Company

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Tussle between multiplex owners, movie producers

There has been a long row between multiplex owners and movie producers
regarding the revenue sharing arrangement between the two. The majority of
the collection (~70%) from the movies happens during the first week of release.
Generally, producers have been getting 45-48% in the first week, 35-38% in the
second week and 30% share of net collections in the third week of a newly
released movie. Revenue sharing agreements have been on a case-to-case
basis with big production houses, with negotiating capabilities, getting a higher
share than small and first-time producers.

Exhibitor’s demands
With inferior quality of content this year and below-average performance of
many big budget movies, multiplex owners are arguing for a performance
based model. Their demands are:

• Revenue sharing agreement to be finalised after a movie is considered

to be hit
• In case of flop movies producers should carry the major part of the
burden
• They are asking for 40:60/45:55 revenue sharing with producers in
favour of multiplexes
• They feel this share is justified as producers have other sources of
income like sale of rights to television and sale of music

Producer’s demand
Following a stalling of talks between the two sides, the United Producers
Forum, which represents top Bollywood banners and the Indian arms of Sony
Pictures and Warner Bros, have gone on an indefinite strike from April 4, 2009.
This would mean that no new movies would be released till the strike
continues. Their demands are:

• Revenue sharing should not be performance linked as the producers

already take the major risk in movie production
• Revenue sharing to be on a 50:50 basis irrespective of the star cast and
production house of the movie, in line with practices followed in
Hollywood
• Producers have further put pressure on multiplexes by giving a deadline
of April 24 to take back old prints released during the past few months

However, there seems to be no near-term solution to this issue. The multiplex

committee association has also decided to go on strike from May 1, 2009.

The exhibitors are now betting on Hollywood and regional movies and other
alternatives like theatre plays to attract audiences and offset the losses due to
the strike.

We have tried to assess the impact of the current blackout on the multiplex
owners. We take two scenarios:

Case 1:
If the deadlock gets over by the end of April or by the first week of May 2009
and the producers release new movies after IPL season 2 get over.

Case 2:
If the deadlock continues till the end of May 2009 or longer.

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Exhibit 2: Case 1 – Deadlock gets resolved by first week of May ‘09
PVR INOX Cinemax
Q1FY09 Q1FY10E Q1FY09 Q1FY10E Q1FY09 Q1FY10E
Properties 24 26 24 28 20 26
Screens 97 108 84 94 59 80

Occupancy 32% 23% 28% 20% 26% 21%

ATP (Rs) 138 145 128 126 129 120
F&B (Rs) 38 37 29 28 30 28
SPH (Rs) 176 182 157 154 159 148

Revenue(Rs Cr) 60.22 45.50 46.49 29.74 28.42 24.80

% Growth (YoY) -24.44 -36.04 -12.74

EBITDA (Rs Cr) 9.68 3.11 7.21 0.76 4.34 1.96

% Growth (YoY) -67.90 -89.47 -54.81
% Margins 16.07 6.83 15.51 2.55 15.28 7.91

Source: Company, ICICIdirect.com Research

In this scenario we expect the occupancy levels to fall to 17-19% for the
multiplex companies. Although the companies would witness significant YoY
decline, they would still be able to generate some revenue from exhibition of
movies in June 2009.

Exhibit 3: Case 2 - Deadlock continues till end of May '09 or longer

PVR INOX Cinemax
Q1FY09 Q1FY10E Q1FY09 Q1FY10E Q1FY09 Q1FY10E
Properties 24 26 24 28 20 26
Screens 97 108 84 94 59 80

Occupancy 32% 17% 28% 16% 26% 16%

ATP (Rs) 138 142 128 122 129 120
F&B (Rs) 38 36 29 27.00 30 28
SPH (Rs) 176 178 157 149 159 148

Revenue (Rs Cr) 60.22 31.66 46.49 21.85 28.42 18.01

% Growth (YoY) -47.4 -53.0 -36.6

EBITDA (Rs Cr) 9.68 -1.15 7.21 -0.08 4.34 -0.14

% Growth (YoY) -111.9 -101.0 -103.1
% Margins 16.07 -3.64 15.51 -0.35 15.28 -0.75

Source: Company, ICICIdirect.com Research

If the strike does not get over in this quarter, then multiplexes have to go empty
and would have to take a huge hit. The occupancy level would go down to the
level of12-15%. The operational cost and heavy rentals would eat up the
margins and profits for this quarter.

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Inferior quality content

Inferior content quality is the key concern for the multiplex industry. Declining
footfalls and occupancy levels in the recent past can be largely attributed to
lower quality of content while the economic slowdown would be a secondary
factor.

