PVR Cinemas: Showdown On The Silver Screen.

     As the sun threw its rays across the early morning sky, the board of directors of PVR Ltd. was in a closed – doors meeting at the company’s Gurgaon headquarters. Over the past few months, rumours had been doing the rounds of the markets that the Anil Dhirubhai Ambani Group’s (ADAG) subsidiary company, Reliance MediaWorks was looking to offload a controlling stake in its multiplex operator, Big Cinemas. Big Cinemas, however, was a loss – making company and its acquirer would have to turn it around for the acquisition to be value – accretive. Wild speculation had surrounded the entire episode but in September 2014, some clarity emerged when ADAG invited bids for Big Cinemas. PVR, hungry for growth and expansion, had thrown its hat into the ring, along with some other biggies such as INOX Leisure, Carnival Films, Provident Equity Partners (a US – based private equity firm) and Navis Capital (a Malaysian private equity fund).

     Two days ago, PVR’s board had approved a $81 million QIP (qualified institutional placement) to raise funds for further growth. The announcement had sent the PVR scrip higher by 2%. While PVR had largely grown organically over the course of the past two decades, its acquisition of Cinemax had shown that the company wouldn’t shy away from inorganic growth, provided the acquisition made business sense and looked to be a strategic fit. With PVR’s QIP almost certain of seeing the light of day, the company would have a large warchest at its disposal.

     The board’s decision and the outcome of the meeting would turn out to be critical in charting PVR’s growth plan over the next decade. Would the board back out of the Big Cinemas deal and resort to growing organically, by opening its own multiplexes or would it enter a potential bidding war for the ADAG – led company? The markets were waiting with bated breath to find out.

The Indian Multiplex Industry.

     India is home to the world’s largest film production industry and entertainment market, in terms of feature films produced each year, which number over 1100. The film exhibition industry would thus be a natural beneficiary of this factor. The Indian multiplex industry, part of the $20 billion Indian entertainment industry, is that industry that is concerned with the exhibition of films, documentaries and movies in India. The industry, which was once almost entirely composed of single – screens, has seen the advent of the multi – screen format over the past two decades, which has been fuelled by the establishment of malls and high – street retail.  

     In a country in which over 3 billion movie tickets are sold each year, the lion’s share of the sector is still composed of single – screens. Multiplex chains, however, are making inroads into several parts of the country and have managed to capture close to a fifth of the market. However, in terms of value, multiplexes have already captured over half of the market due to their premium pricing. The industry itself is capital – intensive in nature and most chains are currently in expansion mode as they aim to boost screen count over the next few years. Even though a large part of the market is unorganized, the major players in the organized space are PVR Cinemas, INOX Leisure, Big Cinemas, Fun Cinemas and Cinépolis.     

     India’s first multiplex was PVR Anupam, which opened in New Delhi in 1997. Ever since then, the multiplex sector has been witnessing a constant double – digit annual rate of growth, close to 18%, which often came at the expense of single screen theatres. India currently has over 9300 movie screens, with close to 1800 being in the multiplex format. The aforementioned top five national players control close to 70% of the capacity. 

 

Business Environment Analysis.

     The Indian multiplex industry essentially operates in a high – growth environment but some factors that fuel that growth are largely outside its control. The following are the operational metrics that drive profitable growth for the multiplex industry.

Content Pipeline.

The success or fate of a film exhibitor is, at the end of the day, determined by the quality of content that it displays to its audience, which in turn drives its topline and bottomline. A robust pipeline of quality content would drive ticket sales and lead to ancillary revenues in the form of food and beverages, advertising and parking fees.

Real Estate Availability.

Most multiplexes are largely set up in malls and thus the industry depends on the real estate sector for proper locations, infrastructure and tie – ups with builders, to result in growth. Quality real estate has become a restricting factor, as far as multiplex growth is concerned. Real estate rents have turned out to be one of the major cost drivers for the multiplex industry. In the aftermath of the financial crisis, multiplex operators had to put expansion on the back burner as several mall developments were stalled for a lack of funds. However, this later turned out to be a blessing in disguise as some operators were able to pick up properties at rock bottom rates and set up screens in 2011.

Release Timing.

