January 19, 2015 Rating matrix Inox Leisure (INOX) | 181...

January 19, 2015

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Triple play on screens, footfalls, ATP… Inox with a 21% multiplex screen share is a formidable No. 2 player in the domestic arena and well poised to ride on the increasing discretionary spends led by the consumption boom. The tilting consumer preference in favour of multiplexes and rising investments in content will drive higher screen rollouts and footfalls, which are expected to grow at 17.2% and 14.3% (FY14-17E CAGR) to 499 and 57.6 million, respectively. By virtue of limited competition in most of its catchments area, Inox enjoys pricing power, which will help drive up ATPs from | 156 in FY14 to | 188 in FY17E. This coupled with rising footfalls is expected to aid 18.6% CAGR in FY14-17E in net box office revenues to | 818.1 crore. High margin F&B and advertisement segments, with increased management focus, may grow at 21.5% and 35.0% CAGR in FY14-17E to | 291.0 crore and | 121.8 crore respectively, aiding EBITDA margin expansion from 16.0% to 18.4% in FY17E. At the aggregate level, Inox is expected to post revenue, EBITDA and PAT CAGR of 19.8%, 25.7% and 34.0%, respectively, over the same time period. We value the company on SOTP basis at | 240 per share and initiate coverage with a BUY recommendation.

Consumerism to drive film industry, Inox set to emerge as beneficiary The Indian film industry is expected grow at 12.3% CAGR from | 13800 crore to | 21980 crore in FY14-18E. Increasing screen penetration and an exponential increase in middle class consumption spending (to $3.2 trillion by 2025) may act as catalysts. Inox would emerge as a clear beneficiary of this consumerism trend. It is expected to post a revenue CAGR of 19.8% over FY14-17E to | 1312.2 crore from | 762.8 crore.

ATP to soar to new heights; cheapest source of out of home entertainment Cinema is the most preferred and cheapest source of out of home entertainment in India, with ATP at $0.7, among the lowest in the world. With rising investment in content and a better movie watching experience, multiplex penetration is bound to increase. Inox as the second largest exhibitor is expected to see a 17.2% expansion in screens to 499 by FY17 from 310 in FY14, and 6.5% CAGR in ATP to | 188.

Valuations to catch up with fundamentals; initiate with BUY rating

With limited competition, rapid screen rollout, rising footfalls and increasing investment in content, Inox’ PAT is expected to more than double by FY17E. Though the stock has rallied ~69% in the last year, we believe there is room for a further re-rating. Using SOTP, we value the ordinary shares at 22x FY17E EPS and treasury shares at 50% discount to current price to arrive at a target price of | 240/share, implying an upside of 33%. We initiate coverage on Inox with BUY recommendation. Exhibit 1: Valuation Metrics

(Year-end March) FY13 FY14 FY15E FY16E FY17ETotal Operating Income (| crore) 663.2 762.8 920.8 1,080.0 1,312.2 EBITDA (| crore) 98.0 122.0 138.6 172.2 242.1 Net Profit (| crore) 18.4 36.9 20.9 41.2 88.9 EPS (|) 3.0 4.8 2.4 4.8 10.4 P/E (x) 60.3 37.3 74.0 37.5 17.4 Price / Book (x) 3.4 3.5 2.7 2.5 2.2 EV/EBITDA (x) 20.0 15.9 15.0 12.2 8.5 RoCE (%) 9.6 11.6 5.8 8.0 13.0 RoE (%) 5.7 9.4 3.7 6.8 12.8

Inox Leisure (INOX) | 181

Rating matrix

Rating : BuyTarget : | 240Target Period : 12 monthsPotential Upside : 33%

YoY growth (%)

(YoY Growth) FY14 FY15E FY16E FY17ENet Sales 15.0 20.7 17.3 21.5 EBITDA 24.4 13.7 24.3 40.5 Net Profit 100.2 (43.5) 97.2 116.0 EPS 61.7 (49.7) 97.2 116.0

Valuation summary FY14 FY15E FY16E FY17E

P/E 37.3 74.0 37.5 17.4Target P/E 49.5 98.3 49.9 23.1 EV / EBITDA 15.9 15.0 12.2 8.5P/BV 3.5 2.7 2.5 2.2 RoNW 9.4 3.7 6.8 12.8RoCE 11.6 5.8 8.0 13.0

Stock data Particulars AmountMarket Capitalization | 1736.2 Crore Total Debt (FY14) | 223.7 Crore Cash and Investments (FY14) | 19.3 Crore EV | 1940.6 Crore 52 week H/L 191 / 84 Equity capital | 96.2 Crore Face value | 10 MF Holding (%) 5.9 FII Holding (%) 14.0 Price movement

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Research Analyst

Karan Mittal [email protected]

Sneha Agarwal [email protected]

Source: Inox, ICICIdirect.com Research


Company background Inox Leisure Ltd was incorporated as a public limited company on November 9, 1999. It is a part of the Inox group that has a rich lineage of successful businesses such as Inox Wind, Inox Air Products, etc. Inox Leisure operates as a subsidiary of Gujarat Fluorochemicals Ltd. It started as a four screen multiplex in Pune and is now a force to reckon with in the Indian multiplex space with ~361 screens spread across 92 properties in 50 cities. Exhibit 2: Promoter group details