Big budget movies like Tasveer 8x10, Delhi 6, Chandni Chowk to China, Love
Story 2050, U Me Aur Hum, Yuvraaj, etc have been unable to attract people to
cinema halls. Erratic box office collection is shown in the graph below with only
a handful of movies performing well in the last fiscal.

Exhibit 4: Gross Box Office collection - trend since March 2008

350
Singh is Kinng and Golmaal Returns and Rab Ne Bana Di Jodi
290
300 Bachna ae Haseeno Fashion and Ghajini
245 245
Examination Season
250
led to low revenue
despite blockbuster
200
Rs crore

movie like Race 159

150 128
118 113 116 111
97 104
100
Lower collection due 59 61
to IPL season 1
50 No new Hindi Movie
released 13
0
August
July
May

January

February
June

April*
September
March

April

October

November

December

March

*April figures for first three weeks

Source: IBOS, ICICIdirect.com Research

IPL season 2 – a lost opportunity

Multiplexes were looking at telecasting live IPL matches to tackle the otherwise
weak movie pipeline in Q1FY10. However, the companies could not reach an
agreement with the official broadcasters of the matches. The multiplex
companies would have got some breathing space and would have been able to
offset a large portion of their cost if they would have got the right to telecast
these matches.

Multiplexes and distributors had made a bid for the telecast of IPL matches to
Sony television, the official broadcaster for the IPL matches. Group M and UFO
movies were the frontrunners for acquiring distribution rights for the IPL
telecast. However, the conditions laid down by the IPL management made it
difficult for the prospective candidates to buy out the rights to telecast IPL. The
management had put a price of Rs 35 crore as the minimum guarantee for
rights of distribution only for one year. This was not feasible for both
multiplexes as well as distributors.

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Exhibit 5: Company wise occupancy levels

50%
45% IPL season in Q109
led to still lower Drastic fall in
45%
41% occupany level occupancy due to
40%
complete black out.
40% 36.7%
35% 34.7%
39% 33.0%
35% 32% 31.8%
36% 30%
29%
30% 33% 28.5% 28.5%
32% 31%
30%
28.5% 28.5% 23%
25% Fall in occupancy
26% 26% 26%
due to examination
21%
20% season 20%

15%
Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09E Q1FY10E

PVR INOX Cinemax

Source: Company, ICICIdirect.com Research

Outlook and valuations

We believe that in the near term, the multiplex industry faces multiple
challenges in the form of:
• No fresh content due to deadlock between producers and exhibitors
• Funding issues and roll-out delays
• IPL season 2 eating into movie goers market
• Weak movie pipeline for next few months (after the deadlock resolves)

Recently, all the media stocks have appreciated significantly. The rise in
valuation is not supported by fundamentals, which continue to remain weak on
a near-term basis. In light of the current events we have revised our estimates
downwards for all companies in the I-direct multiplex universe coverage and
believe they are very expensively valued. We value these companies on an
FY10E EV/EBITDA basis. Assigning a multiple of 7x to PVR, 6.25x to INOX and
7.5x to Cinemax, we have arrived at a target price of Rs 66, Rs 27 and Rs 36 for
PVR, Inox and Cinemax, respectively. We are downgrading PVR Ltd and
Cinemax India to UNDERPERFORMER from HOLD. We maintain our
UNDERPERFORMER rating on INOX Leisure.

Exhibit 6: Revised Estimates (Rs Crore)

PVR INOX Cinemax
Particulars Old New % Change Old New % Change Old New % Change
Revenue 397.5 387.1 -2.60 261.2 218.4 -16.37 184.7 165.4 -10.43
EBITDA 60.2 51.5 -14.49 48.7 36.4 -25.31 42.7 33.4 -21.65
EBITDA Margin % 15.15 13.30 -185 bps 18.64 16.65 -199 bps 23.10 20.21 -289 bps
PAT 15.3 8.7 -42.77 21.9 11.7 -46.59 15.7 7.5 -52.04
EPS (Rs) 6.2 3.3 -46.35 3.6 1.9 -46.59 5.6 2.7 -52.04

Source: ICICIdirect.com Research

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 RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations.
ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current
market price and then categorises them as Outperformer, Performer, Hold and
Underperformer. The performance horizon is two years unless specified and the notional target
price is defined as the analysts' valuation for a stock.
Outperformer (OP): 20% or more;
Performer (P): Between 10% and 20%;
Hold (H): +10% return;
Underperformer (UP): -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicidirect.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
Gr. Floor, Mafatlal House,
163, HT Parekh Marg,
Backbay Reclamation
Churchgate,
Mumbai – 400 020

research@icicidirect.com

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