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Big picture ahead

AnalystVikas Kumar M 5549 1763([email protected])

Institutional SalesSandeepa Arora 5549 1776([email protected])

April 2006

Multiplexes

April 03 , 2006 2

Multiplexes: Big picture ahead

Table of contents

Particulars Page No.

Executive summary 3

Film exhibition sector - Multiplexes 4

PVR Ltd - BUY 16

Shringar Cinemas Ltd - BUY 25

Inox Leisure Ltd - HOLD 34

Adlabs Films Ltd - Not rated 42

April 03 , 2006 3


We are initiating coverage on the film exhibition segment of the Indianfilm industry with an OVERWEIGHT recommendation. The film exhibitionsegment is growing leaps and bounds due to the high demand for qualityfamily entertainment as watching movies is one of the foremostentertainment options in India. With the corporatization of film productionbetter movies targeted at a specific audience are increasing in number,thereby attracting greater number of movie buffs.

Indian retail boomOrganized retail business in India is expected to boom due to rising consumption,availability of quality real estate, and significant investment in malls by largeIndian corporate houses. Multiplexes are preferred anchor tenants in majority ofthe malls as they increase footfalls by around 30 – 40% and help in providing theone stop destination for family entertainment & shopping, which the malls arestriving for.

Changing demographic profileIndia is one of the youngest nations in the world, with two-third of the populationbelow 35 years of age. The 15-34 years age group represents the most frequentmoviegoers worldwide. Hence, an increase in this group would propel growth inthe film exhibition segment. Spurred by improving quality of theatres and excellentservices, the multiplex segment will witness a spurt in demand.

Rising disposable incomeThe rise of the Indian middle class with greater earning power and a higherdisposable income due to strong economic growth and increased globalizationwill drive the growth of the multiplex segment. The higher the income earned,the greater percentage of that income will be spent on discretionary items suchas movies & entertainment. The boom in IT & BPO industry has also added to theincreased availability of disposable income with young people, whose aspirationlevels have jumped, thus leading to greater appetite for lifestyle products andentertainment.

Entertainment tax exemptionsEntertainment tax (E.Tax) rates in India are one of the highest in the world andvary from 15% to 60% of gross box office collections. Various state governmentshave announced E.Tax exemptions to encourage investments in the exhibitionsegment. These exemptions will go a long way in making the initial investmentattractive and to maintain good profitablity.

Execution/compliance delays and over capacity - matter of concernMajority of the multiplexes are coming up in leased properties. Hence, the multiplexoperators are highly dependent on developers for timely delivery of civic shell.Mall development is currently highly unorganized activity in India and delays arequite common. Moreover, there are close to 21 clearances, which vary from stateto state which a multiplex operator has to obtain before starting the operations.

All the major multiplex operators are on a growth path. We feel PVR looks themost attractive in this segment due to its high ROCE and low P/BV ratios coupledwith its expansion plans using the low cost digital model, which has immensegrowth potential. Shringar has become aggressive with its expansion in the recentdays and we expect it to turn around by mid FY07. We feel shringar is a high-riskhigh return stock at current levels.

Table: Comparative valuations (FY08P)

Source: India Infoline Research

CMP EPS P/E P/Bv ROCE EV/EBITA OPM% RecommendationPVR 308 15.3 20.1 2.8 30.1 9.4 20.6 BUYInox 212 5.4 39.5 4.7 21.4 19.5 27.5 HOLDShringar 64 5.0 12.8 7.2 13.4 7.8 19.7 BUY

April 03 , 2006 4


Retail boomOrganized retail business in India is expected to boom due to rising consumption,availability of quality real estate, and significant investment in malls. Large Indiancorporate groups like Tata, Reliance, Raheja, ITC, Bombay Dyeing, Biyani Group,Murugappa and Piramal Groups, besides foreign investors and private equityplayers are firming up plans to identify investment opportunities in the Indianretail sector. The quantum of investments is likely to skyrocket as the inherentattractiveness of the segment lures more and more investors to earn large profits.

The country’s organized retail industry is expected to increase its share of thetotal retail market from 3% as of FY05 to 12% by FY10. Going forward organizedretail is expected to grow at the rate of 25 - 30% p.a and is estimated to becomeUS$24bn (Rs 100,000 cr) by 2010.

Chart: Retailing market size

Source:IMAGES

Mall development activity in small towns is also picking up at a rapid pace, therebycreating quality space for retailers to fulfill their aggressive expansion plans. Thecontribution of these Tier-II cities to total organized retail sales is expected togrow by 20% to 25% as these small towns represent a very large base ofconsumers. The number of malls in India is estimated to have increased fromapproximately 50 at the end of FY04 to around 320 by the end of FY06. Multiplexesare considered as one of the anchor tenants in a shopping mall as they increasethe footfalls by around 30%-40%. Thus the expected growth in organized retailwould result in a significant jump in the number of multiplex cinemas across thecountry.

Chart: Mall distribution across zones by 2007

Source: IMAGES

Drivers for growth

North zone39%

South zone18%

East zone10%

West zone33%

April 03 , 2006 5


Rising disposable incomeStrong economic growth and increased globalization has resulted in higherhousehold income. The rise of the Indian middle class with greater earning powerand a higher disposable income will drive the growth of the multiplex segment.The IT & BPO industry boom has resulted in a large population of young peoplewith high disposable income. Higher the income earned, greater percentage ofincome will be spend on discretionary items such as movies & entertainment.The average Indian household increased the spending on movies as a percentageof disposable income from 1% to 4.6%, between FY99 to FY03.

Chart: Rise of India’s earnings and consumer class

Source: CII-KPMG Report

Changing demographic profileNearly two-third of India’s population is under 35 years of age, making it one ofthe youngest nations in the world. The median age is about 25 years as comparedto 36 years in the United States, 43 years in Japan, 32 years in China. The urbanpopulation between the ages of 15-34 years is expected to increase from 107mnin FY01 to 138mn in FY11, a CAGR of 30% and the urban population between theages of 15-44 years is expected to increase from 146mn to 186mn during thesame period, a CAGR of 27%. The 15-34 years age group represents the mostfrequent moviegoers worldwide and hence an increase in this group would propelgrowth in the multiplex segment.

Chart: population & median age

Source: CIA, India Infoline research

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April 03 , 2006 6


Changing lifestyleThe traditional joint family set up in India is slowly giving way to a nuclear familysystem. This is more pronounced in urban India. With the rise of the servicesectors like IT & BPO young people with less family commitments are earningmore. Their aspirational levels have gone up dramatically. They don’t just spendon basic goods and services, but always something more, something extra. Theywant to indulge themselves by spending more on lifestyle products.

Entertainment tax exemptionsEntertainment tax rates in India are one of the highest in the world. Currently itvaries from 15% to 60% of gross box office collections (differing from state tostate) in comparison to the average rate of 10% in the developed countries.Several states like Maharahtra, Punjab, Kolkatta have announced entertainmenttax exemptions for multiplexes in the initial years to drive growth. The exemptionprovided differs from state to state and hinge on fulfilling various conditions.These again vary from state to state.

Industry sources feel that in few states like Karnataka, the conditions are suchthat it makes operating sense to pay an entertainment tax of 40% instead ofexercising the exemption benefits.

Table: Entertainment Tax exemptionsState Entertainment Entertainment tax exemption for multiplexes Tax rates Year 1 Year 2 Year 3 Year 4 Year 5Mumbai 45% 100% 100% 100% 75% 75%Rest of Maharashtra 45% 100% 100% 100% 75% 75%Madhya Pradesh 50% 100% 100% 100% 75% 75%Punjab 50% 100% 100% 100% 100% 100%Kolkatta 30% 100% 100% 100% 100% NILRajasthan 30% 100% 100% 90% 80% NILDelhi 30% NIL NIL NIL NIL NILKarnataka 40% NIL NIL NIL NIL NILTN 15% NIL NIL NIL NIL NILAndhra Pradesh 20% NIL NIL NIL NIL NILHaryana 30% NIL NIL NIL NIL NILBhopal/indire/Jabalpur 60% 100% 100% 100% 75% 50%Rest of Uttar Pradesh 60% 100% 100% 100% 100% 100%Source: Industry, India Infoline Research

April 03 , 2006 7


Indian Film Industry

The Indian film industry is the largest in the world in terms of number of filmsproduced and admissions. Watching movies is one of the most popularentertainment options in India. On an average, every year 1000 feature filmsare produced in India in different languages. In FY04, the total number ofadmissions in Indian cinemas was 3.1bn. The second largest number of admissionswas in the US, which had 1.5bn admissions in the same period. But in terms ofrevenue, the Indian film industry pales in comparison with its American counterpart.The revenue of the Indian film industry was estimated at $1.5bn (Rs68bn) inFY05, which is only a fraction of the estimated $37bn that the US film industryearned in 2005. Indian Film entertainment is expected to grow at a CAGR of 18%over the next 5 years and is the fastest growing film entertainment market in theworld.

