INOX

The Inox stock has gained almost 60 per cent in one month. Can it hold up the trend?

The Indian entertainment industry has just about started evolving into an organised value chain, with a demarcation of the producer from the distributor, and further, the latter from the exhibitor.

It may so happen that few businesses attempt to capture more than one of these stages of the value chain, depending upon their business mix.

Despite this, whether it is Bhool Bhulaiya, Om Shanti Om or Saawariya, there is one common benefactor of each of such blockbusters who reaps the rewards long after the producers have moved on to their newer ventures and the distributors start hunting for the next big thing.

Ideally, it would be a multiplex that can screen all the three flicks together! However, the tide is strong enough to sweep gains to the feet of all the theatres, single screen or multiplexes, dabbling in these waters.

Inox Leisure, one of the four strong contenders in the organised movie exhibition business, has been aggressively opening new multiplexes. It also has a robust pipeline of signed properties that should help it in having about 170-180 screens by FY09.

Although competitors are scaling up fast, there still appears plenty of headroom for multiplex players to increase their spread in tier-II and tier-III cities where the middle class is burgeoning with ever fatter pockets full of rising disposable incomes.

On track Inox has tied up over 45 properties for its outlined expansion plan of increasing the number of screens to 170-180 by FY09, from 76 screens at 22 properties currently. Besides enhancing its footprint in tier-I cities, the company's focus has also been on a number of tier-II and tier-III cities in order to maintain an even spread across the vast geography.

After being signed up, these properties may take anywhere between 6-24 months to be ready for operations. Alok Tandon, chief operating officer at Inox Leisure outlines the benefit of this lead time: "Since we sign up our properties at the early stages of a mall, Inox does not only get lower rentals, but also is an anchor tenant."

Unlike its peers such as Cinemax or Adlabs, Inox has a low exposure to Mumbai with just two properties in the city, comprising of six screens. Mumbai earns the highest box-office revenues, which pumps up the fortunes for other players.

However, as movie-going culture spreads across the country, other territories too are likely to match up the box office contribution from the financial capital, thus putting Inox in a better position to compete at a pan-India level.

More in store In order to spread its foothold in quality locations, Inox has signed an exclusivity agreement with Pantaloon Retail. This agreement entitles Inox with a right of first refusal for setting up a multiplex at those properties where a Pantaloon outlet is being set up.

At its existing multiplexes, in order to attract higher realisations, Inox plans to convert a row or two of its seats to recliners. This would help the company catch up with its competition, of which a couple of players already offer recliner-seats at their multiplexes, raising the average ticket price (ATP).

Grim numbers? During the second quarter of FY08, Inox's financials included the results of the amalgamated entity, Calcutta Cine, which rendered the consolidated numbers incomparable with the previous quarters.

However, occupancy rates fell q-o-q – from 39 per cent in Q1 FY08 to 37 per cent in Q2 FY08 -thus suggesting that revenue growth came only from the rise in the number of seats.

But, the lower occupancy rates in the last quarter was due to an increase in total number of seats consequent to the launch of two new properties; occupancy rates at new multiplexes typically take some time to take-off.

Operating margins too, remained subdued due to an overall increase in entertainment tax, as the tax exemption tenure for a number of its properties ended.

"As new tax-exempt properties will be added, the increase in entertainment tax is likely to be nullified," claims Tandon. Going by the expansion plans, this appears likely to take effect.

Although the numbers of Calcutta Cine have not been published, analysts believe that it operated at lower margins compared to Inox. This too, could be one of the reasons behind lower operating profits of Inox during the last quarter. However, expanding its profitability hereon may be a tough cookie for the company as it may be vulnerable to higher lease rentals at new properties.

On the positive side, the contribution from food and beverages has been high for the company, which takes its spend per head (SPH) to about Rs 150, which is toward the higher end, by industry trends.

Again, its multiplexes are located at prime locations in the cities it is present, which attracts a higher income consumer footfall, thus providing it a potential cushion in the event of an economic downturn.

Valuation After trading flat at around Rs 116, the Inox stock has risen 63.7 per cent in a month, to Rs 194.15. The spurt is likely to have come due to rumours of the Reliance ADA group, which owns Adlabs, intending to make a bid for the company.

Reliance Capital has increased its stake in Inox from 7 per cent to 9 per cent this month, thus providing additional fuel to the fire.

Rumours aside, the company has charted out its growth plan for an aggressive expansion. It has also witnessed an appreciation in the value of its two owned properties owing to the real estate boom, which has increased the value of the company. However, the extent of the increase in the value of its real estate remains to be estimated.

At Rs 194.15, the stock trades at a price-earnings multiple of 34.7 times and 27.3 times estimated FY08 and FY09 earnings respectively. Over the past year, Inox has been underperforming the sector consistently. Merely going by the fundamentals, the counter still appears to have quite some steam left in it.

If the rumours materialise, they may provide important triggers for a further rise. Long term investors may however want to keep an eye on the counter and enter at dips, considering Inox's ambitious plans vis-à-vis the potential of the multiplex sector. Risk takers may want to take a plunge right away.