Films shot with festive date releases help footfalls and revenue generation at the box office. It is common for film - goers to enjoy watching movies released on festive dates, ignoring the ticket prices. Films readied for release during vacations, sports events as the IPL and the World Cup generally receive a lukewarm reception, unless the star cast is appealing.

Average Ticket Prices.

The average ticket prices (ATP) are a major determinant of profitability and at Rs. 160 in 2013, they registered a 6% annual growth. However, 50% of the revenue from ticket sales goes to the distributor in the first week and that figure falls to 42.5%, 37.5% and 30% in the next 3 weeks.  

Occupancy Rates.

This metric, which is essentially the number of tickets sold as a percentage of the total number of seats, is an important factor that drives profitability. Generally, occupancy rates are high in the first week of a release and then peter down, as time elapses. The sector – wide average occupancy rate in 2013 was close to 30%. 

Screen Reservation.

Certain states have imposed an informal reservation of screens for regional movies, side – by - side with the pan - India popular films (both Indian and international) that hit the screen. This affects revenue collections as regional movies have a ticket pricing that is normally 30-40% lower than the pan - India popular movies.

Screen Footprint.

Generally, multiplexes with a large, national footprint are likely to be more profitable than a small regional chain, even in a difficult market condition. This would be one reason why many operators are going in for inorganic growth at a quickened pace.

Ancillary Revenues.

These include revenues from the sale of food and beverages, advertising (both on screen and at the multiplex premises) and parking fees. The profit margins are much higher on these than those from ticket sales. Multiplexes are also diversifying into film production, bowling alleys and restaurants to shore up revenues.

PESTLE Analysis.

     In order to gain a better comprehension of the nuances of the Indian multiplex industry and the business environment within which it operates, a PESTLE analysis would go a long way in highlighting some key trends. The PESTLE analysis dissects the industry in terms of the various political, economic, social, technological, legal and environmental factors that affect it and either promote or hinder growth in the industry.

Political Factors.

The political factors that impact the industry include the government taxes levied on the sector, such as entertainment tax (in the range of 20 – 67% of the ticket price, based on the state). Additionally, in many states, governments have imposed price caps on tickets. For instance, in the state of Tamil Nadu, tickets for the first two rows of any show are sold at Rs. 10 each and a cap of Rs. 120 exists on ticket prices, irrespective of the show timings or day. Andhra Pradesh has a Rs. 150 ticket price cap. Karnataka is now exploring a similar price cap. The multiplex industry, as evidenced by the above facts, operates in a highly regulated environment. Screen reservation for regional movies is a deterrent for the growth of the industry. The industry is yet to get recognition as a promoter of social well - being and mass entertainment. While the government could encourage growth with tax benefits and incentives, it continues to treat the industry as a milking cow, by way of high taxes.

Economic Factors.

Higher economic growth results in higher disposable income and this in turn increases spending on movie – watching. Besides, with higher disposable incomes, more and more Indians are increasing their spending on leisure and entertainment, with the multiplex industry being a direct beneficiary. However, a tightening of interest rates could impact credit advanced to the sector, especially at a time when the industry is in consolidation mode.

Socio – Cultural Factors.

Since the multiplex industry is, in essence, consumption – oriented, the changing demographic profile is a key factor. Rapid urbanization, changes in lifestyles, increasing discretionary spending are fuelling urban growth for the industry. Similarly, rural upliftment by various schemes and industrial growth / agricultural growth is putting more money in the hands of the rural folk. Furthermore, with the Indian movie – goer inculcating a taste for a wider variety of cinema and with entertainment traversing the course from being a want to a need, the industry would be a direct beneficiary.

Technological Factors.

New technologies such as the direct beaming of the movie to the exhibitor from the producer (a technology developed by UFO Moviez), in lieu of a movie reel, has helped curb piracy to some extent. In addition, innovations such as 3D and 4D cinema, IMAX and ECX (Enhanced Cinema Experience) are enhancing the movie – watching experience for the movie – goer and in turn, increasing sales for the industry. Social media is promoting cinema like never before and this is having a positive rub – off on the multiplex industry. However, increasing internet penetration is also leading to instances of movie piracy. Ticket booking through online portals such as bookmyshow.com helps the viewer plan his show and ticket price, which at times helps prolong the run of the movie at the box office.