The trend of corporatisation of the Indian film industry is considered to be one ofthe most important aspects for the growth of the industry. Industry sources alsoindicate that more than half of the releases in 2005 were by corporates ratherthan individuals. Corporates have also forayed into film distribution – not just forfilms being produced/exhibited by them, but also for other producers.

The Indian film industry currently realizes almost 80% of its revenue from domesticand overseas box office collections. In comparison, the US film industry earnsonly 35% from box office receipts. KPMG estimates that revenue leakage due topiracy is 14% in India. However, some industry people put the figure as high as20%.

Chart: Indian film industry revenue distribution

Source: CII-KPMG

Highly fragmented industryThe exhibition industry is highly fragmented, with no single entity having controlover a large number of theaters. Local entrepreneurs currently run large numberof theaters and don’t have deep pockets or the management expertise to starta chain of theaters.

In cinema ads2%

Music2%

Satellite/DTH/IP-TV9%

Domestic theatrical

57%Overseas theatrical

12%

Leakages/piracy14%

DVD/VCD/Overseas cable

4%

April 03 , 2006 8


Under-screenedIn India, the number of screens per million population is just 12 whereas theaverage in the western countries is approximately 40. A UNESCO study hasestimated that India needs 20,000 screens to cater to the cinema viewingpopulation. No new single/double screen cinemas are expected in the near future.Besides, majority of the traditional theatres in cities/towns are expected to beconverted into multiplexes. Also, the lands are being put to use for building mallsto capitalize on its real estate value.

Chart: Number of screens per Mn people

(Screens per mn population)

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Uneven regional distributionAccording to the Film Federation of India, there are 12,000 theaters in India.Many of these are not functional. There are around 80 multiplexes with 295screens. Moreover, the geographical distribution of theaters is quite uneven.Four southern states of Karnataka, Kerala, Tamil Nadu and Andhra Pradeshaccount for about 60% of the total theaters in the country, while housing just22% of the population.

Chart: Number of theaters in India

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Source: Industry, India Infoline research

April 03 , 2006 9


Increasing Ad spendAdvertisement expenditure in India was estimated to be approximately Rs118bnin FY04. India continues to have low advertisement spend to GDP ratio comparedto other developed economies. In FY04, the advertisement spend to GDP ratiostood at 0.34% which is much lower than China’s 0.55%. However, with the GDPexpected to grow at nearly 8% the ad spends are expected to grow at a muchhigher pace. The buoyant economy, changing demographics, increasing disposableincome and changing lifestyles are expected to drive growth in advertising spend.The overall Ad spend in multiplexes is minuscule but any incremental spend wouldmove towards multiplexes rather than standalone theaters.

Chart: Ad-send to GDP ratios

Source: CII-KPMG

Multiplex operating models

Lease modelThis has emerged as the most preferred model among the multiplex owners.Typically the lease period is between 10 to 15 years. There are three ways ofentering into a lease model.

• Fixed rental model (FR) - In this model the operator leases out the civic shelland invests in the fit-outs of the multiplex.

• Fixed rental plus variable as a percentage of sales (FRV) - In this model fixed rental is much lower than in the FR and this is compensated by sharing a partof revenues generated by the operator. This model is preferred in areas inwhich it is difficult to ascertain the revenue potential.

• Retrofit – This is nothing but leasing of existing theaters and converting theminto multiplexes.

Ownership modelIn this model the operator can purchase the land do the construction and the fit-out of the multiplex or purchase the civic shell from the developer and completethe fit-outs himself. This model is highly capital intensive leading to lower returnon investment and long gestation period.

Theater management modelIn this model a developer constructs the necessary infrastructure of the multiplexand outsources the operations to a multiplex operator for a fixed period of time.Developer enjoys the depreciation benefits. Multiplex operator charges a fixedfee or a percentage of the revenue/profits of the multiplex.

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April 03 , 2006 10


Digitalization is still in a nascent stage in India. There are two types of digitalcinemas, e-cinema and d-cinema. e-cinema cost is a third of d-cinema but thequality is even lower than the normal analog 35mm films. d-cinema is veryexpensive and its quality is equal to or better than the normal analog 35mmfilms. For digitalization to be effective the price of projectors have to come downdramatically or a cost sharing agreement for the projectors between producers,distributors and exhibitors have to be worked out. Unless and until the productionand distribution become organized the acceptance of digitalization will be difficult.

Modes of delivery: Currently there are three modes of delivery of content forthe digital projector. Content can be transmitted through optic cable, satellite orstored in a hard disk and transported.

Table: D-cinema Vs. E-cinema d-cinema e-cinemaQuality Equal to or better than 35mm Below analog qualityPrice Expensive ($100 - 150K) Cheap ($20 - 50K)Developed for Cinema market Video marketRelation to India 1 or 2 cinemas Various models are being tried

out. But no major success till dateDriver Quality Price

Digitalization

April 03 , 2006 11


Multiplex Vs. Traditional screens

Multiplex Single/double screensAverage Screens 3-6 1-2Average seats per screen 150-500 900-1500Average ticket price (Aprox.) Rs 50 - 80 Rs 17Shows per screen per day 4-5 3-4Real estate Predominantly leased Predominately own asset

property modelOwnership Mostly corporate Mostly local entrepreneursTax benefits Entertainment tax Nil

benefit in several statesMajor Advantages Shared facilities Best locations

Looping of cinemasMultiple locations

High F&B revenues Source: Industry, India Infoline research

Enhanced viewing experienceTraditional single/double screen cinemas are run by local entrepreneurs and overthe years the quality of majority of it has deteriorated. A good number of familieshave avoided cinemas due to the inferior quality of entertainment provided bythe traditional theatres. On the other hand, multiplex cinemas are characterizedby a good ambience, quality viewing with high-end sound systems, comfortableseating, good security, excellent service and quality food & beverages. As a result,watching movies in cinemas has once again become the most preferred sourceof family entertainment. People are willing to pay a premium to have an enhancedviewing experience.

Better occupancy & realizationTraditional cinemas have an average occupancy of 15-30% with low-ticket priceswhereas multiplex cinemas have an average occupancy of 40-45% and theirticket realization rates are much higher. Multiplex cinemas have several screenswith different seating capacity, providing them with the flexibility in screeningmovies according to their earning potential. They can also shift movies after theinitial weeks depending on the response to screens with lower seating capacityfor better utilization. Multiplexes generally have seating capacities varying from150 to 500 seats per screen in relation to 900 to 1500 seats per screen in thetraditional cinemas.

Better exploitation of moviesA movie can be released in multiple screens in the first week of its release andthen gradually moved to a single screen with high seating capacity and finally tothe smallest theatre within the multiplex. Majority of multiplexes have a facilitycalled looping, allowing them to show a movie in multiple screens with a singleprint. This leads to reduction in costs and gives multiplex owners a big advantageover traditional cinemas.

Greater number of showsA multiplex operator has the flexibility to decide on the screening schedule so asto maximize the number of shows, thus accommodating a higher number ofpatrons. But few states have restrictions on the number of shows a multiplexcan have or the time period between two shows. This can be a major hindranceto the new age exhibitors.

Characteristics and advantages

April 03 , 2006 12


Dynamic ticket pricingMaharashtra, Delhi and a lot of other states have allowed dynamic ticket pricing.Dynamic ticket pricing allows multiplex owners to charge ticket prices accordingto the demand. This helps the multiplexes generate higher occupancy rate byvarying the prices due to the perishable nature of seats. They can thus increaserevenue by charging more for a blockbuster film in the first few weeks. Priceelasticity for multiplexes varies not only between movies and during differentdays of the week but also varies depending on the timing of the shows.Multiplexes charge more for the weekend and evening shows during theweekdays.

Improved cost managementMultiplexes enjoy a set of shared facilities, such as box office, toilets, food &beverages facilities, manpower and support staff resulting in lower overheadsper screen. Corporates are entering into film exhibition using the multiplex model,thus bringing in better management skills, and professionalism, resulting inimproved control over costs.

Corporatization of exhibition businessWith corporatization comes professionalism. Multiplex cinemas have well trainedstaffs, leading to excellent service in relation to traditional cinemas that are knownfor its poor service. Dedicated marketing teams work out as what content willappeal to the customers on the basis of consumer survey and other metrics. Dueto the presence at multiple locations multiplexes can also enjoy the benefits ofeconomics of scale in relation to overhead costs and better bargaining powerwith producers, distributors and F&B suppliers.

