UFO Moviez IPO: Valuations price in near-term gains

Business model is robust and will lead to financials growing at a healthy pace in the next few years

UFO Moviez, which offers a digital distribution platform for distributors and exhibitors, plans to raise Rs 600 crore from its Initial Public Offer (IPO).

The company has a market share of a little over 50 per cent in the digital distribution market. It procures film content from producers and distributors, digitises and encrypts these and delivers through satellites to about 5,000 screens. It takes a fixed fee from the distributors, on a per movie/screen basis for the first two weeks after a film’s release. This revenue stream accounts for about half its overall revenue and has grown about 75 per cent annually over FY10-14. A higher number of movies released and a rise in the digitisation cost are factors which will push up the revenue on this count.

From the exhibitors, it collects rentals for equipment such as server, projector and VSAT antenna installed by the company at their premises. The agreement for the rentals is for 10 years and can be terminated after four years. Exhibitors are billed monthly, Rs 3,000 to Rs 40,000, depending on the equipment. Revenues from this stream have grown 26 per cent annually over FY10-14 and account for 24 per cent of the top line. Expansion of its digital distribution network and release in a higher number of screens are the key triggers.

  The third source of revenue is in-cinema advertising, shared with the exhibitors. The company has a tie-up with 1,770 advertisers and controls the ad rights of 3,400 screens. It shares about 18 per cent of revenue from this space with the exhibitors, with a minimum guarantee in some cases. The segment has grown 10 times over four years (FY10-14) to reach Rs 100 crore, on the back of growth in ad minutes. Of the Rs 421 crore revenue in FY14, about 24 per cent came from this.

While large multiplexes (18 per cent of the roughly 9,000-10,000 screens are multiplex) manage their own ad inventory by approaching advertisers directly, most single-screen operators and non-chain multiplexes sell their ad inventories with the help of digital integrators such as UFO Moviez. For the industry, in-cinema ad revenues are expected to grow 18-20 per cent annually, from Rs 400 crore in FY14 to Rs 800 crore in FY18, according to CRISIL Research estimates.

The company is looking at bridging the ad inventory gap between it and the multiplexes. While it has ads of three minutes a show, entities such as PVR have about 18 minutes a show. As the ad rates and minutes grow, this vertical is expected to account for about half the revenue over the next four to five years.

The company has built a robust revenue model and the financials have been improving. While its operating cash flow in FY14 was Rs 120 crore, it was Rs 69 crore for the first nine months of FY15. Debt to equity is also manageable at 0.4 times and is expected to come down, given that the peak of capital expenditure is done.

Growth depends on the viability of single screens or non-chain multiplexes. Large multiplexes have their own digitisation equipment and ad inventory. Their expansion and market share away from the smaller exhibitors is a negative for the company. While the company has long-term contracts with the exhibitors, with the lack of a high-cost entry barrier, the business model can be duplicated, though not easily.

At the price band, the stock trades at about 25 times its estimated FY16 earnings. Though there is no direct peer, India’s largest exhibitor, PVR, trades at 45-47 times its estimated FY16 earnings; Eros (among the largest production/distribution studios in India) trades at 16-17 times one-year forward earnings. While the prospects look good, UFO should have something on the plate for IPO investors. Long-term investors might want to consider it after the listing.