Legal Factors.

In India, censorship laws are the main obstacle for the multiplex industry. Several critically – acclaimed films are not released in the country due to the stringency of these laws. Moreover, the improper nationwide implementation of the Piracy Act does go on to affect the health of the industry. Licensing requirements from too many quarters (Municipality for building plans, Fire Department for safety, Food Department for the sale of food and beverages), before setting up the screen, and annual compliance review are deterrents to the growth.

Environmental Factors.

As far as the multiplex industry goes, standalone multiplexes face hurdles in receiving land and environmental clearances. The same applies to mall developments (which are usually approved, only if they are set up in business district areas and the outskirts of cities than in residential areas, which add to the capital cost due to land pricing and facilities development), which are essential for multiplex operators looking to set up new screens and expand their footprint. The key environmental hurdles involve the sanction of clearances and NOCs from the pollution control boards.

     The multiplex industry, as a whole, is evolving with the advent of big companies in India, which follow a professional style of management, as opposed to single screens, which are promoter – driven. Multiplex operators employ and engage trained staff and their aim is to make movie – watching an enjoyable experience for the movie – goer. The companies, with increased FII participation, also focus on growth and profitability. 

Key Drivers Of Growth.

     As far as the multiplex industry goes, there are certain factors that act as opportunities to ignite and trigger further growth and profitability for the industry as a whole. These factors are as follow.

Increased Discretionary Spending.

With discretionary spending as a proportion of income on a rise, coupled with increasing urbanization, the changing lifestyle of the aspirational Indian, who is on the lookout for entertainment would contribute to the sectoral growth, as far as the multiplex industry goes.

Low Screen Penetration.

India has only 8 screens per million people, compared with 117 in the United States, 38 in Europe and 31 in China. With enough room for expansion and a huge opportunity, this rate of penetration is all set to increase, going forward, with many multiplex operators having lined up plans for both organic and inorganic growth. While the cost of setting up a new screen is around Rs. 2.5 crores (organic route), the per – screen cost of an acquisition works out to over Rs. 4.2 crores.

Robust Content.

The box office collections of movies, year – on – year, are on the rise. With movies having a short screen life, multiplexes often go in for wide releases, along with the distributors. Today’s big budget films open on over 5000 screens and many go on to rake in over Rs. 100 crores each. In fact, some films even go on to cross the magical figure of Rs. 200 crores and collections are expected to only rise in future.

Rising Ancillary Revenues.

With multiplexes tapping ancillary streams of revenues to drive their toplines, the share of these in the total revenues has risen to close to 30%. These include revenues from food and beverage sales, parking, advertising and brand extensions such as restaurants and bowling alleys. The profit margins on these revenues, however, are much higher, thus enabling multiplexes to increase profitability. 

Key Impediments To Growth.

While there may be several factors that may be spurring growth in the Indian multiplex industry, there are other factors that pose a risk and that could hamper growth in the industry. These factors are as follow.

Poor Quality of Content.

If the film exhibited at a cinema fails to rake in the crowds, the cinema hall suffers. This is one of the major threats that the multiplex industry faces. In fact, a spate of films that flopped at the box office in 2011 led a multi – month slump for the multiplex industry.

Political and Tax Regime.

With the government treating the multiplex industry as its favourite whipping boy by levying high rates of entertainment tax, imposing price caps and regulating censorship laws, the industry’s growth could be slowed down by the complex regulatory environment.

Reduction in Discretionary Expenditure.

If the economy turns for the worse, disposable incomes would fall and as a result, so would discretionary spending in general and spending on movie outings in particular. This would impact the revenues of multiplex operators.

Threats from Other Forms of Entertainment.

Even though movie – going is a major form of entertainment, many people are turning to amusement parks, malls, pubs, restaurants, theatres and sporting events as alternatives. This leads to declines in occupancy rates in multiplexes. In fact, every year, during the IPL season, film production houses avoid releasing films, as most Indians prefer cricket to movies during those two months. This, in turn, hits the multiplexes’ top lines.

Consolidation.

