PVR Ltd.- Play on increasing disposable income

The proactive role played by the Honourable High Court is appreciation worthy. But, the expression " regular prices" is laden with ambiguity. Who is the competent authority to ascertain the correct pricing?
The phrase " regular pricing" is as subjective as it can possibly be. Regular pricing for the wealthy could be a buffet meal at a 5 star.
Regular pricing for a middle class person could be a Rs 100 meal at a suburban restaurant.
What pricing are we referring to?
Pricing is seldom determined by the cost of production.
And, if government intervenes to set prices for food and beverages at multiplexes it’ll have far reaching consequences.
Someone may then demand a pricing cap on the tariff at 5 star hotels.
The list is endless.
Controlling prices of businesses is seldom a
recipe for economic success.
In my humble opinon, market forces should be allowed to decide what the fair price is.
Sure, their ticket sales might suffer because of the emergence of online content.
But, in my humble opinion, it seems unlikely to me that the pricing freedom will be restricted.
But then, anything is possible.
Only time will tell.

Also, the article shared mentions the reducing footfalls. But, it’s pertinent to note that cinema footfalls of frequent moviegoers increased in 2015 and 2016.
Netflix and other streaming services were prevalent even then. It’s entirely possible that the lower footfall is a blip. Or it truly depicts a trend- I don’t know. Yet again, time will tell.
In most age groups, movie footfalls of frequent moviegoers peaked in 2012 and then started reducing.
But, in 2014 footfalls started improving again.
I think we should wait a little before we write off theatre chains.
They’ve been fairly resilient despite the technological onslaught and piracy issues.
They might possibly survive the emergence of streaming services as well.
We can only theorize in the meanwhile.

Frequent moviegoers- Those who visit the cinema at least once a month.

And, my final submission- Moviegoing is about the experience as much as it’s about the film content.
Despite being amidst loud sounds in a cinema there’s something pacifying about the experience of watching a film on a large screen in a group.
It’s seems unlikely that such an experience can be replicated at home.
I’m technologically ill informed but virtual reality sets could improve the experience. But, I don’t know enough about it to share my thoughts.
An analogy- Online food applications have made it incredibly convenient to get food delivered whenever we want.
Examples being Faasos, Box 8, etc.
They provide top quality food.
But, I still choose to visit restaurants and cherish the experience.
There certainly is a transition from offline to online.
But, I’m inclined to believe that there will be enough people who are interested in visiting the offline outlet to sustain the business.

Also instead of looking at Netflix etc as threats, we could look at the fair amount of opportunities they bring along, especially with regard to the vast original content that they have been producing, with the big data they have been able to accumulate.
We all know that PVR is experimenting with the concept of movies-on-demand. If they could collaborate, i think both could make a lot of money together. Imagine, we being able to crowd-source GOT and other such content and watch it on the theatre like experience of PVR with Dolbi digital sound.
In my humble opinion, PVR has a long runway ahead.
Disclosure: Invested

Earnings Call Q4 FY18 Key highlights:-

  • No of screens – 49 new screens opened in FY18. 23 screens ready to open once mall owners clears regulatory issues. 90+ screens expected to open in FY19
  • Capex – INR 350 cr in FY18 including DT acquisition. Expect ~INR 400 to 450 cr of capex going forward on new screens, upgrades and renovation
  • Per screen capex of ~INR 3 cr remains same
  • OTT platform impact – management sees this as positive cycle – more revenue earned by content partner through additional channels leading to more investment in content created and hence more films to be screened
  • All new releases will have 8 weeks of exclusive theatrical window as per new agreements being signed
  • On straight to Digital content – HBO has been doing this in the past so no new concept. Will not impact their business as all such films are small/medium budget films but big budget films business model is defeated if not released in theatrical
  • On expected fund raise utilization – Cinema business will consolidate further and they want to be ready for to take grab any opportunity that may arise
  • Market Share – 25% of overall theatrical business of a film
  • ATP increased during the Q4 FY18 (10% y-o-y)
  • ATP to grow at inflation rate in future (4-5% in the long term basis)
  • Q4 FY18 Ad revenue growth 37% y-o-y
  • Expects 15-20% growth in Ad revenue driven by creating more/new spaces/inventories
  • Online ticket booking – JD is not the partner anymore
  • Higher receivables due to change in billing cycle owning to GST implementation
  • South India is one of the most profitable market, Occupancy is very high in south market because of lower penetration
  • No major difference in tier 1 & tier 2 cities revenue profile

Key highlights of previous quarters - https://quotethemoat.wordpress.com/earning-call-summaries/pvr-ltd/

These are serious revelations

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What is serious in these revelations?

Well for starters Panama Papers is equivalent of what people used to refer “Swiss Bank accounts” for.

And a firm right at the centre of it was managing money for promoters of PVR to make overseas investments definitely scores negative points in my evaluation of quality of management.