The company is the second largest player in the multiplex space with a multiplex screen market share of ~21%. It is behind PVR, which has about 463 screens in its portfolio and a multiplex screen market share of about 27.2%. Apart from the organic expansion, the company has also grown inorganically by acquiring 89 Cinemas, Fame Cinemas and Satyam Cineplexes over the period. The Satyam acquisition has been a strategic move for the company cementing its position in the northern belt of the country and also helping it bridge the gap with the No. 1 player. Inox has a strong presence in the southern and eastern states with about 82 and 70 screens, respectively (pre-Satyam). The management intends to add about 181 screens by FY17E end, thereby reaching a screen count of about 546 screens. Factoring in certain delays, we have incorporated addition of 134 screens over the next two years, Exhibit 3: Inox screen portfolio with timeline

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IPO - 1.7 Crore shares @ | 120 each

During 2006, the company came out with a public issue of 1,65,00,000 equity shares of | 10 each at a price of | 120 per share consisting of a fresh issue of 1,20,00,000 equity shares of | 10 each. Also, Gujarat Fluorochemicals made an offer for sale of 45,00,000 equity shares of | 10 each.

Promoter and FIIs & DIIs holding (%) (Dec 2014)

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Source: BSE, ICICIdirect.com Research

Region wise distribution

North East South WestCity 15 9 10 17Properties 23 18 21 32Screens 79 70 86 130Seats 20192 18000 20000 37000

Source: Company, ICICIdirect.com Research




Exhibit 4: Inox – Presence across the country



Investment Rationale Consumption story in India to act as catalyst for multiplex industry

With a revival of macroeconomic and per capita income growth, lifestyle based consumption is expected to witness a paramount change. While consumption expenditure has always been the driver of Indian economic growth, the pace and size of consumption spends is expected to multiply manifold. With favourable demographics and the largest working age population, India is set to have the largest middle class by 2050, contributing 32% of global middle class spending. On the one hand, with more people crossing the poverty line, overall consumption is expected to increase while, on the other hand, with rising income level, several households would move up the value chain resulting in premiumisation.

Exhibit 5: Middle class distribution

Source: GS (Working age population = share of population aged 15-60), McKinsey, ICICIdirect.com Research

India is expected to witness a 4.7x increase in middle class households from 31 million in 2008 to 149 million in 2030. Owing to this, Indian middle class consumption spending is expected to cross $3.2 trillion by 2025, 3x of US$991 billion in 2010.

Exhibit 6: 32% of world's middle class spending will be in India by 2050

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Source: OECD, Bloomberg, Reuters, ICICIdirect.com Research

The Indian economy has always been differentiated from other emerging markets by virtue of its unparalleled domestic demand led by a young population, rapidly growing middle class and rapid pace of urbanisation. The above-mentioned favourable demographics and rising aspirations to consume better and expensive would lead to premiumisation in the long run. A similar trend in China in the last decade has changed its position on

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Middle class households to increase 4.7x from 31 mn in 2008 to 149 mn in 2030

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the world map while now India is following suit. This trend is expected to be reflected across sectors. The media & entertainment sector may emerge as one of the biggest beneficiaries as the consumer shifts his spending from food, clothing and shelter to entertainment & leisure.

Film industry set to grow at 12.3% CAGR (FY14-18E); Inox may see 19.8% revenue CAGR in FY14-17E

India, despite being among the top five box office markets in the world (as per 2013 data) lags steeply behind in per capita theatrical spends. The per capita theatrical spend in India is at a meagre $1.3 vs. $3.0 in China, which is more than twice that of the Indian spending. Indian macroeconomic parameters indicate that today it stands where China was 10 years ago. India’s per capita income could grow 6x from current levels in the next 10 years, if it follows China’s growth pattern. The growth in per capita income would bolster growth in the per capita theatrical spends. Thus, it is seen to be reaching the levels seen in other similar countries.

Exhibit 7: Global box office markets

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Source: Businessinsider, ICICIdirect.com Research

Exhibit 8: Per capita spends on theatricals

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Source: Industry, ICICIdirect.com Research

The film industry witnessed a CAGR of 8.8% in CY08-13 despite the economic slowdown. Domestic theatrical revenues form a whopping 76% of the film industry revenues and the trend is expected to continue in the foreseeable future. Factors such as rapid urbanisation and consumerism, rising penetration of multiplexes in tier II and III cities and increasing scale of movies in sync with the audience’s receptivity to differentiated content are together expected to help the industry sustain its growth over the next few years. Exhibit 9: Film industry revenue estimates

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Source: FICCI KPMG Report 2014, ICICIdirect.com Research

US $ India2013 2003 2013

GDP PC (Constant Price) 1,509.5 1,277.2 6,958.7PC Personal Disposable Income 1,118.0 600.3 3,054.9PC Private Consumption (US $) 775.8 465.3 1,867.6Investment PC (US $) 474.4 523.2 1,876.8Median Age (Yrs) 27.0 31.0 37.0Saving Rate (%) 30.1 43.8 49.5Urban Population (%) 32.0 40.0 53.0FDI Inflows (in US$ bn) 28.0 54.0 124.0

Economic parameters in India & China

China

*PC = Per Capita Source: Bloomberg, OECD, ICICIdirect.com Research


Hence, domestic theatricals are expected to grow at 11.9% CAGR in FY14-18E to reach | 16020 crore. Hence, the industry is expected to grow at 12.3% CAGR in FY14-18E rising from | 13800 crore at the end of 2014 to | 21980 crore by the end of 2018E.