     In recent years, consolidation has become the name of the game in the industry. With quick expansion becoming a necessity in order to capture the growing market, many players began taking the inorganic route. In 2005, the ADAG paid Rs. 350 crores to become the largest shareholder in Adlabs. In 2009, DT Cinemas, an arm of DLF, sold its 29 screens to PVR for Rs. 60 crores in a cash – cum – share deal. INOX then acquired one of its rivals, Fame Cinemas, in 2010 and in 2011, PVR paid Rs. 395 crores to acquire a majority stake in Cinemax. INOX followed suit in 2014 by acquiring Delhi – based Satyam Cineplexes for Rs. 182 crores. This industry shake – up has resulted in PVR becoming the largest player, with 444 screens and INOX following second, with a screen count of 358.

Sector Financials.

     While most of the multiplexes are growing their toplines by over 20%, growth in profitability is also keeping pace at over 20%, indicating that their operating profit margins are showing an upward trend. However, net profit margins are at single digits, in the range of 7%, which are unusually low for service industries. While film exhibition costs and tax outgo are on the rise, the biggest increase in expenses has been interest costs (from Rs. 17 crores to Rs. 76 crores for PVR and from Rs. 16 crores to Rs. 27 crores for INOX, over the past 2 years). With large, listed players such as PVR and INOX having gone in for debt – funded acquisitions in the recent past, the interest outgo has impacted their net profit margins.  

     Both companies have reported rising debt – equity ratios. They continue to report negative cash flows and their current ratios are less than the crucial level of 1, which may force them to raise funds to meet their working capital requirements. Also, both PVR and INOX have seen falling interest coverage ratios, which show that their earnings before interest and tax have grown at a slower rate than their interest outgoes. This does seem worrying, considering the fact that both companies still seem to prefer inorganic growth. If these companies were to pursue further acquisitions, taking on additional debt from here on would only strain their financials and weaken their balance sheets. This would, in turn, hamper their ability to keep pace with the expansion requirements of the business and capitalize on any other growth opportunities that might come their way.

PVR Cinemas: Go Big Or Go Home?

     While the board of directors of PVR was contemplating on whether to go ahead and enter the imminent bidding war and takeover battle for Big Cinemas, which the ADAG had put on the block, they certainly weren’t ignorant of the fact that the outcome of the Big Cinemas saga would either catapult PVR into an entirely different league in the multiplex industry or it would saddle the company with additional debt and prove to be a white elephant and a major stumbling block for PVR to overcome. The board’s decision, ultimately, would change the face and the fate of the two – decade old multiplex giant as we know it.

     PVR Cinemas was set up in 1995, as a joint venture between Priya Exhibitors Pvt. Ltd. and Village Roadshow, an Australian entertainment and media giant. In 1997, the JV launched PVR Anupam, India’s first multiplex, in Saket, New Delhi. In 2003, when PVR was only a 12 – screen operation, ICICI Ventures picked up a significant stake for Rs. 40 crores, giving the company the funds it needed for expansion. In the same year, Village Roadshow exited the JV but allowed the Indian company to continue to use the PVR brand name. PVR moved out of the NCR area for the first time in 2004, with a multiplex at Bangalore’s Forum Mall. With its nationwide expansion underway, PVR went in for an IPO in 2006 and it raised Rs. 128 crores.

     In a bid to raise the contribution of ancillary revenues, which contribute higher profit margins, PVR entered the domain of film production and distribution in 2007 with PVR Pictures and subsequently, PVR Leisure was launched. The subsidiary focused on allied offerings such as bowling alleys, skating rinks and restaurants, under the PVR bluO brand name.

     In 2011, PVR acquired the 135 screens – strong Cinemax for Rs. 395 crores and the acquisition led to it becoming the largest movie exhibitor in the country. PVR’s expansion strategy has been paying off in recent years with revenues growing from Rs. 402 crores in FY11 to Rs. 1285 crores in FY14, while profits have more than tripled from Rs. 17 crores in FY11 to Rs. 57 crores in FY14. However, in the recent past, PVR has gone in for multiple rounds of preferential share issues and QIPs to investors such as L Capital (the investment arm of LVMH) and Morgan Stanley to raise funds, resulting in its equity capital expanding from Rs. 27 crores in FY11 to Rs. 41 crores in FY14. Moreover, its debt has increased from Rs. 161 crores in FY11 to Rs. 502 crores in FY14, resulting in its interest expenses rising from Rs. 16 crores in FY11 to Rs. 77 crores in FY14. This has led to a slowdown in profitability growth and a falling net profit margin, over the past two fiscals.