Corporatization of multiplexes also helps producers as ticket collections go upand there are less revenue leakages. . This is possible due to the better utilizationof technology across locations and provision of overall collection details at atouch of a button. Even though multiplex cinemas are few in numbers at present,they constituted 28-34% of gross box office collections (GBOC) for the top 50Hindi films and 21-25% of GBOC for all Hindi films released in FY04.

Newer areas of incomeThe high standards of multiplexes and quality of service, have opened up moresources of income generation. Some of these include in-theatre promotions,alternative contents like cricket matches, F1 races etc., and corporate screenings.Areas that were never used by traditional cinemas for advertising are beingexploited now. Elevators, ticket counters, ticket jackets, seats, floors, walls,popcorn containers, washrooms, etc are being exploited for advertisements.

April 03 , 2006 13


Commands higher Ad ratesThe high standards of multiplexes in quality of service and presence in multiplelocations have enabled it to attract more advertisers with a national presenceand premium goods and service providers. Hence, they are able to commandbetter advertising rates. Multiplexes charge anywhere between Rs5000 toRs12000 for one-minute film per week. On the other hand, conventional theaterseven in A+ category cities charge anywhere between Rs600 to Rs7500, which ismuch lower.

Chart: Ad rates for 1-minute film per week in various city categories & multiplex

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Source: Industry, India Infoline research

Characterized by negative working capitalMultiplex business is characterized by a negative working capital as the customerspay upfront, there are hardly any debtors, inventory days are minimal and creditorsdays range from 30-60 days.

Very high margins in food and beveragesFood and beverages (F&B) sold in multiplexes enjoy very high margins. The marginsare as high as 60–70%. These contribute around 18–22% of total revenues formultiplexes. This revenue goes a long way in maintaining the profitability of themultiplex operators. The shows are timed in such a manner that none of thebreaks are at the same time. This ensures better service to the patrons andbetter utilization of the F&B outlets.

April 03 , 2006 14


PVR# Shringar Inox*Multiplexes 37 37 23Screens 162 164 96Seats 41096 44773 27029

Valuation

PVR, Inox, Shringar and Adlabs are the biggest listed players in the film exhibitionspace. We believe they are well placed to take advantage of the growth expectedin film exhibition due to the retail boom in India. They trade at a premium to theirglobal counterparts because of the high growth potential and better margins.The Indian film industry is expected to grow at a CAGR of 18% over the next 5years as against a CAGR of 6.6%, 8.5%, 5.5% and 6.7% for the United States,EMEA, Asia/Pacific and Latin America, respectively. Due to the high growth rateand entertainment tax exemptions multiplex operators in India enjoy PAT marginsbetween 6-12% as against the 3-5% margins enjoyed by their counterparts inthe developed countries.

PVR with its high ROCE and low P/BV looks very attractive and we initiate coveragewith a strong Buy recommendation. Shringar Cinemas is also expanding immenselybut is yet to turn around. Due to this reason it is trading at a discount to itspeers. We expect it to turn around in the second half of FY07 and initiate coverageunder high return high-risk category with a Buy recommendation. Inox Leisure isthe most profitable multiplex operator today. It appears that all the upside fromthe possible property additions due to its tie-up with Pantaloon have been factoredin at current levels. Hence, we initiate coverage with a Hold recommendation.

Table: Major Indian Multiplex Players (FY 08P)

Source: India Infoline research, Company

Table: Global exhibition industry peers Price Mcap P/E P/Bv ROE US $ US$mn FY06P FY07P FY06P FY07P FY06P FY07PCJ Entertainment 19.31 344 16.0 12.7 1.7 1.5 9.4 11.0Major Cineplex 0.45 316 18.8 16.3 3.8 3.3 20.4 20.6Kinepolis 35.84 248 18.3 16.4 2.0 1.8 11.4 11.8Regal entertainment 18.29 2720 22.2 19.3 25.8 7.3 52.6 34.9Source: Bloomberg, as of 29/03/2006

Table: Expected expansion by FY09 by various players

#Has singed up another 12 properties but details yet to be finalized.* Properties that would be added from Pantaloon tie-up has not been consideredSource: company

Table: Expected Multiplex additions:

Existing 2005 2006 2007 2008 2009

PVR# 10 3 10 9 5Shringar 3 2 10 10 12Inox* 6 3 6 3 5#Has singed up another 12 properties but details yet to be finalized.* Properties that would be added from Pantaloon tie-up has not been consideredSource: company

CMP EPS P/E P/Bv ROCE EV/EBITA OPM% RecommendationPVR 308 15.3 20.1 2.8 30.1 9.4 20.6 BUYInox 212 5.4 39.5 4.7 21.4 19.5 27.5 HOLDShringar 64 5.0 12.8 7.2 13.4 7.8 19.7 BUY

April 03 , 2006 15


Execution delayMajority of the multiplexes are on leased model and the agreements for the civicshell are signed when the developer finalizes the plans or starts construction ofthe mall. The multiplex operator does not have control over the time period inwhich the mall construction is executed and the civic shell is handed over to theoperator. Delays in mall development are a common phenomenon.

Retail business in India is highly unorganized currently and organized playersare slowly entering the business. With the entry of organized players the riskrelating to delay in execution will come down. Long gestation periods due todelays can hurt the growth of multiplex operators and lead to high capital costs.

Compliance delayThere are on an average 21 clearances a multiplex operator has to obtain beforehe can start operations. Plus, it varies from state to state. The large number ofgovernment compliances required could lead to delay in starting operations.

OvercapacityAll the major players are having ambitious expansion plans and are signing upproperties at tremendous speed. Catchment areas ranges from 2 – 3 Kms incities like Mumbai and Delhi to 4 – 5 kms in other cities. With multiple operatorseyeing for the same catchment areas, it could lead to fragmentation of the viewersand may lead to low occupancy and price wars.

Table: Expansion plans of major players by FY09

ScreensINOX* 96PVR# 162Shringar 164Adlabs 145E-City Entertainment 145* Properties that would be added from Pantaloon tie-up has not been considered#Has singed up another 12 properties but details yet to be finalized.

Major concerns

April 03 , 2006 16


PVR Limited

PVR Limited (PVR) is the largest multiplex operator in terms of number ofscreens. It opened the first multiplex in Delhi in 1997 and operates thelargest multiplex with 11 screens in Bangalore. PVR is planning to expandto 49 multiplexes with 241 screens by FY09 and is also looking at the lowcost digital cinema multiplex model to expand the cinemas under itsoperations. We initiate coverage with a 12-month price target of Rs398.

Ø The planed expansion will give it a pan India presence with presence in 28 cities.

Ø PVR plans to add multiplexes in Sec B and C category cities using low-costdigital model, which we feel is still an untapped market with strong growthpotential. Close to 38% of the urban population resides is in SEC B and Ccities

Ø Currently majority of the company’s properties do not enjoy entertainmenttax exemptions. However, going forward most of PVR’s planed multiplexesare in locations where tax exemptions are being offered. This would positivelyimpact its margins.

Ø PVR is on an aggressive expansion mode. Any alteration in the expansionplan would affect the earnings projections.

Ø Due to the company’s competitive advantages through a pan India presenceand backward integration into film distribution, revenues and profits areexpected to record a strong CAGR of 64% and 110% respectively over FY05-08.

Ø At the current market price (Rs308) it is trading at 20.1x its expected EPS ofRs15.3 in FY08.

Financial highlights

Period FY04 FY05 FY06P FY07P FY08P (’12) (’12) (’12) (’12) (’12)Sales (Rs mn) 587 843 1226 2309 3733Growth % 10.4 43.7 45.3 88.3 61.7Operating profit (Rs mn) 68 113 175 424 767OPM % 11.6 13.4 14.3 18.4 20.6APAT (Rs mn) 16 38 64 176 350Growth % (13) 137.8 68.9 176.0 98.4ROCE % 18.8 18.1 10.1 20.7 30.1EPS (Rs) 1.2 2.2 2.8 7.7 15.3PE (x) @ 308 257.7 139.2 110.3 39.9 20.1

Rating: BUYMarket Cap: Rs7bnCMP: RS308Target Price: 398Avg. Volumes (1 mth): 2397752 week H/L 337/251BSE Code: 532689NSE Code: PVRBloomberg Code: PVR@INReuters Code: PVRL.BO

Share Holding Pattern

(As on 16/02/2006) (%)Promoters 40.0FIIs 11.5MFs 28.3Other Corporate 5.7Public & Others 14.5

Share Price Chart

Initiating Coverage


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April 03 , 2006 17


Pan India presencePVR’s aggressive growth plans are likely to make it a plan-India player in thenear future; currently it has presence in Delhi, Bangalore and Hyderabad. Withthe completion of the expected expansion the company will have presence in 28cities with 241 screens. The company plans to expand by targeting Sec B & Ccategory cities using the low cost digital cinema model. This large scale operationscould enhance its relative bargaining power with distributors and producers tohave better access to new movies and a more favorable film hire rates andterms.