Screen penetration to be growth driver for multiplex industry; Inox set to reach 499 screens by FY17E

India is No. 1 in terms of number of movies produced in a year with as many as 1200+ movies in 2011, about 50% higher than the number of movies seen in the US. Though the number has stabilised at this level, the box office size has grown dramatically owing to the number of screens on which the movies have been releasing. However, despite being the highest content producer, it lags steeply in terms of screen penetration.

Exhibit 10: India No. 1 content producer

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Source: UNESCO Institute for Statistics, April 2013, ICICIdirect.com Research

There are about 9,000-10,000 screens in India, of which about 1,700 are multiplex screens. Moreover, several of the single screen theatres are non-functional. India has a low screen density of eight screens per million in comparison with 117 per million in the US. Given the low screen penetration, India has the potential to significantly scale up the number of screens.

Exhibit 11: Global trends in screens per million population

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Currently, multiplexes account for only ~18-20% of the total number of screens in India. As can be seen in the exhibit below, most developed countries have totally shifted towards the multiplex culture. India is also


advancing towards the trend. In recent years, screen additions have been skewed in favour of multiplexes. The year 2012 saw as many as 97 single screens shutting down.

Single screen owners are facing difficulties in negotiating terms with producers. Small players have to share a larger proportion of their revenues with producers and book screens for a longer duration, which exposes them to risk in case a movie flops. The opportunity cost in terms of a miss in a movie is high for single screens. The bigger multiplex owners such as PVR and Inox, which control a sizable share of box office collections, have a say in the industry as well as a competitive advantage in being able to negotiate deals with producers. Moreover, multiplexes provide a premium movie watching experience in terms of superior sound system, recliner seats and top notch food items. Occupancy levels for major multiplexes are a reflection of the trend as they have risen from ~23-27% in 2011 to more than ~26-30% in 2014. The increasing occupancies have infused further confidence in the industry to open screens in the less penetrated areas. Inox is expected to post a screen CAGR of 17.2% to 499 screens by FY17E.

Exhibit 12: Global trends in type of screens

Source: UNESCO Institute for Statistics, July 2013, ICICIdirect.com Research


New mall developments to drive multiplex growth

Multiplexes are anchor tenants for malls, driving a majority of the footfalls. As per industry estimates, there is scope for at least 2,000 new malls in the country. With upbeat industry sentiments and the ongoing consumption boom, real estate development is expected to revive, aiding multiplex growth.

Going ahead, the industry is expected to see addition of at least 300 screens in the coming years. The two largest players, PVR and Inox alone, would add 145 and 134 screens, respectively, by FY17E.

Digital screens help reduce piracy

The Indian film industry has faced the scourge of piracy for a very long time and suffered losses owing to piracy. Increasing digitisation has facilitated the simultaneous release of movies across several screens. Currently, 80-100% of films are distributed digitally vs. 50% in 2010-11. The industry has achieved 90-95% digitisation of screens. Digital prints cost a fifth of analog prints, leading to swift reach of movies across the country at a much lower price. This has resulted in movies being released across more screens. A wider reach and a coordinated release of movies has been a key step towards curbing piracy.

With reducing piracy, the highest grossing movie of 2014, PK, was released in as many as 5200 screens simultaneously in contrast to Hum Aapke Hain Kaun (one of the highest grossing movie of 1994), which was released in just about 500 screens. The difference created by the higher number of screens can be seen in their gross box office collections. PK collected ~| 326 crore vs. | 60-80 crore collected by Hum Aapke Hain Kaun. A further reduction in piracy spells good news for the industry and is an added motivation for multiplex players to go about with their expansion plans. Exhibit 13: Trends in number of screens in which movies have been released

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Source: Industry reports, ICICIdirect.com Research

Growing investments in content to be catalyst behind demand

The Indian box office is at the cusp of a new beginning with the eyes of several foreign production houses set on India. It is among the top five box office markets in globally with the potential to grow manifold. It comprises about 51% of total admission in the world, which is reason enough for all production houses to expand their footprint in India. Investment inflows in the movie production space are set to multiply as several movie studios like Virgin Produced India, Fox Star Studio and Paramount Pictures join hands with Indian producers. Higher investments


would lead to production of quality content, hence drawing higher footfalls in cinemas. The market for superior quality content can be gauged from the fact that Hollywood movies released in India (like Interstellar, Gravity, etc), especially in metros, are faring exceedingly well at the box office. The rationale also finds favour in the trend noticed in China where Hollywood movies have started accounting for nearly half of the Chinese box office. With the increase in the number of Hollywood releases, multiplexes are expected to see a direct growth in footfalls. Secondly, the Indian film industry is characterised by its heterogeneous nature with the confluence of 10 key language markets - Hindi, Telugu, Tamil, Malayalam, Kannada, Punjabi, Bengali, Marathi, Bhojpuri and Gujarati. With greater interaction across the language markets, from exchange of talent to remaking movies in different languages, each individual market is expected to grow, expanding the depth and breadth of the Indian box office. Most of this has been possible on account of studios forming alliances with regional players and co-producing movies. The exhibit below shows the demographic diversity in terms of languages.

