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BW Businessworld

The Lord Of The Screens

PVR’s acquisition of Chennai-based SPI Cinemas has not only strengthened its footing in the southern states but also made it the seventh largest multiplex operator in the world by admissions

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On the basis of number of films produced and released, India is the largest market in the world. But in terms of screen density (movie screen per million people) it is among the low­est — eight screens per million com­pared to 126 in the US, 60 in the UK, 40 in South Korea and 26 in China. US-based National Association of Theatre Owners reported there are 40,837 screens in the US as of July. In India, however, there are only around 2,400 multiplex screens and around 6,700 single-screen theatres. However, nearly 45 per cent of the total domestic box office collections are generated at the multiplexes. The top four players based on screen count — PVR, Inox, Carnival, Cinepolis — account for over 70-73 per cent of the overall multiplex business. And that is why any major acquisition has a long-term impact on the films business in India.

A recent Deloitte report says the projected domestic box office collections for FY2019 are pegged at around Rs 11,000 crore of which nearly half is expected to be generated between the four largest multiplex operators. However, it is PVR, the BSE-listed country’s largest multiplex operator for over six years in a row, that is marching ahead having successfully acquired yet another established movie exhibition chain down south — SPI — making PVR the seventh largest multiplex chain operator in the world based by admissions. By the end of 2020, PVR will have 1,000 screens (up from over 700 currently), company officials say.

But why SPI Cinemas, a leading cinema player in the south  with 76 screens across 17 properties in 10 cities, we asked the brother duo of Ajay and Sanjeev Bijli, the promoters of PVR Cinemas. “When half of the Indian box office collec­tions come from regional content of which 37 per cent is generated by three big south Indian languages — Telugu, Tamil and Kannada — the Rs 850-crore acquisition makes a lot of business sense,” says Ajay, the CMD of PVR. Post-acquisition, the screen count for PVR in Tamil Nadu has virtually gone up 2.5 times — from 29 to 64 screens. In the southern region, PVR now has the second highest screen count (after western India) having added 63 screens to take its overall tally to 232. This is virtually double that of Inox Leisure in southern India. Inox is the second biggest cinema chain in the country after PVR.
PVR’s screen count in the country has gone up from 643 to 711. “The SPI Cinemas acquisition has enhanced the business in southern India just as the acquisition of DT Cinemas from DLF had helped us expand in northern India two years ago,” says Sanjeev, Joint MD, PVR.

In August, in a cash-and-stock deal PVR acquired SPI Cinemas, which operates brands like Satyam Cinemas, Escape, Palazzo, The Cinema and S2, in key markets of Tamil Nadu, Telangana, Andhra Pradesh, Karnataka, Kerala, and Mumbai. As per the terms of the acquisition, PVR has acquired 71.7 per cent stake in SPI Cinemas from existing shareholders for a total consideration of Rs 633 crore, and has issued 1.6 million new equity shares of PVR for the balance stake (share worth over Rs 210 crore).

For PVR, which was established in 1997, the journey from opening its first multiplex screen in Delhi to the  700-screen milestone has been a remarkable one. Before the current financial year ends, PVR may further scale up its tally of screens to well above 730.

Acquisition rationale
In order to better understand the nuances of the deal, we turned to PVR CFO Nitin Sood. Sood lists a number of rea­sons why PVR had been eyeing SPI Cinemas for the last few years. “SPI has leadership position in the highly attrac­tive Tamil Nadu market with 42 existing screens in the state and 31 in Chennai alone. Post-acquisition PVR has become the No. 1 player in all key southern cities including Chennai, Bangalore, and Hyderabad,” he says.

 “This acquisition will add scale to the existing business of PVR and the post-consolidation revenue would be at least 2x of the nearest competitor. Further, SPI Cinemas has an attractive operating and financial performance with high­est average occupancy across the country and healthy Ebitda margins,” Sood adds.

Then, there are other financial parameters too. SPI’s sponsorship revenue is 7 per cent of their revenue com­pared to PVR’s 12 per cent. “With national advertisers, PVR can double the SPI sponsorship revenues in the next 18-24 months. In addition to the 89 screens (existing and upcoming), it has a strong pipeline of 100-plus screens expected to be delivered over the next five years,” says Sood listing some of the rationale behind the acquisition. The complete integration of PVR and SPI may take at least three more quarters.

A back-of-the-envelope calculation shows that for this acquisition, PVR is paying an average of Rs 8.3 crore per screen. How do PVR justify the deal on a cost-per-screen basis when the average revenue per screen is half the aver­age cost per screen? “We are in the location business and therefore cost per screen is never the criteria for acquisi­tion. No two screens are the same on business parameters. We pay based on a multiple of earnings and the number of years in which we will get back the investments,” explains Sood. Therefore the SPI acquisi­tion has followed the same princi­ple. “The business is expected to generate an Ebitda of Rs 100 crore in the next 12 months and at an enterprise value (EV) of approxi­mately Rs 1,000 crore. Therefore, we have valued the business at 10x EV/Ebitda based on the current year earnings,” says Sood. Acoording to him, the PVR-SPI deal has, in fact, come at a significant discount when com­pared to some of other transactions that have happened in the exhibition space recently including the purchase of Fun Cinemas by Cinepolis (approximately 12.5x EV/Ebitda), and Satyam-Delhi by Inox (12.5x).

