Multiplex Pricing

IPO REVIEW

PVR's business offers growth potential, but the issue is expensive from a near term perspective

PVR Limited, India's largest multiplex operator, is raising funds through an IPO in the price band of Rs 200-Rs 240. The company is raising the funds to finance new cinema and multiplex projects, expand its distribution business and upgrade the existing multiplexes.

The issue comprises 77 lakh shares of which 57 lakh shares are being issued newly while ICICI Venture, an existing shareholder is selling 20 lakh shares. The issue will constitute 33.66 per cent of the fully-diluted post-issue capital of the company and should fetch the company an amount of between Rs 154 crore and Rs 185 crore.

T Rowe Price, a foreign institutional investor, has recently picked up a 5.8 per cent stake (pre-issue) in the company at Rs 230 per share which will fall to 4.37 post issue.

Multiplexes on the rise

PVR is expanding its chain of multiplexes rapidly and will have commissioned 76 screens by the end of FY06 and another 36 by FY07, taking the tally to 112. It will thus have a presence across the country.

In India today, the number of screens per million of population is just twelve compared with an average of 35-40 in western countries. Multiplexes offer several advantages over single-screen theatres in that occupancies are better because films can be screened in theatres of varying sizes depending on the response they are expected to receive.

Thus, theatres can be used optimally. Moreover, there is more flexibility in pricing tickets which can vary between Rs 50 and Rs 300 depending on the time of the show and the film being screened.

Given India's favourable demographics, changing aspirations and lifestyles and also the population's high level of interest particularly in Hindi films, the multiplex business offers good growth prospects.

Thus, occupancies at PVR which are currently around 50 per cent, with admissions of 4.2 million in H1FY06 should not fall too much despite the increasing trend of films being viewed on DVD players at home.

PVR claims that it has had 4.2 million admissions in H1FY06 compared with 4.8 million in FY05. Multiplexes have the advantage of low fixed operating costs which allow them to break-even even at occupancies of 30-35 per cent.

Also, a significant portion of revenues - as much as 20-25 per cent -- are earned from from F&B. Currently, several states are offering tax incentives to multiplex operators which makes the business more viable.

The risks associated with the multiplex business are those of timely execution of projects, especially those proposed to be located in malls that are yet to be constructed.

The other risk is of course, one of overcrowding, with other multiplex operators planning to expand their networks. Break-even levels may be low, but if competition requires ticket prices, which now average Rs 120 for PVR, to be brought down, there would be pressure on operating margins which are currently in the region of 20 per cent.

However, occupancies are sensitive to ticket prices so volumes would typically go up if prices were to be reduced. However, when ticket prices are reduced, aspiration value too comes down which again could impact occupancies.

The company's film distribution business is housed in a 100 per cent subsidiary. The strategy is to distribute Hindi films in those territories where PVR's cinemas are located. Besides, it plans to buy the entire suite of distribution rights for international films, on an all-India basis.

The issue has been aggressively priced. PVR reported a profit after tax (PAT) of Rs 3.6 crore in FY05 and Rs 3.87 in H1 FY06. Thus, at the lower end of the band of Rs 200, the issue is priced at a multiple of 45.4 times expected FY06 earnings of Rs 4.40 (annualised H1numbers). 

FINANCIALS
(In Rs crore)	H1FY06	FY05	FY04
Total income	55.71	70.66	49.73
Total expenditure	44.51	57.48	41.35
PBDT	9.85	10.79	6.47
Net profit	3.87	3.64	1.56

At the top end of the band, the multiple would be 54.5. Even assuming a 100 per cent profit growth in FY07 given the rapid expansion that is taking place, the issue, at Rs 240, is priced at a multiple of 36.3 times, on the post-issue equity. If one were to assume again a 100 per cent growth in earnings for FY08, the multiple is more reasonable at 15-18 times.

The business may be an attractive one, especially in the metros, where there is spending power, especially among the youth. However, it is difficult to tell how successfully the model will work in the smaller towns.

Issue closes: December 14, 1005