Exhibit 14: Key languages in India

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Source: Census 2011, ICICIdirect.com Research

Exhibit 15: Break-up of movies produced in terms of languages

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Source: UNESCO Institute for Statistics, April 2013., ICICIdirect.com Research

Even amid the various language markets, the South Indian film industry catches our attention. As we can see, the South Indian languages put together comprise as much as ~41% of the total films produced. The South Indian industry is itself worth ~| 2000-2500 crore (as per industry estimates). For instance, out of 69 movies produced/co-produced by Eros in 2014, ~30 were in southern languages. The South Indian film industry continues to be dominated by single screens due to the slow pace of real estate development in those regions. There is a huge opportunity for the growth of multiplex screens in the region. The good thing about the southern markets is that the public fervently hero worships their stars and are drawn towards theatres without much fuss. Though this opportunity cannot be assigned a number, clearly it is a big one, which makes multiplex expansion in southern markets look even more attractive. Among bigger multiplex players, Inox has a sizeable 39% market share in the southern multiplex space with ~82 screens (ex-Satyam) in the region.

Footfalls to grow exponentially, led by higher screens, superior content

India continues to lead the world in terms of number of admissions with ~2940 million footfalls in 2011 vs. the world total of 6984 million.


Exhibit 16: Total global admissions

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Footfalls in the past have been skewed in favour of single screens. However, with quality content and a superior movie watching experience provided by multiplexes, the scenario is changing. The overall increase in the number of multiplex screens in the industry has had a multiplier effect on the footfalls.

The average length of movies has been reducing constantly from 160-180 minutes a decade back to ~120-150 minutes today. The reduced length of movies has made it possible to accommodate a higher number of shows, which has increased from ~4.3 shown in 2010 to ~5.2 currently, resulting in an industry wide increase in footfalls. The duration of Hollywood movies generally ranges between 90 and 120 minutes. We believe Bollywood is also following suit as seen from the duration of movies such as Highway (133 minutes), Ugly (130 minutes), etc.

Footfalls in Inox theatres have grown at 12.1% CAGR in FY12-14 to 38.6 million from 30.7 million, led by increasing number of shows, higher occupancy and increasing number of screens. Going ahead, with 17.2% CAGR in FY14-17E in the number of screens to 499 screens and higher demand for content, we expect footfalls for Inox to witness 14.3% CAGR in FY14-17E.

Exhibit 17: Footfalls data for Inox

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The increase in footfalls coupled with ATP increases will have a multiplier effect on the revenues of multiplexes, thus helping Inox to clock topline growth of 17.3% and 21.5% in FY16E and FY17E to | 1080.0 crore and | 1312.2 crore, respectively.

ATP to soar to new heights

In India, there as very few sources of out of home entertainment, such as amusement parks, theatres, live shows & concerts, stand up comedy shows, etc. However, with most forms of leisure priced at a range higher than that of movies, a weekend getaway to the multiplexes becomes the most preferred form of entertainment. Hence, the film industry is expected to take off as consumption levels increase. Quality content and relatively low average ticket price (ATP) provide room for multiplex owners to take price hikes. Exhibit 18: Minimum, maximum range of costs of other forms of entertainment in Mumbai

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Source: Bookmyshow, ICICIdirect.com Research

Secondly, with growing income levels, the scale of overall spending towards entertainment and leisure has risen. Collection of | 100 crore for a movie sounded very ambitious in the last decade. However, with the increase in spending towards this form of entertainment, as many as 35 movies were seen to cross the | 100 crore mark over the last few years with the latest blockbuster, PK reaching as high as ~| 326 crore (at the net level) as per the latest calculations available.

Exhibit 19: Number of movies crossing | 100 crore mark

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Source: Boxofficeindia.co.in, ICICIdirect.com Research


The total of the top five grossing movies in 2014 was | 1084.54 crore, which is nearly 48.3% higher than the total of | 731.1 crore seen in 2012. Going ahead, with the growth in screens and ATP, we expect many more movies to be able to cross the | 100 crore mark.

Exhibit 20: Box office statistics

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Source: Boxofficeindia.co.in, Koimoi.com, ICICIdirect.com Research

Though the industry has attained the | 100 crore mark in movies, average ATPs remain below the global average. ATPs in India are about a tenth of that in China.

Exhibit 21: ATPs in India vs. global averages

Global Average Ticket Prices

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Imax (Image Maximum) theatres cater to 3D movies and movies with special visual effects. ATPs in such theatres are typically 2-3x of non-Imax theatres. With the higher number of 3D movies and only about seven to eight Imax theatres in India, this segment has tremendous growth potential. With its strong operating cash flows, Inox would be able to leverage this 3D opportunity and enter this segment, which can be a boost to ATPs in the coming future.

Lastly, the ongoing consolidation drive would help push up ATPs further. Several players have got catapulted to leading positions after acquiring several smaller players. PVR acquired Cinemax (2013) and currently there are ongoing discussions on PVR acquiring south based SPI Cinemas. Cinepolis is also said to have acquired Fun Cinemas. Recently, Carnival Cinemas zoomed to the No. 3 position post the acquisition of Big Cinemas and Glitz from Network18. Inox has also gained a strong footing in the northern belt of the country post the Satyam acquisition. It had also


acquired 89 Cinemas and Fame Cinemas in the past. The consolidation is leading to concentration of power in the hands of the larger players who would get to be price makers in terms of setting average ticket prices.

Exhibitors are also enhancing their ATPs by adopting differential pricing across weekdays and weekends and maximising footfalls across the week. They are also adopting differential pricing according to the estimated popularity based on the star cast.

