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Multiplexes must grow at a phenomenal phase to justify current valuations

The spotlight is again on the consolidation of multiplexes, as Kochi-based Carnival Films Pvt Ltd is fighting it out with Cinepolis, a Mexican film exhibitor and the fourth largest film exhibiting chain in the world, to acquire a local multiplex SRS Ltd. Carnival Films had earlier acquired Big Cinemas from Reliance Media Works a few weeks ago. However, a look at the top two listed entities in the multiplex space -- Inox Leisure Ltd and PVR Ltd -- offers a curious picture.

Though these two largest multiplex chains have given handsome returns of 63 per cent and 72 per cent in the last three years, their valuations looks really stretched. With a net profit margin of less than three per cent and an EPS growth of -0.58 percent (Inox) and 3.6 per cent (PVR), the high PE of 87 and 90 respectively looks unjustifiable. These companies will have to grow at 90% to justify their current P/E. They seem to be simply riding on the hype about their future potential in a film crazy country like India.

For the record, no country is addicted to the silver screen as India. Cinemas sell more than three billion tickets every year, over the double the quantity sold in America, the next biggest market for films. Thanks to the box office pull and a five-year tax holiday, many existing and new players were setting up multiplexes across the country between 2005 and 2008. An AT Kearney report in 2006 projected a four-fold jump in screens to 2,000 by 2009-10. Five players - Big Cinemas, PVR Cinemas, Cinemax India, Fame (earlier Shringar) Cinemans, Inox -- raised ₹637 crore from the stock market during this period.

Soon the industry entered into a consolidation phase with Inox acquiring Calcutta Cine Pvt Ltd in 2007, followed by Fame India in 2010. (See table: Consolidated figures) Inox and PVR emerged as the two leaders after the first phase of consolidation. The space is expected to witness another round of consolidation. If the first phase of consolidation was mainly thanks to the economic downturn that threatened the survival of some players, the next round of consolidation could purely be the survival of the fittest.

However, none of these can hide the fact the industry has failed to live up the hype. To begin with, the growth in screens are nowhere close the projections. There were only 200o screens in 2013. In fact, the warnings were always there. The first red flag is the box office pull doesn't translate into money in India. Indian cinemas make less than $2 billion a year, compared to 10.5 billion made by the US movies. France, which handles one-twentieth as many admissions as India, makes roughly around the same as Indian movies.

Multiplexes in this country also face very peculiar challenges. In India, the state governments levy their own entertainment taxes, which run as high as 60%. Some states like Andhra Pradesh and Tamil Nadu also cap ticket prices. Piracy is a huge issue. According to a report by Ernst & Young, the Indian film industry loses nearly $1 billion in revenue due to piracy. Though digitisation helped tackling the issue to a certain extent, industry players say the revenue loss due to piracy is around 40%. The lingering economic trouble has also hit the industry hard. In 2012, the multiplex industry lost out on 150 additional screens as malls across the country weren't completed on time. These multiplexes will also have to push for growth non-ticket revenues, mainly from food and beverages and advertising, if they want to improve their profitability.

Sure, with around 18% of the total screens, multiplexes control over two-thirds of the box office revenues. With single screens struggling to put up a show, their share is likely to increase in the coming years. But will that bring in the much needed growth to justify their current valuations? As said before, they will have to grow at 90% to justify their current valuations. Will they be able to perform this enviable task with their likely bargaining power as they consolidate further?

An exhibitors revenue comprises 70 per cent ticket sales, 20 per cent food and beverages and 10 per cent cinema advertising. While the proportion remains more or less the same, the volume in absolute terms goes up. Average ticket prices have grown moderately to ₹168-175 from ₹150-160 for leading multiple chains in the last two years, according to FICCI-KPMG report in 2014. It is just around 10%. Is that good enough? Will they be able to push the other two - food and beverages, advertising -- to fuel the profitability? It looks unlikely as food and beverages are already highly priced and advertising revenue can only grow up to a limit. If you include the lease rentals, which constitute 16-20 per cent of total income- that has been growing up steadily, multiplexes really have a huge task cut out for them.

Acquired byChain AcquiredYear of AcquisitionNo of Screens
InoxFame Cinemas201095
PVRCinemax2012135
CarnivalBroadway201410
InoxSatyam201438
CinepolisFun cinemas201483
CarnivalBig Cinemas2014250