     With the 250 – screens strong Big Cinemas on the block for a valuation that could easily stretch beyond Rs. 1000 crores, the eventuality of PVR acquiring the prized asset would result in the former extending its lead over INOX and cementing its place as the undisputed leader in the multiplex industry. However, considering the fact that INOX, Carnival Films, Provident Equity Partners and Navis Capital all vying for the asset, a bidding war could erupt for Big Cinemas. PVR, on its part, has announced a QIP to raise funds for expansion but it is still in the process of consolidating Cinemax into its folds. The Big Cinemas saga would erupt in the next few weeks and the PVR board’s strategy, in terms of pouncing on Big Cinemas or backing down, would be interesting to watch. For now, the markets are watching the silver screen in earnest. The showdown is all set to begin.   

Teaching Note.

     By examining the imminent takeover battle for Big Cinemas and PVR’s possible strategy, our aim is to analyse the following:

1. The multiplex sector in India from a business environment point of view and zero in on the factors that either accelerate or decelerate growth in this emerging business sector.

2. The business environment in which the Indian multiplex industry operates and the operational metrics that drive the industry.

3. A PESTLE analysis to dissect the sector in terms of the political, economic, socio – cultural, technological, legal and environmental factors that play a role in influencing various aspects of the industry.

4. The key growth and profitability triggers for the Indian multiplex industry.

5. The main factors that pose a risk to and impede the business model of the multiplex operators in the country.

6. The recent consolidation in the industry.

7. A brief financial analysis of the major multiplex operators.

8. Given the uncertainty surrounding the business model of the multiplex industry, is inorganic growth really the best way for companies to sustain their growth and expansion?

Exhibit 1: PVR Debt Equity Ratio For The Period FY2010 Through FY2013.

PVR’s current ratio has been exhibiting a decreasing trend over the past few fiscals and it currently stands at 0.99. This fact, coupled with a negative cash flow, would mean that the company may have to go in for fund - raising, just to sustain its working capital requirements. If PVR were to go in for an acquisition, it would have to go in further fund – raising. However, while an expansion of its equity base would lead to a squeeze on its EPS and ROE, incurring additional debt would lead to a rising debt – equity ratio and a falling interest coverage ratio, as evidenced in PVR’s financials in the recent years.

Exhibit 2: PVR's Timeline In Reaching Market Leadership.

1995: Priya Village Roadshow set up as 60:40 joint venture.

1997: PVR Anupam, India’s first multiplex, launched at Saket, Delhi.

2003: Village Roadshow exits the JV and Ajay Bijli acquire the Australian company’s holding; ICICI Venture picks up 38 per cent stake in PVR for Rs 40 crore.

2004: PVR expands beyond NCR, opens country’s largest multiplex in Bangalore.

2006: Company’s IPO raises Rs 128 crore.

2007: Ajay Bijli launches production & distribution subsidiary, PVR Pictures.

2010: PVR’s co-production with Ashutosh Gowariker’s ‘Khelein Hum Jee Jaan Sey’ tanks.

2012: PVR buys out Cinemax chain for Rs 395 crore, becomes the country’s No. 1 multiplex operator.

References.

1. PVR annual report.

2. INOX annual report.

3. Moneycontrol.com

4. http://articles.economictimes.indiatimes.com/2014-08-17/news/52901438_1_pvr-ltd-ajay-bijli-major-cineplex-group

5. http://www.business-standard.com/article/management/pvr-inox-in-battle-for-screen-presence-114081401155_1.html

6. http://www.businessworld.in/news/null/multiplex-masters/697498/page-1.html

7. http://firstbiz.firstpost.com/corporate/how-pvrs-ajay-bijli-became-the-king-of-multiplexes-39413.html

8. http://www.business-standard.com/article/companies/providence-equity-partners-in-race-for-big-cinemas-buyout-114091400765_1.html

9. http://www.dealcurry.com/20140718-Reliance-To-Exit-Big-Cinemas.htm

10. http://articles.economictimes.indiatimes.com/2013-12-05/news/44808283_1_inox-leisure-nitin-sood-cinemax-india