The increasing disposable income will expand the purchasing power of the masses, thereby enabling multiplexes to pass on price hikes effectively. The upward trajectory for ATPs has already begun with ATPs having grown from | 150-160 in 2011 to | 168-175 in 2013 for leading multiplex chains. Cashing in on the economic revival and increasing demand for content, we expect Inox to successfully pass on price hikes to reach ATPs of | 188 by FY17E from | 156 in FY14.

Exhibit 22: Inox ATP Trend

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Satyam acquisition - Positioning enhancer

Owing to the strong presence of the Hindi speaking population, North India is a major box office market. Inox had only about 48 screens and a meagre 19% market share in the region.

However, the company recently acquired about 38 screens of Satyam Cineplexes for ~| 182 crore. Apart from the 38 operational screens, Inox has also gained access to three to four screens, which were fully funded and ready for operations along with 30 screens that were lined up to open in the coming 12-18 months. The post Satyam northern belt screen count for Inox is about 79 screens. Satyam Cineplexes has higher ATPs than the Inox properties and three of the Satyam properties feature in the top 10 best EBITDA generating properties in the industry.

Per screen valuations work out to | 4.7 crore per screen (based on operational screens). Though the valuations appear expensive at face value, the strong screen pipeline makes up for the rich valuations. In addition, on account of the absence of Inox in the northern belt, it was lagging behind the market leader in terms of brand value. Owing to this screen build-up, we expect Inox to reach a screen count of 499 screens by FY17E. The Satyam acquisition will help strengthen its brand image and expand the mind market share.


Changing revenue mix, advertisement revenues to grow manifold

Multiplexes are shifting focus on ancillary revenues like F&B and in-cinema advertisement to drive profitability.

Food and beverage: Exhibitors have been continuously innovating to provide cinemagoers a plethora of options in terms of quality food and services like within cinema ordering. The offerings, which were restricted to pop-corn traditionally, have expanded to include various Indian snacks and fast food items. This has led F&B revenues to increase at 19.4% CAGR in FY12-14 to | 162.3 crore in FY14 from | 113.9 crore in FY12.

Exhibit 23: Inox F&B revenue trend

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F&B Revenues F&B Costs SPH (RHS)


Owing to the continuous innovation in food products, spends per head on F&B have been increasingly consistently. They have increased from | 47.0 in FY13 to | 56.0 in Q3FY15. The company has been able to maintain gross F&B margins at higher than industry average. Gross F&B margins for Inox are at ~73-75% whereas for PVR it is at 68-70%. The management feels it will be able to maintain margins at current levels. We expect Inox to post 21.5% CAGR in FY14-17E in F&B revenues by virtue of 8.8% CAGR in FY14-17E in spends per head. F&B revenues are expected to form 22% of revenues in the coming future, up from 21% in FY14.

Exhibit 24: Pictures from Inox F&B


Exhibit 25: Pictures from Inox F&B


In-cinema advertisement: As per industry estimates, the size of the in-cinema advertising market is estimated to be about | 3.9 billion (as on 2013), 3.1% of box office collection. The demand for in-cinema advertisement is in full-swing with other forms of advertisement


becoming costlier. The average 10 second slot for a mainstream Hindi GEC is | 100000 while that on leading radio operators costs | 9800 (pan-India slot). In such a case, in-cinema advertisement, wherein it is easier to estimate eyeballs and get undivided attention, becomes the preferred choice for advertisers.

Multiplex owners are also innovating in terms of granting advertisers a choice to pay per eyeballs and other customised deals. Moreover, advertisers are also able to generate touch points in the form of kiosks, letting consumers experience the products. The industry is not only getting national advertising but also attracting regional advertisers.

Inox has total footfalls of 38.6 million (FY14), which is ~55% lower than the leader PVR. However, the difference in advertisement revenues (187% lower than PVR) is higher than that in footfalls. Inox is striving hard to bridge the gap with a dedicated advertisement sales force and a keen management focus on the revenue stream. Ad revenues per screen for PVR are nearly double that of Inox. As footfalls in Inox increase, the gap is expected to reduce. The company uses differential pricing as per the popularity of movies, the size of the contracts and show timings. Advertisement revenues flow in directly into the EBITDA, thus expanding margins. Inox has brand associations with most large advertisers in India, which includes companies across segments such as Coke, Pepsi, Airtel, Vodafone, Reliance, Micromax, Nokia, Microsoft, Samsung, Google, Sony, Panasonic, Flipkart, Toyota, Maruti, Mahindra, etc. Going ahead, we expect Inox to post an advertisement revenue growth of 35.0% CAGR in FY14-17E to | 121.8 crore in FY17E from | 49.5 crore in FY14.

Exhibit 26: Advertisement revenue vs. peers

61.875.3

141.9

76.5

29.2 32.449.5

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* H1FY15 for PVR LImited Source: Company, ICICIdirect.com Research


Potential value unlocking from owned properties:

Multiplex operators generally follow an asset light model. However, of the total 94 locations, Inox has about seven owned properties in prime locations spread across 4 lakh sq ft in Pune, Mumbai, Gujarat, Jaipur, etc. The owned nature of properties is also helping in saving lease rentals. However, according to the management, the current market value of these properties would be closer to | 400 crore while the book value is about | 150 crore.

