Shringar Cinemas: Enter entertainment

The Shringar Cinemas IPO provides investors an opportunity to participate in the multiplex business.

In the nine months ended December 2004, revenues from Shringar Cinemas' movie exhibition business accounted for around 75 per cent of total consolidated revenues. Much of the balance came from movie distribution.

About 80 per cent of revenues of the exhibition business came from the company's operations in Fame Adlabs, a multiplex in Andheri, Mumbai.

The company launched operations in two more multiplexes in late 2004 - seat capacity has increased almost 200 per cent. Around seven more launches are lined up for 2005/2006.

How will these new launches fare? The financials of Fame Adlabs provide clues. This multiplex, which operates as a 50:50 JV with Adlabs had revenues of Rs 15.4 crore in the nine months till December 2004. Its EBITDA margin stood at an impressive 37 per cent and net margin was 19 per cent.

But things may not be as rosy going forward. Multiplexes in Maharashtra enjoy tax breaks (100 per cent on entertainment tax) in the first three years of operations.

In the fourth and fifth years, multiplexes have to pay tax on 25 per cent of net ticket sales. The tax breaks cease from the sixth year onwards. Entertainment tax, at 45 per cent of net ticket sales, would shave off a significant chunk from the company's profit.

The Shringar management plans to tackle this by increasing the share of revenues from food and beverage, from current levels of 22 per cent of exhibition revenues.

The company's investments in the two multiplexes launched late last year has severely dented profitability in the current fiscal.

EBITDA fell to just 8.6 per cent of revenues, and it reported a loss at the net profit level in the nine months till December. Based on annualised nine month numbers, the company gets absurd EV/EBITDA multiples of over 50 times.

But, since FY06 will reflect full operations of three multiplexes (against one in FY05) and part operations of seven multiplexes (against two in FY05), growth in both revenues and profit is expected to be explosive in FY06.

The call really is whether EBITDA would grow fast enough (in the region of about 800 per cent from current levels) for the FY06 EV/EBITDA multiple to be more acceptable at around 7-8 times.

Nervous emerging markets

Local factors such as high derivative positions and end-of-year considerations may have exacerbated the sell-off, but there is little doubt that the fall in the Indian stock market is part and parcel of the larger decline in emerging market stocks, bonds and currencies.

On Tuesday, the US Federal Open Markets Committee changed the wording of its statement to give the impression that inflation risks were higher.

As if on cue, Wednesday's US consumer price index data showed that prices paid by consumers in February rose 0.4 per cent, the highest in four months.

The markets have interpreted this to mean that the Fed stance on inflation is hardening, and that stronger doses of interest rate tightening may follow. The dollar has strengthened on this expectation and the US ten-year yield has moved up to a 9-month high.

Is this then the end of the road for emerging markets? We've had such scares before, but the bears believe that higher interest rates and a stronger dollar will spell the end of the bull run for emerging markets.

The bulls do have some ammunition, the main one being that US growth is likely to slow in the second half, and that could change the Fed's stance.

Further, there are strong reasons for the Fed to be wary of unnerving debt-laden US consumers and the mortgage market. Nevertheless, at the moment there's little doubt that higher interest rates in the US have sparked a sell-off by leveraged players like the hedge funds.

Moreover, the Fed has clearly signalled a stronger dollar. It's likely to be some time before the damage from the latest bout of nervousness will be repaired.

Gokaldas Exports public issue

Gokaldas Exports Ltd (GEL) is leveraging the current investor interest in textile stocks with its forthcoming IPO.

The stocks are being offered at a price band of Rs 375-Rs 425 per share, resulting in an aggregate issue size of Rs 132.81 crore (assuming the higher price band).

Investors would be buying the GEL stock at a P/E of about 10.4 times FY05 earnings (EPS for H1 FY05 has been annualised and assuming the higher price band).

In contrast other textile stocks like Arvind Mills trade at a P/E of 22 (trailing 12 months earning), while Raymond trades at 18.8 times earnings.

The company plans to use the funds raised to set up four factories, modernise existing factories and repay loans.

GEL is well positioned in the quota free world with its client base including globally recognised brands like GAP, Nike and Old Navy.

However, the underlying concern is that its top five customers accounted for 80.38 per cent of its revenues in FY04 and as the company does not have long term contracts with its customers, its profit could be dented if it loses a key customer.

Also with China growing its apparel exports to the US by about 80.2 per cent y-o-y in January, the pricing pressures could also hit the profitability of GEL.

The management of the company tried to allay such fears at the investor's conference, by pointing to the quality of their work and the reputation they have built with global brands.

With strong investor appetite for textile stocks, the potential listing premium would be a clear draw.

With contributions from Mobis Philipose and Amriteshwar Mathur