Growth via low cost platform is immensePVR plans to add multiplexes in Sec B and C cities, which we feel are still anuntapped market. We believe the potential for low priced but good quality cinemasis high in India as close to 38% of the urban population is in the Sec B and Ccities.

The company plans to expand into these cities using low-cost digital platform. Itplans to take existing cinemas on lease, renovate and convert it into multiplexes;currently it has two such projects – one at Latur and the other one in Aurangabadunder implementation. The catchment area for high priced multiplexes is restrictedto up-market urban households. Hence, for growth the low cost digital platformhas immense potential. We expect low cost digital cinemas to emerge as a highvolume, low margin business with strong growth potential.

Table: Break-up of urban India households across various SEC categories

Investment Rationale

All India- UrbanSEC (Mn) (%)A 5.8 10%B 10 17%C 12.2 21%D 13.3 23%E 16.5 29%Total 57.8 100%Source: IRS 2005

Backward integration to film distributionPVR plans to expand its film distribution business (through wholly owned subsidiaryPVR Pictures). Currently it has distribution offices in Delhi and Bangalore where ithas its cinemas, and plans to expand into other regions where it is also openingnew screens. PVR is the largest independent Hollywood film distributor in India.It acquires films under minimum guarantee and commission models. PVR’s filmdistribution business can complement its exhibition business and help strengthenits industry positioning. However, effective risk management will be critical indistribution.

Entertainment tax exemptionsThe company pays high entertainment tax currently vis-à-vis its peers as most ofits properties are in areas where entertainment tax exemptions are not available.With the planed expansion, the company will have many properties eligible forentertainment tax exemptions, thus reducing its total absolute entertainmenttax outgo. This would help in improving the company’s margins in future.

April 03 , 2006 18


The company is trading at 20.1x its expected EPS of Rs15.3 in FY08. PVR hasforayed into low priced but good quality cinemas in the Sec B & C cities using low-cost digital platform, we believe this has immense potential for growth as thedemand for affordable form of family entertainment in these cities are very high.PVR is on an aggressive growth phase and is expected to add more cinemasunder its low-cost digital platform. With ROCE of 30.1% and P/ Bv of 2.8x thecompany looks very attractive. We initiate coverage with a 15 to 18 month pricetarget of Rs 398 for our targeted P/E and P/Bv of 26x and 3.6x respectively forFY08.

From FY09 margins are expected to slightly come down, as majority of theproperties to be added from FY09 will be of the low cost digital model, which is alow margin high quantity business.

Table: Peer comparison (FY 08P)

Valuation

PVR Shringar InoxPrice (Rs) 308 64 212Net sales 3733 1967 2494Operating Profit 767 387 687OPM (%) 20.6 19.7 27.5PAT 350 158 322NPM % 9.4 8.0 12.9EPS (Rs) 15.3 5.0 5.4Market cap. 7046 2020 12720Market cap/sales 1.9 1.0 60.0ROCE (%) 30.1 13.4 21.4P/E (x) 20.1 12.8 39.5P/bv (x) 2.8 7.2 4.7Source: India Infoline research

Investment concerns

Competition heating upCompetition is very high in the multiplex business. All players have charted outvery ambitious expansion plans and are spreading their wings aggressively. Thiscould lead to a supply glut in future, resulting in lower occupancy rates and fierceprice wars. Advertising revenues rates could also take a hit as number ofmultiplexes increase.

April 03 , 2006 19


PVR is the largest multiplex operator by number of screens. It was incorporatedin 1995 as Priya Village Roadshows in a joint venture with Village Roadshows ofAustralia, which is one of the largest non-US cinema exhibition companies in theworld. The Australian firm exited the JV with PVR as a part of its businessconsolidation in 2002. PVR established the first multiplex cinema in India (PVRAnupam in Sahet, Delhi) in 1997 and operates the 11-screen multiplex in Bangalore,which is the largest multiplex in India. Its current operations are primarily basedin and around Delhi, Bangalore and Hyderabad, where it has recentlycommissioned a multiplex.

SubsidiariesPVR Pictures (P) Ltd: It is a wholly owned subsidiary of PVR Ltd and is into filmdistribution. As a policy the company distributes Indian films only in areas whereit has its own cinemas. Moreover, PVR Pictures is the largest independentHollywood film distributor in India.

Key management personals

Company background

Name Designation BackgroundMr.Ajjay Bijli Chairman cum A graduate from Hindu college, New

Managing Director delhi and has completed the OwnersPresident Management Program atHarvard Business school. He has morethan 15 years of experience in the filmexhibition industry. He received ‘TheTheatre World Newsmaker of the Year Award in 2003 and `Entrepreneur of theYear- Entertainment’ by the IndianRetail forum in 2005

Mr.sanjeev Kumar Executive Director A MBA from Imperial Collage, UK andhas over 10 years experience in the filmexhibition industry. He has also receivedtraining at Village entertainmentCenters, Australia in Operations andDevelopment.

Mr. Sanjay malhotra Chief Financial Officer A Chartered Accountant by professionwith 17 years of professionalexperience. He was working withDimensions Consulting (P) Ltd beforejoining PVR.

April 03 , 2006 20


Projects under implementation/plan phase

All these bellow mentioned projects are expected to be implemented in the nextthree years (by FY09).

Tax benefitProjects under implementation/plan phase Screen Seats Availability

1 Juhu, Mumbai 5 1260 Y2 Muland, Mumbai 6 1750 Y3 Indore 5 1140 Y4 Prashant Vihar Delhi 3 800 N5 Lucknow 4 920 Y6 Gurgaon, Haryana 2 450 N7 Latur 3 1050 Y8 Aurangabad 3 1100 Y9 Mumbai 8 2200 Y10 Delhi 6 1269 N11 Mumbai 7 2050 Y12 Mumbai 4 1250 Y13 Chennai 7 1600 N14 Ludhiana 4 1000 Y15 Delhi 6 1500 N16 Ludhiana 6 1000 Y17 Chandigarh 4 1013 N18 Moradabad 4 873 Y19 Panipat 3 832 N20 Jalandhar 4 1300 Y21 Bhatinda 4 1025 Y22 Lucknow 4 1037 Y23 Lucknow 3 740 Y24 Amritsar 5 1100 Y

Total - projects under implementation/planning 110 28259

Total - existing projects (including under Franchise model) 53 12837

Total - all 163 41096 Note: PVR has signed up another 12 properties but number of screens, seats and expected year ofoperation are yet to be finalized by the company. We expect majority of these to come into operationsfrom FY09 onwards

April 03 , 2006 21


PVR’s revenues are expected to grow to Rs 3733mn by FY08, a CAGR of 64%.Profits of the company are expected to grow to Rs350mn by FY08, a CAGR of110%. Operating profits are expected to rise to Rs767mn by FY08. OPM is expectedto increase due to entertainment tax exemptions enjoyed my many of theupcoming properties and benefits arising out of economies of scale. We are ofthe opinion that the company would be able to maintain its OPM at 18- 20%levels.

The company’s ROCE is expected to go up to 30% by FY08 from 18% in FY05 dueto an effective utilization of capital raised by the company in the recent IPO. FY06has a dip in ROCE and RONW due to the dilution of equity through the recentlycompleted IPO. We have been conservative in your projections; hence, the upsidein revenues is higher than its downside.

Financial analysis

Chart: Revenue Trend Chart: Net profit trend

Source: India Infoline research Source: India Infoline research

Chart: Operating profit Vs. OPM trend

Source: India Infoline research

587843

1226

2309

3733

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1000150020002500300035004000

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16 3864

176

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Chart: EPS

1.2 2.2 2.8

7.7

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Source: India Infoline research

EPS of the company is expected to grow at a CAGR of 90% between FY05 – 08 to15.3 in FY08. This is mainly due to the large number of properties, which areexpected to come into operations and the availability of entertainment tax benefitsto a majority of the upcoming properties. We expect this trend in growth tocontinue for the next 3 to 4 years as the company is in its growth path.