A sale-and-leaseback of these properties could free up funds to repay debt resulting in RoCE expansion though it will be EBITDA margin dilutive (in the form of higher rentals). However, the management has indicated that it has no such plans in the foreseeable future. Exhibit 27: Owned properties of Inox City / Property State Screens Seats Total Area (sq. ft.) Multiplex Area (sq. ft.)Pune Maharashtra 4 1316 140229 53189Vadodara Gujarat 4 1318 109,452 48,622Nariman Point, Mumbai Maharashtra 5 1323 40131 40131Jaipur Rajasthan 2 787 26,392 26,392Swabhumi , Kolkatta West Bengal 4 1022 46204 46204Anand Gujarat 3 624 27,871 27,871Corporate Office Maharashtra 16000Total 22 6390 406,279 242,409



Risk & concerns Dependency on third party content

Though the planning stage in India lasts 18-24 months, the implementation stage is just about six months, leading to severe cost overruns. Just as stadiums would be empty if a sporting match is not thrilling enough, cinema halls would be very scantily occupied if the movie fails to generate viewer interest. Exhibitors are totally dependent on third party content. In the event that movies do not fare well at the box office, footfalls decline and, hence, occupancies reduce. A larger number of misses than hits at the box office could impact our footfall assumptions. In such an eventuality, the topline could be impacted.

Higher than expected rate of GST – Double edged sword

The media industry is plagued by issues of high taxation as well as double taxation. Taxes differ from state to state with some states like Maharashtra, Bihar and Karnataka having taxes in excess of 45%.

Exhibit 28: Entertainment tax in various states State Entertainment Tax (as % of ticket price) Note

Maharashtra45% for tickets under | 250; 49.5% for tickets priced

at | 251-350;51.75% for tickets at | 351-500; 54% for tickets | 501 & above

Marathi films are-tax free

Bihar 50%Karnataka 40%

Uttar Pradesh30% for ticket up to | 10; 35% for tickets between |

10-30;40% for tickets exceeding | 30

West Bengal 30%2% for Bengali, Santhali

& Nepali filmsHaryana 30%Kerala 30%Orissa 25%Gujarat 20%Delhi 20%Madhya Pradesh 20%Andhra Pradesh 20% 15% for Telugu filmsTamil Nadu 15% Tamil films are tax free

Assam15% for tickets less than | 20; 20% for tickets more

than | 20

JharkhandEntertainment Tax exempted for April 2012 to March

2013Earlier it was 110%

Punjab Tax FreeJ&K Tax FreeRajasthan Tax FreeHimachal Pradesh Tax FreeMadhya Pradesh 20%

Source: taxindia.com, ICICIdirect.com Research

Inox pays an average entertainment tax of ~18-19%, service taxes on property rentals and VAT of food and beverage (F&B) revenues. This takes a toll on its margins. Under the GST regime, companies would be able to get advantage of input tax credit. According to management, the neutral tax rate for Inox would be in the range of 22-23%. If the GST rate is fixed above this, it could impact margins for Inox. Vice-versa, in case the rate is fixed at a lower end, the company’s margins could expand to that extent (after paying distribution charges which are paid on net collection). We have not factored this in our estimates.


Faces competition from other forms of entertainment

The multiplex industry faces competition from other forms of entertainment such as sports, plays, amusement parks, etc. In the event that other forms of entertainment are in the same cost bracket as films, we may see some churn in the footfalls towards those segments.

Shortening of TV release window

In the past, movies were broadcasted on television only after about 60-90 days of release. However, these days the broadcasts take place after about a month from the release. The film industry would continue to lose revenues if the window of releases in other forms of entertainment such as TV and internet continue to be shortened. In such a scenario, people will refrain from visiting theatres and wait to watch the movie at home. We could see footfalls being affected in such a scenario.

Spat between producers and exhibitors

Currently, the deals between producers and exhibitors are fixed, with the percentage distribution being 50% for the first week, 42.5% in second week, 37.5% in third week and 30% thereafter. However, in 2009, there was a boycott by the main Indian producers who refused to release big films to pressurise exhibitors (mainly multiplex cinemas) to increase the revenue sharing. The two-month dispute (from April to early June) concluded with a 50:50 split agreement. This led to a reduction in total admissions from 3251 million in 2008 to about 2900 million in 2009. Any such disagreement in future will not bode well for the exhibition industry.


Financials Revenue to grow at 19.8% CAGR in FY14-17E Inox posted 44.2% CAGR in FY12-14 in revenue, aided by 12.1% CAGR in FY12-14 in footfalls coupled with 9.6% CAGR in FY12-14 in screen additions. Going ahead, with a further expansion of screens to 499 by FY17E, footfalls are expected to post 14.3% growth in FY14-17E to 57.6 million from 38.6 million in FY14. The growth in footfalls coupled with 6.5% CAGR in ATP over FY14-17E is expected to lead to 18.6% growth in net ticketing revenues to | 818.1 crore in FY17E from | 490.5 crore in FY14 (our revenues as well as costs are shown on a net basis). Spends towards food and beverages (F&B) is also increasing. Going ahead, with increasing disposable income and continuous innovation on part of Inox, F&B revenues are expected to grow at 21.5% CAGR in FY14-17E to | 291.0 crore in FY17E from | 162.3 crore in FY14, driven by strong growth in spends per head (SPH) from | 49 in FY14 to | 63 in FY17E. The advertisement revenue segment is also increasingly gaining traction. The stream has grown at 30.2% CAGR in FY12-14 from | 29.2 crore in FY12 to | 49.5 crore in FY14. With other modes of advertisement being more expensive, in-cinema advertisement is emerging as an attractive medium to capture the attention of the masses. Advertisement revenues of Inox are expected to grow at 35.0% CAGR in FY14-17E to | 121.8 crore in FY17E from | 49.5 crore in FY14. Growth in advertisement revenues is highly EBITDA accretive. Inox is expected to post a total revenue CAGR of 19.8% in FY14-17E to | 1312.2 crore in FY17E from | 762.8 crore in FY14. The revenues may be higher than estimated in the event that the company undertakes any inorganic expansion. Exhibit 29: Revenue growth trend

