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UFO Moviez IPO: Stay Away

With future prospects opaque and high listing valuation (~33 PE annualized 9MFY15!!) we recommend to stay away from it

UFO Moviez is in the business of digital cinema distribution network and in-cinema advertising platform . It enjoys a healthy market share of 54% in the distribution space. It caters to around 4,912 screens in India. Its global screen network is 6,611.

Business
The revenue stream of the company can be divided into three sources: Distribution, exhibitors and advertising. Distribution contributes 50% and the other two sources roughly contributes around 25% each. It earns on per show basis for digit film prints delivered on its network from distributors. It earns sale and monthly lease rentals of digital equipment at individual cinemas. In-house advertising connecting 1,669 advertisers to its ad-inventory of 3,770 in-cinema screens, mostly single-screen halls. (Which is almost 6 times the leading chain PVR in terms of screens)

Concerns
If annualized revenue and profits for 9MFY15 are compared with FY14, then the revenue has grown by a mere 12% and the profit by 4% on consolidated basis. It seems, the company is struggling to maintain its earlier healthy growth of revenues in profits.

The company is currently operating around three minutes of advertisements per show, compared to nearly 5x minutes by multiplexes. That means their advertisement fee is at a significant discount to the multiplexes.

The company's screen network primarily comprises single screens. With multiplexes crowding the Tier 1 & Tier 2 cities, the distribution and advertising income of the company may be dented substantially.

Many big distributors like EROS, Viacom18, and so on, have become producers (vertical integration) and many big production houses like Yash Raj, TIPS, Sun have become distributors. This is basically because distribution is a business with low entry barrier. This will further hit the distribution business of UFO.

Low cost of digitisation of screens and with most of digitisation work already done, the sale and lease of digital equipment business is likely to suffer in the coming days.
At ₹625 (higher band) and 9M annualized EPS, its PE of 33 is very high, compared to most of its peers, who earn higher revenues and better margins.

Growth No's
Distribution stream income ( FY10-14)80% CAGR
Exhibitor Income( FY10-14)25% CAGR
Reported Profit (FY12-14)*228% CAGR
* Company was in loss in earlier years financial statement available - FY 10, FY11

Important Ratiosin %
Operating Margin32.14
Net Profit Margin12.1
ROE13.63