PVR Ltd.- Play on increasing disposable income

Did you guys read about the GST rate of 28% being imposed on cinema in addition to empowering state bodies to levy entertainment tax. I think this is a huge setback in terms of pricing and margins.

Read how disappointed the Film guild is http://www.twitlonger.com/show/n_1spsuc7

I’m not going to talk numbers here. But let’s scuttlebutt on the product/ service.

If I look at Delhi NCR’s perspective, the only quality cinema player in this area is PVR. I don’t say it as one company has an edge over competition, I’m calling it a monopoly.

I live in Noida. If I want to go out for a movie, my options are:

  1. Spice cinemas (started a decade back, really tired infrastructure but economical)
  2. Wave cinemas (Ponty Chadha’s venture. My last resort)
  3. Carnival cinemas (replaced Big Cinemas, as good as tier 3 town single screen cinemas)

On the contrary, PVR + DT offer a premium experience, IMAX, 4DX, a much better f&b menu at a reasonable price premium. I believe the story is similar for most other areas in the NCR. PVR has built this kind of perception among a lot of people that I meet and speak to.

I visit Chandigarh too quite often and DT + PVR rule the roost. Apart from people who strictly prefer convenience of the cinema being closest to their place/ cheapest, any quality buyer knows only PVR offers what they want. It is pushing towards being a monopoly.

How is it in other cities?

In Chennai, PVR is present in two locations. I don’t think they have any advantage over other players. Maybe in the top tier but people wouldn’t go there only because it is a PVR. There is a price cap of Rs 120 per ticket even for an IMAX movie (but are creative means to make money: popcorn sells for as much as the movie ticket, 2/4 wheeler parking ~Rs 50/150, etc, online booking “convenience” fee of Rs 30, etc.) Basically PVR does neither has any differentiating factors nor can’t command a premium.

What are the other players in Chennai?

Regional players only with an exception of Inox. They are also present in two locations only. Same as PVR in terms of perception among people.

Because of the Rs 120 price cap, there are limited screens and demand outstrips the supply. You could watch an IMAX movie for Rs 10 also (max first three rows)! During the first weekend for any special movies (Rajnikant movie, Bahubali, Diwali/Pongal releases, etc.) tickets get sold out in matter of minutes. Even for a routine weekend or evening show, it is quite difficult to get reservation.

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South is a unique case and more of a volume game. While the bull case occupancy on an aggregate basis ranges between 33-37% overall, in South it easily goes up 60-70% due to price cap and other reasons.

PVR has completed a 5 screen complex near Chennai airport. Waiting for approval. Approval might delayed given the political situation in TN . With that they will be present in 3 locations in Chennai.

FYI
IMAX movie pricing is not capped at 120 rs at Chennai . it is 350 Rs

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I stand corrected. But I think it was hiked recently. When it was launched, it was Rs 120 only?

And the acceptability is increasing off late. Most of the Hollywood movies have an IMAX these days and as a consumer, I do prefer to watch IMAX if it’s available. Does PVR make a better margin on IMAX?

Chennai/TN would not be ideal location to look if you are evaluating a multiplex operator’s prospects in india . Tickets are set at a cap of 120 thanks to a long standing government mandate .multiplex operators have stayed away from aggressive plans in TN, Hence another major southern metro like bangalore which till very recently did not had price caps has 5 times as many PVR screens compared to chennai.

Delhi/NCR contributes 1/3rd of boxoffice collections in india followed by another 1/3rd in Greater Mumbai region followed by east punjab,bangalore/karnataka. .Essentially PVR has a monopoly in Delhi/NCR, infact the PVR-DT cinemas merger was initially held up at CCI for this very particular reason . In Mumbai also PVR has the highest number of screens thanks to its merger with cinemax . Same with east punjab and bangalore.

The edge PVR has over other operators is Locations and management, you will find them in almost all the key population centres in the city in the best of malls in that city.Being in best and swanky malls allows it offer premium services like Gold class,gourmet snacks, world class projection and sound systems ,this in turn allows them to charge higher ticket prices than the competition. you could look at average ticket prices,F&B spends and advertising rates they charge and compare them to another listed player -Inox to understand the competitive advantage PVR has.

Note : Was Invested in PVR from 2010-2015 . Haven’t analyzed PVR recently , so information may be a bit stale.

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The issue is we don’t know what can happen in future. What if Delhi govt. you can’t charge more than Rs 250, F&B should be sold at MRP or priced similarly as market rates, etc. In TN, there were AMMA Cinemas to come up (might not happen now after demise of ex-CM) and the actor’s association is also mulling booking ticket at Rs 10 convenience fee (now it is Rs 30 or Rs 30+taxes). I think there is a ticket price cap in AP as well.

Nonetheless I think these are good businesses but not sure if there investment worthy at this juncture.

Ticket price capping has already been around for a pretty long time .Couple of things we need to bear in mind about price capping are -
1.With entertainment taxes as high as 40% state governments tend to benefit from higher ticket prices as much as film industry.
2.Demands for price capping are always championed by regional language film industry lobbies . The stronger the regional language industry in the state ,the lower the ticket prices. State governments very rarely do it out of their own accord (excluding TN of course) .

States with Strong regional film industries already have some kind of price capping or entertainment tax exemption for regional movies.