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FY14-17E CAGR of 19.8%

663.2 762.8920.8

1080.0

1312.2


Inox to clock 18.4% EBITDA margins by FY17E Inox has been consistently maintaining EBITDA margins in the range of ~14-16% in the past few years. Going ahead, as footfalls increase further the company will gain tremendously in terms of operating leverage, especially for older properties. The high margin contributing F&B segment, which is expected to grow at 21.5% CAGR in FY14-17E is also expected to drive the margins. Moreover, the advertisement revenue segment is highly EBITDA accretive as it flows directly into the EBITDA.


We expect the company to post EBITDA growth of 25.7% CAGR in FY14-17E to | 242.1 crore in FY17E from | 122.0 crore in FY14. The margins are, thereby, expected to expand to 18.4% in FY17E from 16.0% in FY14. Exhibit 30: EBITDA and PAT margins trend

14.816.0

15.115.9

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2.84.8

2.44.0

7.1

0.02.04.06.08.0

10.012.014.016.018.020.0


(%)

EBITDA (%) PAT (%)


Healthy operating cash flow generation, easily able to fund expansion Inox typically incurs capex in the range of | 2.0-3.0 crore per screen depending on the location of the screen. In H1FY15, the company acquired a 38 screen portfolio from Satyam Cineplexes at an aggregate value of | 182 crore, which was largely funded by debt. Going ahead, with strong operating cash flow generation, the company should be able to fund its expansion plans in FY16E and FY17E. Going ahead, there could be additional cash generation if the company plans to extract value out of its owned properties, which is estimated to command a market value of about | 400 crore. In addition, offloading stake in treasury shares (about 1.1 crore shares) held by the company worth | 191.1 (as per current market price) crore could lead to further cash inflows. Exhibit 31: Capex and operating cash flows trend

280.8

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Return ratios set to improve As the company moves towards achieving a PAT CAGR of 34.0% in FY14-17E, return ratios are expected to start treading higher. We expect Inox to reach RoCE and RoE of 13.0% and 12.8% by FY17E from 11.6% and 9.4%, respectively, in FY14. The return ratios in FY15 took a dip owing to the debt, which came on board due to the Satyam acquisition against revenues only for a limited period. It is not a structural dip. In case the company sells its owned properties, which could free up funds to repay debt, the RoCE could expand by about an additional 250 bps by FY17E. However, the management has indicated that it has no such plans in the foreseeable future. Exhibit 32: Return ratios trend

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Valuation The entertainment industry is expected to be a major beneficiary of increasing discretionary spends led by the consumption boom in the country. Within the out of home entertainment space, multiplexes, by virtue of being present at the lowest price point, are best placed to ride the wave. The FII holding in the stock has increased from 0.02% to 14.02% in the past five quarters, also validating our assumption. Inox, with 365 screens across 94 properties is a formidable No. 2 player in the Indian multiplex industry, which has already been witnessing consolidation. The ongoing trend of consolidation and cannibalisation of single screens by multiplexes lends huge pricing as well as bargaining power to exhibitors. We expect the company to add 134 more screens by FY17 to take the total tally to 499, leading to 19.8% and 25.7% revenue and EBITDA CAGR (FY14-17E) to | 1312.2 and | 242.1 crore, respectively.

SOTP based valuation of | 240 per share; initiate with BUY rating

We value the ordinary shares at 22x two year forward EPS to arrive at value per share of |229. In addition, the treasury shares (1.1 crore) are valued at 50% discount to current market price of | 181. Per share value works out to |11. Though the stock has rallied ~69% in the last year, we believe there is room for a further re-rating. Our SOTP based target price of |240 per share implies an upside of 33% from current levels. We initiate coverage on Inox Leisure with BUY rating.

Exhibit 33: SOTP based valuation of |240 per share Particular Unit AmountEPS for FY17E | 10.4Target Multiple x 22.0Value per share (A) | 229Treasury Shares outstanding Crore 1.1Value as per current market price | Crore 191.1Holding discount % 50%Discounted value | Crore 95.5No. of outstanding shares (Ex-treasury shares) 8.6Per share value (B) 11Total Value per share (A + B) 240

Source: Respective Companies, ICICIdirect.com Research

Exhibit 34: Two year forward P/E Chart

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Price P/E 6 P/E 12 P/E 18 P/E 24 P/E 30

Source: BSE, Companies, ICICIdirect.com Research


Our SOTP valuation for Inox implies an FY17E EV/screen of 5.3 crore. Some of the recent deals in the Indian multiplex space have materialised at ~| 3-4.8 crore EV/screen, which may be to a slight discount to our valuation for Inox. However, we expect larger multiplexes to trade at a premium to older deals on account of higher bargaining power and greater screen concentration.