According to Alok Tandon, CEO, Inox Leisure, country’s second-largest multiplex operator, it was Inox that started the consolidation phase in the multiplex industry by acquiring Calcutta Cine and later Fame India and Satyam Cineplexes.

“Acquisition of the right chain as per one’s objective is a ‘key’ in our line of work,” says Tandon. “We make such stra­tegic moves as and when it is required as per our business objectives and we continue to evaluate opportunities for organic and inorganic growth in the exhibition sector.” Does the SPI Cinemas acquisition bother its rivals? “We are well placed in south with 25 multiplexes and 113 screens so far and we have many more coming up so we are placed strong,” says Tandon. “At the national level, we have already signed up for nearly 850-plus new screens which are due to open in the next few years,” he adds.

Growing business
With each passing quarter, more screens are being added by the leading multiplex opera­tors. This is precisely because India remains an extremely underserved market when it comes to quality theatres. “A multiplex at a right location is virtu­ally an instant hit with those residing in its proximity considering the fact the movie-watching at a theatre is considered a family event,” says a senior analyst who tracks this space.



A look at the revenue, profit, screen count, etc., shows that most of the leading operators are clocking growth. PVR clocked a 8 per cent revenue growth for FY2017-18 with overall revenue growing from Rs 2,182 crore to Rs 2,365 crore. “Revenue growth was backed by double-digit growth in net box office (11 per cent), food & beverages (8 per cent) and advertising (18 per cent) revenues. Our oper­ating margins expanded from 17.2 per cent to 18.3 per cent delivering a growth of 15 per cent over FY 2016-17. The profit after tax increased by 29 per cent from Rs 96 crore to Rs 124 crore,” says Sood.  

For the entire 2017-18, Inox Leisure posted a net profit of Rs 114.63 crore, as against Rs 30.62 crore in the previous year. Its total income was at Rs 1,362.58 crore as compared to Rs 1,229.83 crore in 2016-17. “Over FY18, our average ticket price increased by 8.2 per cent, ad revenue increased by 44.4 per cent, and other operating revenues increased by 9.4 per cent,” Inox says in its annual report.

Looking at the growth in the sector, one question pops up. Why would someone sell their established multiplex business? “We went in for consolidation because as a com­pany we wanted to take on more and grow and being a larger chain, we had access to the best practices from around the globe,” says Inox’s Tandon. “I think, sellers found it difficult to keep up with the changes and to meet the demands, passing on the mantle to the larger multiplex chain made more sense. A larger chain has more access to better technology and other elements required for a world-class cinema viewing experience,” he adds.

According to Ajay, one decides to exit the business for a variety of reasons. “Mostly, the priority business for many are real estate (as was the case with the DT Cinemas acqui­sition). No acquisition process is easy,” says Ajay.

Other major players like Cinépolis India (a wholly owned subsidiary of Mexico-based cinema chain Cinépolis) and Carnival Cinemas, too, have been expand­ing their screen presence across cities and states. Cinépolis India currently operates 339 screens under the brand names of Cinépolis, Cinépolis VIP and Fun Cinemas. It also operates India’s biggest Megaplex — 15 screen multi­plex in Pune and has introduced innovative concepts to the exhibition industry in India. Carnival Cinemas has a sig­nificant presence in the country’s Tier 2 and Tier 3 cities. They have, in fact, gone abroad and opened a theatre in Singapore too.

Changing technology
Related to acquisition of multiplex chains is technological breakthroughs in the business of digital cinema driven by the ever-growing mul­tiplex chains. “Digital cinema refers to the use of digital technology to distribute or project motion pictures as opposed to the historical use of reels of motion picture film,” says Gautam Dutta, CEO of PVR.

A digital movie, therefore, can be distrib­uted to cinemas in multiple ways including over the Internet or via dedicated satellite links, or hard drives. Digital cinema is very cost effective in terms production, editing and transportation. Low-cost cameras and computer-based editing software have gradually enabled films to be produced at a minimal cost. Unlike celluloid film, there is no projection mechanism or manual handling to add scratches or other physically generated artefacts; quality of content remains constant throughout. Even Inox boasts of the latest technology at its screens. “Our theatres are fitted with the latest tech­nology, including laser projection format with 300 per cent enhanced picture qual­ity, best of surround sound with Dolby Atmos, Volfoni smart crystal diamond solutions with the brightest 3D screens making movies life-like like never before,” says Tandon.