April 03 , 2006 22


Financials

Income statement

Balance Sheet

Period FY04 FY05 FY06P FY07P FY08P(Rs in mn) (12) (12) (12) (12) (12)Revenue 587 843 1226 2309 3733Operating expenses (519) (730) (1051) (1885) (2966)Operating profit 68 113 175 424 767Other Income 16 21 27 27 27EBIDTA 84 134 202 451 794Financial charges (19) (26) (30) (29) (35)Depreciation/Amortization (38) (55) (70) (151) (228)PBT 27 53 102 271 532Tax Provisions (11) (15) (34) (91) (178)PAT 16 38 68 180 354Preference dividend (4) (4) (4)Net profit as restated 16 38 64 176 350

(Rs in mn) FY04 FY05 FY06P FY07P FY08P (12) (12) (12) (12) (12)Source of FundsEquity Share capital 133 171 229 229 229Preference Share capital 0 0 200 200 200Reserves & surplus 177 362 1737 1913 2263Net Worth 311 533 2165 2342 2692Loan funds 302 468 450 470 550Deferred tax liability 34 42 68 98 158Capital Employed 647 1043 2683 2910 3400

Application of fundsGross fixed assets 481 831 950 2150 3250Less: Depreciation (112) (160) (230) (380) (608)Add: Capital WIP 117 175 913 540 350Net fixed assets 486 846 1634 2310 2993Intangible assets 3 3 14 16 19Investments 5 12 675 213 36Current assets 233 333 478 638 828Current liabilities (90) (156) (245) (370) (554)Net working capital 143 176 233 268 274Mics. Expenditures 11 5 127 103 78Total 647 1043 2683 2910 3400

April 03 , 2006 23


Key Ratios

FY04 FY05 FY06P FY07P FY08P (12) (12) (12) (12) (12)Per shareEPS 1.2 2.2 2.8 7.7 15.3BVPS 23.3 31.2 85.9 93.6 108.9

Valuation ratioP/E 257.7 139.2 110.3 39.9 20.1P/BV 13.2 9.9 3.6 3.3 2.8EV/EBIDTA 52.2 42.1 36.3 16.3 9.4EV/Sales 7.5 6.7 6.0 3.2 2.0

Profitability ratioOPM% 11.6 13.4 14.3 18.4 20.6PAT% 2.7 4.5 5.2 7.6 9.4ROCE 18.8 18.1 10.1 20.7 30.1RONW 5.3 7.2 3.3 8.1 13.5ROA 7.2 7.6 5.2 10.7 17.1

Turnover ratioNet sales to fixed assets 120.8 99.7 75.0 99.9 124.7Net sales to total assets 92.2 81.3 48.0 82.2 112.4Net sales to working capital 409.6 477.9 525.6 862.6 1364.2

Growth%Sales 10.4 43.7 45.3 88.3 61.7EBIDTA 17 60 51 123 76PAT (13) 138 69 176 98

Liquidity ratioDebtors days 16 11 13 13 13Creditors days 37 52 49 40 38Inventory days 2 3 2 2 2Current ratio 2.6 2.1 2.0 1.7 1.5

Component ratioEntertainment tax 17.9 18.6 17.4 14.2 11.0Film distributors share 22.3 21.0 21.6 22.0 22.7Cost of food and beverages 5.5 5.4 5.1 5.4 5.6Personal cost 10.0 8.8 9.6 9.8 9.9Operating and admin expenses 32.6 32.8 31.7 30.4 30.3

Shringar Cinemas Ltd

March 03, 2006

Rating: OutperformerMarket Cap: Rs2bnCMP: Rs64Target Price: Rs100Avg. Volumes (1 mth): 12302552 week H/L Rs103/43BSE Code: 532631NSE Code: SHRINGARBloomberg Code: SCIN@INReuters Code: SHRC.BO

Share holding pattern

Share price chart

(As on 31-Dec-2005) (%)

Promoters 47.76

FIIs & NRI 22.35

MF 1.47

Other corporate 9.01

Public & Others 19.42

Period FY05 FY06P FY07P FY08P(12) (12) (12) (12)

Sales (Rs mn) 397 568 975 1967Growth (%) 42.9 71.6 101.8Operating profit (Rs mn) 34 30 154 387OPM (%) 8.5 5.3 15.8 19.7APAT (Rs mn) (51) (33) 55 158Growth (%) 36.1 266.9 188.5ROCE (%) 1.5 0.6 7.2 13.4RONW (%) (20.8) (4.8) 7.5 17.7EPS* (Rs) 1.7 5.0PE (x) @ 64 36.8 12.8

Shringar Cinemas (Shringar) is an integrated film exhibition and distributioncompany operating five multiplexes in Mumbai, Nasik and Kolkata underthe brand name ‘Fame’. The company had recently decided to enter intofood courts beginning with the areas in which it has a multiplex and slowlymoving to other areas. The company has aggressive plans to put up 30multiplexes across 24 cities over the next three years. We initiate coveragewith an OUTPERFORMER with high-risk rating.

Ø The company has aggressive growth plans. Shringar plans to operate 164screens with 44,773 seats within the next three years

Ø The promoters have four decades of experience; this would help Shringar toselect and enter untapped markets and help in better selection of movies

Ø It is diversifing into the food court business

Ø Further dilution possible, as Shringar needs more than Rs2.6bn for its planedexpansion and new businesses

Ø Execution delay is a big concern

Ø As Shringar is on an aggressive expansion mode, any change in the samecan crimp the company’s financials

Ø We expect revenues to increase at a CAGR of 70% and profits to jumpthree-folds by FY08P. These estimates are excluding the contribution fromthe proposed food court business.

Ø At the current price (Rs64) it is trading at 12.8x its expected EPS of Rs5of FY08.

Financial highlights



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April 03 , 2006 25



Extensive growth plansThe growth driver of the business is multiplexes, which is part of the exhibitiondivision. The company intends to concentrate on this segment going forwardand has charted out extensive expansion plans. Currently, Shringar operatesfive multiplexes of which, one ‘Fame Adlabs” is a JV with Adlabs.

Chart: Existing multiplexesMultiplex Location Screens Seats Start dateFame Adlabs* Versova 5 1607 Apr’02Fame Malad InOrbit Mall, Malad 6 1580 Sep’04Fame Nasik Nasik 3 1400 Jan’05Fame Kandivali Raghuleela Mall, Kandivili 4 1275 June’05Multiplex Fame Kolkata 4 900 Dec’05

* 50:50 JV with AdlabsSource: company

Going forward, Shringar is looking to invest around Rs 2.6bn in building 30multiplexes with 132 screens across 24 cities in the next three years. Majority ofthe multiplexes being setup by the company are a part of malls. Shringar prefersto take properties on long-term lease, typically 10 to 15 years instead of owningthem. This helps the company to expand at a faster rate with less capitalrequirement. Also, the company intends to add two multiplexes each inAurangabad and Surat under the theater management/programming model with10 screens in H1 FY07.

Moreover, Shringar plans to add majority of the multiplexes in Tier II and Tier IIIcities, which we feel are still an untapped market. We believe the potential forlow priced but good quality cinemas is high in India as close to 38% of the urbanpopulation is in the SEC B and C city category.

Film distribution experienceThe promoters have strong distribution business of over 25 years and have verygood relationship with producers and other distributors. This would help Shringarin selecting best of the locations for its film exhibition business and target theright audience.

The company plans to operate on a de-risked commissioned base model. Thecompany has a tie-up with Paramount Pictures for distribution of films in CPCIterritories. The company plans to maintain the exposure to film distributionbusiness at current levels.

Cost reduction initiativesThe company has been incurring losses in the past due to high pre launch andpromotional campaigns, administrative and management expenses. We believethat as the new projects are implemented, these costs would be spread outand improve the company’s profitability. The company has also decided to usethe interior designs it already has for majority of the upcoming multiplexes thusreducing on the expensive interior designers consultation charges.

Entering into food court segmentShringar plans to enter into the food court segment in majority of its multiplexes.The company has decided to follow a fixed rental and variable revenue sharingmodel for the food court business and has signed up close to 8 properties atpresent. A food court is expected to start operations in the upcoming Suratmultiplex within the next 2 to 3 months and others are spread over the nextthree years. Contribution from this business has not been considered in ourprojections and valuations, as this business is still in the initial stages.

April 03 , 2006 26


More dilution and debt possibleThe company has approved in a recent extra ordinary meeting an increase inauthorized share capital from Rs 350mn to Rs 520mn, also decided to increasethe borrowing power of the company to Rs3000mn over and above the paid upcapital and free reserves of the company.