Exhibit 35: Some of the recent deals in multiplex space Acquirer Seller Year EV (| Crore) Screens EV/Screen (Crore)PVR Cinemax 2013 570 138 4.1Inox Satyam 2014 182 38 4.8Carnival Cinemas Big Cinemas 2014 750 250 3.0Average 4.0

Source: Media Sources, ICICIdirect.com Research


Financial Summary Exhibit 36: Income statement (Year-end March) FY14 FY15E FY16E FY17ETotal operating Income 762.8 920.8 1,080.0 1,312.2Growth (%) 15.0 20.7 17.3 21.5Employee Expenses 49.6 68.4 83.5 96.7Exhibition Cost 223.5 258.6 305.0 376.3Cost of F&B 46.6 50.8 58.6 72.7Rent 0.0 177.1 210.7 257.4Other Expenses 321.1 227.4 250.0 267.0Total Operating Expenditure 640.8 782.2 907.8 1,070.1EBITDA 122.0 138.6 172.2 242.1Growth (%) 24.4 13.7 24.3 40.5Depreciation 50.7 78.8 86.3 94.5Interest 27.6 41.9 46.2 44.2Other Income 8.9 8.7 12.0 9.2Exceptional Items 0.4 0.5 0.0 0.0PBT 52.2 26.1 51.8 112.6Total Tax 15.3 5.3 10.6 23.6PAT 36.9 20.9 41.2 88.9

Growth (%) 100.2 -43.5 97.2 116.0EPS (|) (based on ordinary shares ex-treasury) 4.8 2.4 4.8 10.4


Exhibit 37: Balance sheet (Year-end March) FY14 FY15E FY16E FY17ELiabilitiesEquity Capital 96.1 96.1 96.1 96.1Reserve and Surplus 444.4 550.1 591.2 680.2Interest in benefit trust (149.7) (80.9) (80.9) (80.9) Total Shareholders funds 390.9 565.3 606.5 695.4Total Debt 223.7 462.0 462.0 442.0Others 53.0 32.8 32.8 32.8 Total Liabilities 667.6 1,060.1 1,101.3 1,170.2

AssetsTotal Fixed Assets 634.7 677.9 743.6 813.6Investments 3.7 108.2 78.2 78.2Goodwill on Consolidation 0.0 164.1 164.1 164.1Debtors 33.4 53.0 58.8 68.0 Inventory 8.6 9.9 11.6 14.1Loans and Advances 157.1 197.7 207.5 212.7Other Current Assets 1.8 52.7 61.6 75.1

Cash 16.6 11.2 26.7 49.9Total Current Assets 217.5 324.5 366.2 419.7

Total Current Liabilities 190.5 217.3 254.0 309.3

Net Current Assets 27.0 107.2 112.2 110.4Other Non Current Assets 2.3 2.8 3.2 3.9Application of Funds 667.6 1,060.1 1,101.3 1,170.2



Exhibit 38: Cash flow statement (Year-end March) FY14 FY15E FY16E FY17EPAT 36.9 20.9 41.2 88.9Add: Depreciation 50.7 78.8 86.3 94.5Add: Interest Paid 27.6 41.9 46.2 44.2(Inc)/dec in Current Assets -9.4 -112.4 -26.2 -30.3Inc/(dec) in CL and Provisions 9.9 26.9 36.7 55.3CF from operating activities 115.8 56.0 184.1 252.6 (Inc)/dec in Investments -2.6 -104.5 30.0 0.0(Inc)/dec in Fixed Assets -90.3 -122.0 -152.0 -164.5Others -9.0 -184.8 -0.5 -0.7CF from investing activities (102.0) (411.3) (122.5) (165.2) Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0Inc/(dec) in loan funds -22.3 238.3 0.0 -20.0Less: Interest Paid 27.6 41.9 46.2 44.2Others -25.9 69.8 -92.4 -88.4CF from financing activities (20.6) 350.0 (46.2) (64.2) Net Cash flow -6.8 -5.4 15.5 23.2Opening Cash 23.3 16.6 11.2 26.7

Closing Cash 16.6 11.2 26.7 49.9

Source: ICICIdirect.com Research

Exhibit 39: Ratio analysis (Year-end March) FY14 FY15E FY16E FY17EPer share data (|)EPS 4.8 2.4 4.8 10.4Cash EPS 11.5 11.6 14.9 21.4BV 51.3 66.1 70.9 81.3DPS 0.0 0.0 0.0 0.0Cash Per Share 0.0 0.0 0.0 0.0Operating Ratios (%)EBITDA Margin 16.0 15.1 15.9 18.4PBT / Net Sales 0.0 0.0 0.0 0.0PAT Margin 4.8 2.3 3.8 6.8Inventory days 0.0 0.0 0.0 0.0Debtor days 22.8 16.6 17.5 18.4Creditor days 10.6 10.6 10.6 10.6Return Ratios (%)RoE 9.4 3.7 6.8 12.8RoCE 11.6 5.8 8.0 13.0RoIC 11.9 6.7 9.1 14.8

Valuation Ratios (x)P/E 37.3 74.0 37.5 17.4

EV / EBITDA 15.9 15.0 12.2 8.5

EV / Net Sales 2.5 2.4 2.0 1.6Market Cap / Sales 2.3 2.0 1.7 1.4Price to Book Value 3.5 2.7 2.5 2.2Solvency RatiosDebt/EBITDA 0.0 0.0 0.0 0.0Debt / Equity 0.6 0.8 0.8 0.6Current Ratio 1.1 1.5 1.4 1.4Quick Ratio 1.1 1.4 1.4 1.3



RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]


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January 19, 2015 Rating matrix Inox Leisure (INOX) | 181...

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