PVR along with Samsung has just launched India’s first PVR Onyx, where the entire screen is LED so there is no traditional projection system involved. “LED screen is the new era of digital cinema. LED has replaced the light reflection screen. Cinema LED screen’s true black colours offer the audience a detail-rich and vivid cinema experi­ence. LED cinema is unaffected by ambient light, Onyx view upholds consistent and distortion-free picture qual­ity that keeps audiences engaged and furthers realism,” says Dutta.

The evolving tastes and preferences of Indian consum­ers has also led to different premium formats for viewing movies. “PVR has now various movie viewing premium in their portfolio for their patrons.  For example, Gold Class and Directors Cut, Imax (both in 2D and 3D), 4DX, PVR PXL, (our home grown large screen format — first by an Indian exhibition company), PlayHouse (Kid’s Auditorium), PVR Onyx (India’s first LED screen cinema),” says Sanjeev. “The premium format screens comprise 8-9 per cent of our total screen count and it is expected to reach 20 per cent of the total screens by 2020,” adds Sanjeev.

Currently, most of the top Hollywood producers release their movies in Imax and 4DX formats as well, The Avengers: Infinity War, Mission Impossible: Fallout, Deadpool, Gold, etc. Even mov­ies from Bollywood such as Bahubali 2 and the forthcoming Thugs of Hindostan will be released in the Imax format in particular to offer that added edge to the Indian consumer. “The occupancy per­centage under these formats have been encouraging and above average for all formats, as high as 95 per cent during mega blockbusters and around 85 per cent during block­buster movies,” adds Sood.

Industry challenges 

The introduction of GST is severely impacting the business of Indian multiplex owners as they are struggling with a high GST bracket. “We are working with the 28 per cent tax rate, which is the highest in the tax category. We are put in the same bracket as sin products. We have made several representations and hope that in future the rates will be lowered for the multiplex busi­ness,” says Ajay. Concurs Tandon of Inox. “Our industry is for the masses and not a luxury item so a 28 per cent GST is completely unfair. Today, cinema can be consumed through vari­ous platforms — theatrical, DTH services, digi­tal delivery of content, etc. Different platforms for delivery of the same content should not be taxed differently, but currently it is not the case,” argues Tandon.

Today, the DTH services are taxed at 18 per cent while the cinema exhibition attracts a levy of 28 per cent. Another issue dogging the mul­tiplex business is the local body entertainment tax (LBET). While the entertainment tax (ET) levied by state governments has been sub­sumed in GST, local bodies (municipal corpo­rations, municipalities, gram panchayats, etc.) have now been authorised to levy ET or the LBET, which is not subsumed in GST.

“All this goes against the principle of ‘one nation one tax’, hence cinema tickets will have to bear two taxes on the same transac­tion,” says Tandon. Actually in 18 states, the pre-GST effective rate was lower than 28 per cent. After the imple­mentation of GST, for exam­ple, Chennai and some other cities have started levying a 20 per cent LBET on foreign films, 15 per cent on Hindi films and 8 per cent on Tamil films. This LBET is in addition to the 28 per cent GST. As a result, effective tax rate in Chennai is 53.6 per cent, 47.2 per cent and 38.2 per cent for foreign, Hindi and Tamil films, respectively. Rajasthan, Gujarat, Maharashtra, Chandigarh and Madhya Pradesh have also authorised their local bodies to start levying LBET in addition to GST.

The rise of over-the-top or OTT platforms such as Netflix, Amazon Prime Video, Hotstar, Eros, Zee5, among others, has led to a situation where a newly released Bollywood film has made its OTT debut within a few weeks of its theatrical release. This has been impacting the business to some extent, concede the mul­tiplex owners. In order to resolve this issue, there has been intense engagement between multiplex operators and some of the leading film production houses. “We have formalised agreements with production houses that the window from theatre to other platform will be eight weeks. In these eight weeks, even promotion of the movie cannot be done on other platforms,” says Kamal Gianchandani, CEO — PVR Pictures and Chief of Strategy, PVR Cinemas.

PVR seems unstoppable for now. What’s more, it is con­stantly evaluating options of taking the brand PVR outside the country. Going forward, PVR is also looking at the Dubai and the UAE markets where a large population of the diaspora and Bollywood film lovers reside. It has already signed an MoU with Al-Futtaim group to explore opportunities in Dubai and the Kingdom of Saudi Arabia.

“We are conducting market research in the local market and understanding the dynamics of that market. For us, this is the big strategic opportunity given that the Kingdom of Saudi Arabia has just opened the market for new cine­mas and this can be a big opportunity for us to make super-normal returns if we enter early in that market,” says Sanjeev. Very soon, one may hear of a PVR opening in the Middle East.


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magazine 29 september 2018 pvr cinemas