It's showtime folks

SPECIAL REPORT

Faced with a tepid growth in its core film processing business, AFL is restructuring its business strategy to generate alternative revenue streams.

After its forward integration into exhibition business through the world's largest IMAX dome theatre project and the four screen multiplex in suburban Mumbai, the management has decided to foray into the film production business.

Given its 22-year association with the film production houses, the management has been seriously evaluating this option for a long time. It has earmarked around Rs 25 crore for the film production business, with focus on medium budget movies in the Rs 4 crore to Rs 6 crore range.

The foray into film production will be through a fully-owned subsidiary "� Entertainment One. The impact of this venture will be visible in the company's financial performance only in FY04 as it intends to begin shooting its first film only by the end of this calendar year.

Theatre management is another new business which seems to be high on the management's priority list. Theatre management, a new concept in India, essentially involves sharing operational and business risk with the theatre owners.

The concept is quite popular in developed countries where international exhibition companies prefer to enter into long term lease contracts with theatre owners rather than invest in creating exhibition facilities.

The management is believed to be already negotiating with some theatre owners in Mumbai. The agreement will either be to convert the existing theatres into multiplexes and operate it on a profit sharing basis or takeover the operations of an existing theatre and pay a fixed annual amount to the theatre owner. The latter option seems like a more risky proposition as the entire business risk is borne by the theatre management company.

But the management is confident of its ability to identify movies that could do well and also negotiate with distributors to acquire movie rights at reasonable rates. This confidence also stems from the fact that the larger number of screens (including four screens of its multiplex) under its belt will provide the company the requisite bargaining power. Again, the benefits of this is expected to accrue only after FY03.

Subsequent to the diversification, the company will have an interest in the entire spectrum of film business, ranging from film production, film processing, post-production and exhibition. The only missing link is the film distribution business which has been consciously avoided by the management. "Distribution is quite a high-risk business. In fact, most of the distributors have registered huge losses in the last year or so," says Manmohan Shetty, managing director, Adlabs Films.

The core issue

Although the company has a proven track record in film processing and post-production work, the growth in revenues from film processing business is largely dependent on external factors like number of releases as well as the success of these films at the box office. A big budget or successful film generally requires a greater number of prints to be distributed in each territory.

The impact of these external factors is clearly visible in the company's financial performance in this fiscal. Despite the dominant market share of over 70 per cent in the western region of India, the income from film processing business declined by seven per cent to Rs 19.43 crore during the first nine months ended December 2001. The dearth of blockbuster movies like Lagaan and Gadar - Ek prem gatha in this fiscal has also added to the company's woes.

With no hope of any recovery in this quarter as well, revenues from IMAX theatre and multiplex are expected to drive the company's growth this fiscal. "Given the prevailing turmoil in the country, the business has suffered due to the delays in releasing new films in this quarter," explains Shetty.

On the brighter side, the corporatisation of production houses is a positive development for the film process business. "An organised industry structure would mean better transparency and credibility for the production houses which will eventually lead to increase in institutional funding for film production," points out Kalpesh Parekh, analyst, Sushil Finance. Moreover, the average number of prints per movie processed have gone up considerably to over 400, up from 200 prints a couple of years back.

However, notwithstanding these encouraging trends, analysts believe that the growth in this business segment will be limited to around 10-12 per cent per annum in the foreseeable future. AFL has already increased its film processing capacity by 40 per cent to 100 prints per day. Thus, there is hardly any scope for further investments in this business which has compelled the management to venture into related businesses.

The trading in raw materials for film processing has been another traditional source of income for the company. Though the company currently derives over 30 per cent of its revenues from trading activity, the business has meagre margins of around three per cent. Nor is the revenue from this business expected to show any considerable growth in the future.

Vying for viewers

The IMAX theatre and the multiplex (fully commissioned only in the later part of the last quarter) has contributed to 14.2 per cent (or Rs 6.25 crore) of total turnover in this fiscal. But, the company's pet project of the 520 seater giant screen IMAX dome theatre has performed much below the management's expectations. Currently, it is operating at an occupancy rate of around 37 per cent, much below the 50 per cent level projected in the draft prospectus.

"Given the lower-than-expected response, the break-even period could be extended by couple of years," admits Shetty. Earlier the management had projected a break-even in the first five years itself.

Analysts believe that the locational disadvantage and the high cost of entry fee has kept the viewers away. Besides, the general lack of content for dome theatres will make it difficult for the company to manage the show once the initial curiosity factor wears off. To overcome this hurdle, the company is planing to introduce four new movies for its IMAX theatre in the next fiscal.

The four screen multiplex is operating at a much better occupancy rate of around 45 per cent. The company is likely to benefit immensely from the current entertainment policy in Maharashtra, whereby newly constructed multiplex theatres are exempt from entertainment tax for the first three years from the date of commissioning of project. Thereafter only 25 per cent tax would be levied for the next two years.

Hence, all the entertainment collection would directly accrue to the company's bottomline. Even at 40 per cent capacity utilisation, analysts estimate that the company would be savings to the tune of Rs 2 crore annually.

Valuations

Though the company has chalked out a strategy to shift to a higher growth trajectory, it will be quite some time before the benefits of the proposed venture are reflected in its financial performance. Moreover, both film production and theatre management are relatively high risk businesses.

The company is estimated to post a net profit of Rs 12-13 crore for this fiscal, which amounts to an earning per share of just below Rs 6 per share. At the current price of Rs 56.45 he scrip is trading at a discounting of 9 times its estimated earnings for FY02 which appear quite attractive. However, there seems to be no immediate trigger to generate enough excitement at the counter.