Karnataka government held off strong demands for ticket price capping from kannada film industry for almost a decade. Even when it agreed , the prices were fixed at a relatively higher price of 200 as against demands of 120 from the kannada film lobby as it didn’t want to lose on entertainment tax revenues fixed at 30%.Gold class , imax and 4dx cinemas were exempted.Weekday prices were already lower than that , now they just reduced weekend prices and hiked weekday prices.impact may be neutral positive for multiplexes as they may get higher volumes on weekends thanks to lower weekend prices.

Apart from these states , everything else is dominated by Bollywood and in some urban centres Hollywood . These industries have zero interest in capping ticket prices , infact they encourage higher prices for big releases as the cut from multiplexes is around 50% of revenues.

On F&B , almost all of the revenues comes from popcorn,cola or snacks locally prepared inside the multiplex . Fixing prices for these would be like asking restaurants to set standard prices for their dishes .i don’t recall something like that happening .There are already some restrictions for selling items like package bottled water above MRP , multiplexes worked around this by resorting to sourcing bottles with higher MRP from suppliers or selling only high end water bottles like evian and himalayan .you would find hardly any packaged snacks/eatables with fixed MRP inside multiplexes.

Personally , I feel pretty sanguine about the industry prospects but repelled by exorbitant valuations in line with rest of the market.

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PVR cinemas opens today a 5 screen complex near chennai airport

https://twitter.com/hashtag/GrandGaladaMall?src=hash

Any reason why PVR is correcting so much?

This is my first post, I am following valuepickr from few years, learning a lot through this forum.
@rao13 , as per valuations seems to be very high, my thoughts,

  1. ~ 500 screens, M.Cap/Screen =~ 13 Cr, higher side
  2. In spite of number of screens increasing YoY & good movies in last quarters , not great Q1FY18 results, as well last 3 years no improvement in net profit
  3. short term GST hike may impact

Disclose : Invested ( 4% of my PF ).

Earnings Call Q3 FY18 Key highlights:-

  • Ad revenue and ATP increased during the Q3 FY18 (10% and 7% y-o-q respectively)
  • Ad revenue growth driven by increase in volume. Price growth was marginal due to tax issues
  • Expects 20% growth in Ad revenue in future
  • Cost is marginally down because of advantage of input credit mechanism in GST
  • South India is prominent as part of expansion strategy, as low number of screens in that region
  • 67% of new screen additions in FY17-18 are in South India
  • 36 screens opened in 9M, FY17-18, 31 screens scheduled to open in Q4 FY17-18. 20% of future screens to be premium end screens
  • Recently agreed with major studios on new windowing strategy with respect to OTT and TV.
  • In future, theatrical release window – 6 weeks from release, post that Pay per view window can be opened. Post 8 weeks of release, subscription view/TV window can be opened
  • New screen addition – difficult regulatory/real estate situation on the ground leading to delay in opening new screens
  • Acquisition of small stake in US company – luxury cinema concept. Unique model – F&B revenue is higher than ticketing revenue

Key highlights of previous quarters - https://quotethemoat.wordpress.com/

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I was trying to value this company and although the direct sales and direct expense estimation has been relatively easy i am having significant hiccups in understanding the capital allocation ,depreciation and maintenance projections. Any help is appreciated.

  1. The depreciation is significant . However is this just depressing the earnings due to accounting rules or is it really the amount we need to take into consideration as replacement cost, say after 10 years. Somehow i could not find clear notes on in Annual report

  2. Are they leasing the spaces or owning the spaces in malls? Again missing picture on this in annual report

  3. They have governments grants and material other income from last two years ? Is that sustainable going forward or just one off instances?

  4. There has been no instance of debt reduction from last 3 years , infact they are accumulating more and more debt . With no free cashflows and opening plan of 1000 theatres how are they going to overcome this amount?

Thanks

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I have been waiting for Ready, Player One and was disappointed to find out the reasons behind it not coming out in India on most screens other than SPI cinemas. Missing out on the biggest summer blockbuster - This cant be good for PVR

Came to the thread excitedly to see if someone answered my queries.

Honestly, i don’t think this would put a minor dent in PVR revenues and PVR being the biggest multiplex player in India has the muscle to get the relevant profit sharing from major studios, however such things do not happen often in Industry. This looks like an issue between Warner brothers and BMS /PVR have got nothing directly against it, although some loss of face.

However the moat of PVR is so strong with ideal locations, best quality picture and sound ,the same customers complaining will definitely queuing to PVR for the next block buster. People can skip using BMS to protest as they have multiple options to book tickets , but not PVR for watching movie. Thats where the strong moat and high PE it has.

However if someone can clarify on the depreciation impact to actual earnings and CAPEX for movie theaters, that would really help in my model

Disclosure: Not invested, but waiting for the right time

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At these valuations, we need to consider the following.

  1. OTT players like Netflix, Hotstar and Amazon Prime are getting rights for new releases early (Padmaavat for eg.). This could reduce footfalls into cinemas. This is already happening in the US where movie theatre attendance is at a 25 year low.
  1. At ticket prices in multiplexes around Rs.300-350, it makes sense to spend on OTT subscriptions instead (Hotstar is just 100 a month and Prime about 50 a month?). For many, OTTs compete for the same entertainment pie. There could be great blockbusters that make sense to watch in an IMAX but those are few and far between.

  2. We may see regulations on F&B prices in multiplexes.

  1. Direct to TV movies used to be an anomaly but this might become the norm where movies are made direct for OTT. Netflix already has a few of these and this trend seems to be catching up.
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