Delay in implementationDelay is a big concern for Shringar. Of the projects it had committed during theinitial public offering, only the Kolkata project is complete while others are yet tobe completed. The lack of progress is due to the delay in handover of thecompleted civic shell by the developer and delays in getting the necessaryclearances from government. Though we had taken this into consideration anyextreme delays would affect our assumptions of financial projections.

Banking on expansion to turn around‘Fame Adlabs’ is the sole contributor to profits, which is a 50:50 JV with Adlabs,and other multiplexes are yet to start contributing to bottomline. The company isexpected to turn around in FY07 due to economies of scale from the plannedaddition of multiplexes. The company is banking on aggressive expansion anddue to inadequate internal sources, will bank extensively on external sources forfunding. This dependence will weigh heavily on its margins.

Competition heating upCompetition is very high in the multiplex business. All players have charted outvery ambitious expansion plans and are expanding by leaps and bounds. Thiscould lead to a supply glut in the future, resulting in lower occupancy rates andfierce price wars between different players. Advertising revenues rates will alsotake a hit as number of multiplexes increase.

Valuation

Shringar is trading at 12.8x its expected EPS of Rs5 in FY08. The company isexpected to turn around in FY07 due to economics of scale and the turn aroundof its Mumbai properties. Food court business is expected to meaningfullycontribute to the company’s topline from FY08 onwards. With the expansion plansthe company has, it will have to go in for some form of external sources of funding.We initiate coverage with a BUY rating for long-term investors with high-riskappetite, with a 15 to 18 month price target of Rs 100.

Table: Peer comparison

Investment concerns


April 03 , 2006 27


Shringar Cinemas has over three decade long experience in the Film Distributionbusiness. Their early focus stayed at re-issuing films and releasing them inuntapped markets by way of a focused marketing strategy. Sensing an opportunityin film exhibition business due to the boom in high quality retail space and theexistent poorly maintained single screens, Shringar entered the Film Exhibitionbusiness by first adopting the theater management/ programming model.

Under this model Shringar offered its content selection and programming skills tothe theater owner for a fee and/or a share of profit. This model allowed themanagement to get a feel of the exhibition business, without having to investheavily into capital costs. The company has worked with over 10 cinema hallsover the last six years.

When Government of Maharashtra, in 2001 announced tax benefits for multiplexoperators to encourage investment in the sector, the company raised fresh equitycapital from GW Capital and formed a joint venture in the name of SwanstonMultiples Cinemas P Ltd with the Vasanji Mamania Group (Subsequently, VM grouptransferred its holding to Adlabs Films Ltd). Swanston operates a 5-screen, 1607-seat ‘Fame Adlabs’ multiplex at Versova, Mumbai.

Subsidiaries

Shringar Films Pvt Ltd. (SFPL): It is a 100% subsidiary of Shringar Cinemas and isinto film distribution.

Oxford Multiplex Cinemas Pvt Ltd. (OMCL): It is a 100% subsidiary of ShringarCinemas and will be entering into food court business.

Key management personals

Mr. Shyam ShroffHe has more than four decades of experience in the film distribution businessand has a sharp focus on content acquisition. After his Commerce graduationdegree from Mumbai University, he started his career in film financing by helpinghis father finance films like Dilli Ka Thug, Anmol Moti, Sazaa, Dharma, Night in London,Do Raaste, Aradhana, Anhonee, Apne Rang Hazaar, Heeralaal Pannalaal and manymore. Mr. Shroff received the Best Distributor award by Screen Publication in theyear 2003.

Mr. Baikrishna ShroffHe also has more than four decades of experience and a keen focus on contentmarketing. He started his career in film distribution after completing his graduationin arts from Mumbai University. He has under his belt the credit of marketinghighly successful movies like Lagaan, Ardh Satya, Hyderabad Blues, Munnabhai MBBSand many others. Mr. Shroff has been a member of the Indian Motion PicturesDistributors Association (IMPEDA) for the last 28 years. Mr. Shroff received theBest Distributor award by Screen Publication in the year 2003.

Mr. Shravan ShroffAfter his graduation from Mumbai University and a Masters in BusinessAdministration from Melbourne Business School he joined the group’s business in1997 and pioneering the concept of outsourced screen programming in the sameyear. He is an active member of various industry associations such as theEntertainment Committee of FICCI; the Mumbai chapter of the Youth EntrepreneurOrganization (YEO) a US based non-profit organization and the EntertainmentCommittee of the Uttar Pradesh Film Council. He is also a member of the IDBI filmfinancing committee. Mr. Shravan has been awarded the McDowell Icon of Successin the year 2004 and was even been nominated for The Economic TimesEntrepreneur of the Year award, 2004.

Company background

April 03 , 2006 28


Tax benefitNo. Projects under implementation/plan phase Screen Seats Availability1 Pune 3 1010 Y2 Surat* 6 1900 Y3 Allahabad* 4 1120 Y4 Kolkata 6 1394 Y5 Chandigarh 3 600 Y6 Jalandher 5 940 Y7 Hyderabad 3 812 N8 Bangalore 4 1080 N9 Bangalore 5 1200 N10 Thane 5 1361 Y11 Thane 4 1075 Y12 Ghatkopar 4 1250 Y13 Aurangabad 3 1040 Y14 Navi Mumbai 4 1505 Y15 Kolkata 4 1200 Y16 Ludhiana 4 1000 Y17 Patiala 4 1100 Y18 Ambala 3 800 Y19 Delhi 3 950 N20 Jalandhar 5 1041 T21 Bangalore 4 1100 N22 Chennai 6 1400 N23 Powai 5 1250 Y24 Kalyan 3 1000 Y25 Pune 3 1000 Y26 Kolkata 5 1200 Y27 Amristsar 4 1000 Y28 Ludhiana 12 2000 Y29 Haryana 4 1233 N30 Greater Noida 6 1800 Y31 Pune 5 1400 Y32 Pune 3 1250 Y

Total - projects under implementation/planning 142 38011

Total - existing projects (including JV) 22 6762

Total - all 164 44773



* Under management/programming model

April 03 , 2006 29


Revenue modelShringar plans to concentrate on the film exhibition business through multiplexmodel and slowly phase out the programming part of its business. Distributionbusiness is expected to be capped at the existing levels.

Chart: Consolidated revenue model FY05

Financial analysis

Source: Company, India Infoline Research

Box-office collection is the main source of revenues, contributing 51% of totalrevenues in FY05 and is expected to contribute close to 72% in FY08. Whentheater exhibition as a whole is taken it contributes 72% in FY05 and is expectedto contribute close to 94% by FY08 due to the extensive growth plan of thecompany.

The following pie chart depicts the contribution of each revenue stream to theexhibition business segment. For better understanding purpose, FY05 and FY08Phas been taken at standalone basis. As the JV property ‘Fame Adlabs’ has ceasedto be a subsidiary of Shringar from 1st of September 2006.


Chart: Segmental contribution in exhibition businessin FY05

Chart: Segmental contribution in exhibition businessin FY08P


Theatrical exhibition

68.2%

Programming revenue

3.6%

Food & beverages

19.1%

Pouring rights0.4%

Advertisement8.8%


75.8%

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Advertisement8.3%

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0.5%Programming

revenue0.4%

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3%

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14%

Pouring rights0%

Advertisement7%

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22%

TV/Satellite rights3%


51%

April 03 , 2006 30


We believe that the existing multiplexes and the new multiplexes planned in thenext three years will add significantly to the company’s topline going forward.This is also expected to bring in economies of scale and reduce administrativeand operating overheads, as they will be spread over a large number ofproperties. We expect the company to register a CAGR of 70% over FY05-FY08P.A point to be noted here is multiplex ‘Fame Adlabs’ will not be contributing to itstopline from 1st September, 2006 as Shringar had transferred .01% shares of its50.01% holding to Adlabs thus it ceases to be a subsidiary of Shringar.

Chart: Revenue trend


Planned increase in multiplexes coupled with entertainment tax exemption invarious states will help to significantly boost operating profits. We expect a dipin OPM due to ‘Fame Adlabs’ ceasing to be a subsidiary as stated above in FY06P.We expect the Company to report a profit of Rs158mn FY08P vs. a loss of Rs51mn in FY05

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Source: Company, India Infoline Research Source: Company, India Infoline Research

April 03 , 2006 31


Financials

Consolidated Income Statement

Consolidated Balance Sheet

Period FY05 FY06P FY07P FY08P(Rs in mn) (’12) (’12) (’12) (’12)Revenue 397 568 975 1967Operating expenses (364) (538) (821) (1580)Operating profit 34 30 154 387Other Income 12 17 22 22EBIDTA 46 47 176 409Financial charges (23) (32) (50) (85)Depreciation/Amortization (36) (41) (69) (115)PBT (14) (26) 57 209Tax Provisions (21) (8) (17) (67)PAT (35) (34) 40 142Share in profits/(loss) of associates/JV 7 15 16Share of (profit)/loss transferred to minority (17) (6)Net profit as restated (51) (33) 55 158

(Rs in mn) FY05 FY06P FY07P FY08P (’12) (’12) (’12) (’12)Source of FundsShare capital 234 316 316 316Reserves & surplus 13 364 418 577Net Worth 247 679 734 892Minority interest 24 0 0 0Loan funds 405 320 724 1255Deferred tax liability 6 10 35 50Capital Employed 682 1009 1493 2198

Application of fundsGoodwill 47 47 47 47Gross fixed assets 572 642 1283 2139Less: Depreciation (283) (294) (363) (478)Add: Capital WIP 96 130 145 80Net fixed assets 384 478 1065 1741Investments 25 140 49 7Current assets 349 470 587 788Current liabilities (170) (205) (279) (385)Net working capital 179 265 308 403Profit & loss 47 80 25Total 682 1009 1493 2198

April 03 , 2006 32


Key Ratios

FY05 FY06P FY07P FY08P (12) (12) (12) (12)Per shareEPS - - 1.7 5.0BVPS 10.6 21.5 23.3 28.3

Valuation ratiosP/E - - 36.8 12.8P/BV 25.9 9.4 8.7 7.2EV/EBIDTA 41.2 48.6 15.2 7.8EV/Sales 4.7 4.0 2.7 1.6

Profitability ratiosOPM% 8.5 5.3 15.8 19.7PAT% - - 5.6 8.0ROCE 1.5 0.6 7.2 13.4RONW - - 7.5 17.7ROA - - 3.9 7.4

Turnover ratiosNet sales to fixed assets 1.0 1.2 0.9 1.1Net sales to total assets 0.7 0.6 0.7 0.9Net sales to working capital 2.2 2.1 3.2 4.9

Liquidity ratiosDebtors days 28 28 25 22Creditors days 50 42 33 24Inventory days 0.5 0.6 0.9 0.9Current ratio 2.1 2.3 2.1 2.0

Component ratiosE.Tax 4.7 4.0 4.9 6.1Distribution cost 18.9 19.2 9.4 4.3Programming cost 2.3 1.5 0.8 0.3Exhibition cost 19.1 22.8 27.0 29.5Personal cost 10.7 12.0 11.3 12.2Others 35.8 35.2 30.8 28.0

April 03 , 2006 33


Inox Leisure

Inox Leisure Ltd (Inox) is the only true pan India multiplex operatorcurrently having operations in 7 cities and after the planned expansion willoperate in 16 cities. The stock at current market price is fairly valued andwe initiate coverage with a HOLD recommendation.

Ø Inox multiplexes are located in premium locations across the country therebygiving it pricing power. It has one of the best average ticket prices per seat inthe country.

Ø The tie-up with Pantaloon Group gives it preferential access to more properties.These are not included in the company’s expansion plans in our estimates asnothing concrete has materialized yet.

Ø Inox is the most profitable multiplex operator in India. Though we see adecline in margins going forward due to lease rentals, we are of the opinion,they will be able to maintain bottomline margins between 11-12%.

Ø Their ROCE is set to increase as all the properties coming on stream in futureare on lease rentals, thus reducing its capital outflow

Ø Even though the company is prone to delay in implementation of newprojects, it has a track record of setting up multiplexes in record time asagainst the industry average.

Ø Inox has unveiled an aggressive expansion strategy. So, any changes tothat plan will impact earnings.

Ø Due to the company’s competitive advantages of pan India presence andbetter pricing power, the revenues and profits are expected to record a strongCAGR of 59.5% and 64.5% respectively over FY05-08

Ø At the current market price (Rs212) it is trading at 39.5x its expected EPS ofRs5.4 of FY08

Financial highlightsPeriod FY04 FY05 FY06P FY07P FY08P (12) (12) (12) (12) (12)Sales (Rs mn) 300 615 1016 1770 2494Growth % 86.8 105.1 65.2 74.2 41.0Operating profit (Rs mn) 98 206 351 498 687OPM % 32.8 33.6 34.6 28.1 27.5APAT (Rs mn) 35 72 149 217 322Growth % 6752.9 106.7 106.9 45.3 48.1ROCE % 9.4 16.2 12.7 18.0 21.4EPS (Rs) 0.8 1.6 2.5 3.6 5.4PE (x) @ 212 85.1 58.5 39.5Source: India Infoline Research

Pre Issue Share Holding Pattern

Rating: HOLDMarket Cap: Rs12bnCMP: RS212Target Price: RS218Avg. Volumes (1 week): 178272152 week H/L 224/164BSE Code: 532706NSE Code: INOXLEISUR

(As on 16/02/2006) (%)Promoters 66.0FIIs 7.8MFs 5.9Other Corporate 3.5Public & Others 16.8

Share Price Chart

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April 03 , 2006 34


Pan India presenceInox multiplexes are located all over India at premium locations. This gives thecompany better pricing power compared to its peers. This is evident by theconstant increase in the average ticket price (ATP) over the years. ATP has goneup from Rs98 in FY03 to Rs118 in H1 FY06. They currently operate 8 multiplexesin 7 cities and would be operating 23 multiplexes in 16 cities by FY09. This willalso give them better economies of scale and greater bargaining power. Currently,Inox has one of the best occupancy rates in the industry due to various reasonslike a pan India presence, state of the art facilities, pleasant ambience, world-class designs and other value added services.

Chart: Existing and expected properties


Source: Company

Good marginsInox is one of the most profitable multiplex operators in India. All its peers areoperating at bottomline margins ranging from 4% to 6%, whereas Inox had aPAT margin of 11.7% for FY05.This is partly attributed to lower lease payments,as some of the properties are owned. Going forward as the number of leaseproperties increase, margins are expected to come under pressure. However,this decline is expected to be offset by lower financial charges and depreciationas the company expands. Hence, we expect that Inox will maintain bottomlinemargins between 11-12%.

Tie-up with PantaloonThe Pantaloon Group has recently entered into mall development and has alreadyannounced plans for developing 51 such projects across India. Of the announcedmalls, at least 35 are expected to house multiplexes. Inox’s tie-up with Pantaloongives it preferential access to the latter’s upcoming properties. As result of thetie-up with Pantaloon, Inox will gain an entry into world-class malls at premiumlocations.

April 03 , 2006 35


Tax exemptionsTwo multiplexes of Inox enjoy a 50% income tax exemption under Sec 80 IB ofthe Income Tax Act. This exemption will go away from FY08, which would lead tohigher effective tax outgo.

Competition heating upCompetition is heating up in the multiplex business. All the players haveannounced mega plans going forward. This could lead to a supply glut in future,resulting in lower occupancy rates and fierce price wars. Advertising rates couldalso take a hit as the number of multiplexes increases.

Entertainment Tax exemptionsInox enjoys entertainment tax exemptions in majority of its properties. Oncethese exemptions go away, the company’s profitability could get hit given thehigh level of entertainment tax in India. However, industry sources are expectingrationalization of entertainment tax in future. Rationalization is expected tominimize the impact post exemptions.

Valuation

The company is trading at 39.5x its expected EPS of Rs5.4 in FY08. The tie-upwith Pantaloon Group could give Inox additional 10 to 15 multiplexes at the leastand these properties can be expected to start operations from FY08 and FY09onwards. At the current price it appears that the advantage of the tie-up withPantaloon has been factored in. We initiate coverage with a HOLDrecommondation.

Table: Peer comparison (FY 08P)

Investment concerns


April 03 , 2006 36


Inox is a subsidiary of Gujarat Fluorochemicals Ltd (GFL). GFL is one of the largestmanufacturer and exporter of refrigerants in India. Based on a study undertakenby McKinsey, GFL diversified into the multiplex business. Inox currently operates8 multiplexes in 7 cities.

Key management

Company background

Name Designation BackgroundMr.Pravan Jain Director A chemical engineer from IIT New Delhi

and has over 30 years of experience. Heis the managing director of Inox AirProducts Ltd

Mr.Vivek Jain Director A graduate in economics from StStephens, New Delhi and MBA from IIMAhmedabad. He has over 25 years ofexperience and is the managingdirector of Gujarat Flurochemicals Ltd.

Mr.Deepak Asher Director A fellow member of the ICAI and anassociate member of ICWAI. He hasover 25 years of experience in the fieldsof finance, accounts, taxation etc. and isthe President of Multiplex association ofIndia and a member of the FICCIEntertainment Committee.

Mr.Sundeep S Bedi Director An MBA from the Jamnalal BajajInstitute, Mumbai. A film producer byprofession and has produced films like‘The Rising’, ‘Saathiya’ etc. He is thechairman of the Entertainment Sector ofCII.

Mr.Manoj Bhatia Chief Executive Officer A graduate from Ecole des Roche, apremier hotel school in Switzerland. Hewas involved in setting up the HotelMarine Plaza in Mumbai and was thegeneral manager of The Taj PresidentHotel before joining Inox.

April 03 , 2006 37




Tax benefitProjects under implementation/plan phase Screen Seats Availability

1 Indore 3 1080 Y2 Darjeeling 3 811 Y3 Chennai 3 1156 N4 Hyderabad 6 1470 Y5 Lucknow 4 1000 Y6 Vishakapatnam 4 1300 N7 Jaipur 3 750 Y8 Bangalore 4 1100 N9 Raipur 4 1250 Y10 Bangalore 7 1860 N11 Jaipur 3 750 Y12 Kolkata 5 1042 Y13 Kharagpur 4 1200 Y14 Bangalore 7 1720 N15 Jodhpur 4 1250 Y

Total - projects under implementation/plan phase 64 17739

Total - existing projects 32 9290

Total – all 96 27029 Note: We expect at the least 10 to 15 multiplexes to be added due to the tie up with Pantaloon Group

April 03 , 2006 38


Revenues of the company are expected to increase to Rs 2494mn by FY08, aCAGR of 59.5%. Profits are expected to rise to Rs321.72mn by FY08, a CAGR of64.5%. We have not considered the benefits that could accrue to Inox from thetie-up with Pantaloon. We have been conservative in our projections. Hence,the upside in revenues is higher than its downside.

Financial analysis

Chart: Revenue Trend Chart: Net profit trend


Operating profit is expected to grow to Rs687mn by FY08. While OPM is likely tofall, it is expected to stabilize at around 27% in FY08. This is mainly due to thelease model adopted by the company for all the new properties. However, thenegative impact of lease rentals will be partially offset by reduction in financialcosts and depreciation. Even as margins are likely to be under pressure, thecompany’s ROCE is expected to go up to 21.4% as it shifts from owned model toa lease model, resulting in an effective utilization of capital. FY06 will see a dip inROCE and RONW due to the dilution of equity through the recently completedIPO.

Chart: Operating profit Vs. OPM trend Chart: ROCE Vs. RONW


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April 03 , 2006 39


Financials

Income statement

Balance Sheet

Period FY04 FY05 FY06P FY07P FY08P(Rs in mn) (12) (12) (12) (12) (12)Revenue 300 615 1016 1770 2494Operating expenses (201) (408) (664) (1272) (1808)Operating profit 98 206 351 498 687Other Income 11 23 13 28 16EBIDTA 109 229 365 525 703Financial charges (41) (54) (80) (80) (80)Depreciation/Amortization (22) (35) (55) (111) (128)PBT 46 141 230 334 495Tax Provisions (21) (59) (80) (117) (173)PAT 25 82 149 217 322Adjustments- inc/dec in profits 10 (10) 0 0 0Net profit as restated 35 72 149 217 322

(Rs in mn) FY04 FY05 FY06P FY07P FY08P (12) (12) (12) (12) (12)Source of FundsShare capital 450 450 600 600 600Share application money 36 36Reserves & surplus 35 108 1577 1794 2116Net Worth 522 594 2177 2394 2716Loan funds 845 968 1036 1036 1036Deferred tax liability 19 66 86 112 128Capital Employed 1386 1628 3299 3542 3880

Application of fundsGross fixed assets 832 1525 1912 2584 2976Less: Depreciation (36) (70) (125) (236) (364)Add: Capital WIP 497 48 32 168 67Net fixed assets 1293 1503 1819 2516 2679Investments 5 5 1193 741 921Current assets 140 269 384 486 565Current liabilities (59) (153) (185) (271) (335)Net working capital 81 116 199 215 230Mics. Expenditures 6 4 88 70 50Total 1386 1628 3299 3542 3880

April 03 , 2006 40


Key Ratios

FY04 FY05 FY06P FY07P FY08P (12) (12) (12) (12) (12)Per shareEPS 0.8 1.6 2.5 3.6 5.4BVPS 11.6 13.2 36.3 39.9 45.3

Valuation ratioP/E 256.2 124.0 79.9 55.0 39.5P/BV 17.2 15.1 5.5 5.0 4.7EV/EBIDTA 90.1 43.4 35.5 24.6 19.5EV/Sales 32.7 16.2 12.7 7.3 5.5

Profitability ratioOPM% 32.8 33.6 34.6 28.1 27.5PAT% 11.7 11.7 14.7 12.3 12.9ROCE 9.4 16.2 12.7 18.0 21.4ROE 7.3 13.0 7.2 9.3 12.1ROA 0.4 5.4 4.7 7.3 10.8

Turnover ratioNet sales to fixed assets 23.2 40.9 55.8 70.3 93.1Net sales to total assets 21.7 37.9 31.6 51.0 65.1Net sales to working capital 369.2 530.0 509.4 822.1 1082.9

Growth%Sales 86.8 105.1 102.1 74.2 41.0EBIDTA 122.2 110.5 75.4 44.1 33.8PAT 2688.8 230.7 53.6 45.4 48.1APAT 6752.9 106.7 53.6 45.3 48.1

Leverage ratioDebt / total equity 1.76 1.75 0.50 0.45 0.39

Liquidity ratioDebtors days 8 11 13 13 13Creditors days 70 88 61 52 44Inventory days 2 2 2 2 2Current ratio 2.4 1.8 2.1 1.8 1.7

Component ratioEntertainment tax 3.8 3.3 3.2 3.8 5.3Film distributors share 19.6 21.2 22.8 23.4 23.3Cost of food and beverages 5.9 5.7 5.5 5.8 5.9Personal cost 11.3 9.0 7.8 7.0 6.8Operating and admin expenses 26.6 27.2 26.1 31.9 31.2

April 03 , 2006 41


BackgroundAdlabs Films was setup in 1978 as a motion picture processing laboratory inMumbai. The company has presence in film processing, film production, post–production services, film distribution, film exhibition and digital cinema. In 2005,Anil Dhirubhai Ambani Group (ADAG) acquired 50.16% controlling stake in thecompany. ADAG has plans to expand its presence across the entertainment valuechain ranging from Television to Radio and DTH.

Aggressive growth plansAdlabs plans to expand from current 34 screens to around 140 screens by March’08. It currently has an 80% captive market share in the Film Processing businessin Western India and has acquired Vijaya Labs in Chennai, to increase its footprintin South India. It has also invested in a similar front end-processing laboratory inKolkatta.

Further, the budget for film production has also been raised substantially andmulti-movie deals have been signed with a couple of leading directors. Adlabshas also started to look at overseas film distribution aggressively.

Entering Radio business in a big wayIn the Phase II of radio privatization that took place in February 2006, Adlabsbagged 45 FM Radio licenses, the maximum permitted limit by the Government ofIndia. This makes it one of the largest players in terms of number of licensesowned including stations of existing players.

Scouting for new opportunitiesBacked by ADAG, the company is continuing to look for new opportunities toexpand its business.

Latest Financials

Adlabs Films Ltd

Period to 12/05 12/04 Growth 12/05 12/04 Growth (Rs mn) (3) (3) (%) (9) (9) (%) Net sales 262 216 21.1 697.9 600.4 16.2 Expenditure (153) (134) 14.1 (410) (364) 12.6 Operating profit 109 82 32.3 288 237 21.8 Other income 23 18 27.0 47.9 45.2 6.0 Interest (2) (5) (71.5) (8.6) (12.6) (31.5) Depreciation (16) (15) 11.5 (43.9) (41.1) 7.1 PBT 114 80 41.9 284 228 24.3 Tax (42) (30) 40.2 (94.3) (66.7) 41.4 PAT 72 50 43.0 189 161 17.2 APAT 72 50 43.0 189 161 17.2 OPM (%) 41.6 38.1 3.5 41.3 39.4 1.9 Equity 180 108 180 108 EPS (Annualized) (Rs) 8.0 9.3 7.0 10.0

Pre Issue Share Holding Pattern

Rating: Not RatedMarket Cap: Rs14bnCMP: 391Avg. Volumes (1 mth): 11727352 week H/L 474/118BSE Code: 532399NSE Code: ADLABSFILMBloomberg Code: ADLF@INReuters Code: ADLF.BO

(As on 16/02/2006) (%)Promoters 50.2FIIs & NRI 10.6MFs 5.1Other corporates 2.2Public & Others 32.0

Share Price Chart

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