Promoters can have properties in foreign location in their personal capacity and using holding company structures is quite a usual practice for holding such properties. If you could establish that they have siphoned money from the company or any of these structures are illegal then we probably have a reason to be worried.

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Big negative for PVR. F&B is a high margin segment and contributes 20-25% of revenues. Maharashtra contributes about 25% to revenues. And this can be precedent for rest of the state govts.

This was bound to happen. A 30 rs coke was charged at 250 in PVR recently. Greed has to have some boundaries. Multiplexes are running on thin ice on this one. They just hike prices as if it is no body’s business.

Disc: Exited sometime back after Karnataka/TN started imposing price restrictions.

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these are not high margins but extortionary charges. The business is like this - invite folks by showing nominal ticket price and then charge huge sums for ordinary food etc. If they start charging 500+ for movies, their business model will be over. This is set to be disrupted by Netflix over time. In some housing societies folks are screening movies on projector in clubs with high end sound effect and this has reduced pressure on parents to visit theatres. Innovation and adaptation is on way and these multiplex owners are themselves to blame for this disruption.

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I read on Twitter that why maybe the government will next allow people to take their own food inside Starbucks and high end bars as well. There are many establishments which are able to charge disproportionately for the “experience” they provide to their customers including five star hotels, entertainment parks etc.

But there is one crucial detail which is unique to PVR and the cause of so much outrage and anger against it. PVR operates in an oligopoly situation. While people who go to starbucks have other options like CCD etc., in many cases movie goers have no other option other than PVR. In cases of monopoly/ oligopoly, the regulator can intervene to protect the rights of the customers.

Even so, allowing outside food inside the PVR is outrageous in my opinion. Because it spoils the experience of other customers when people bring outside food and litter. I think this is an extortionary tactic to make PVR fall in line. PVR is obsessive about the experience of customers and they spend a lot both in terms of money and efforts to make sure that the customers have a great experience inside a PVR. And they have the right just like any other business to stop people from bringing in outside food.

What the government or the regulator could do (PVR being in an oligopoly industry) is to regulate the prices - although I would not recommend it. First, if people think that price of food is extortionary, they can chose not to eat for the duration of the movie. This is not a life and death situation like price of medicines. Second, in terms of economics the ROE of PVR over the last 10 years is ~9% (avg) and in the last year was ~11% despite considerable leverage. From the figures, it certainly doesn’t feel like a monopoly or an oligopoly. Despite “extortionary” prices their returns are quite mediocre. Third, if people feel that they are not getting value for the money, the business will sooner or later get disrupted. Take the example of Gillette. Now that was also an oligopoly which charged disproportionately for the blades. Despite their dominance of the industry, they got disrupted by dollar shave club. Hence, let free markets work their magic. Many of those disruptions including Netflix and other streaming services are already taking market share away from theaters.

PS: I do think there is a lot of anger and outrage from some customers about the high food prices in PVR. In my view, the logical thing for PVR to do would be to take a voluntary price reduction.

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Not long ago majority of Indian rich had big sigh of relief when Supreme Court allowed free water on hugely competitive airlines. Such is the irony of life. I have no stakes here so won’t take much time.

We are not talking normal things when popcorn and movie tickets cost you the same. I don’t go to halls for food. What is the purpose of outrageously priced food then?

Improve ROE - Not happening despite charging 3-4x normal price
Customer satisfaction - Deteriorating
Is it sustainable ? - No
Do they provide options like food court- No
Can they increase movie ticket prices - Yes

I had doubled my money here long back and thanked my luck like I did in case of Manpasand. IMO, this is an inferior business and whole model is designed to generate low ROE with emerging tech options. Is the management top class? absolutely no. It has generated substandard ROCE for a long time despite govt support for multiplexes and lack of competition.

Inherent lack of transparency - Many avenues to siphon money through high rent payments and gold plating of capex. I was absolutely not surprised when Mr. Bijli’s name appeared in Panama Papers. I can live with suspicion but not with ultra low return ratios. If the promoters are clean which could be the case. They are not generating enough returns which makes them weak management. I will be running away in either case. They can not win by copying western biz ideas.

So what is the purpose of PVR’s existence - IMO, PVR’s main business is to subsidise bollywood by keeping ticket prices low. Can they charge Rs 500 for movies and Rs 50 for Coke? will it work across India? If the answer is yes, PVR stock can be bought at much lower levels else it is an huge avoid for me at least.

In any case clubbing it with broader consumer basket and giving PE of 45 is a mistake when investment intensity/fixed costs are so high.

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Yet movie after movie is making 200cr+. I don’t see how Netflix and privately arranged projectors can compete with an IMAX or 4DX experience. Besides neither option allows you to watch the latest movie within 3-4 months of release, more for popular ones.

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Thank you for writing this, this is the argument I’ve been giving everyone who celebrated the state court ruling. PVR is a near monopoly in luxury cinema segment but it is not making the kind of money it should. The govt should intervene while pricing essential items but food during a movie is purely luxury and simple laws of economics do not apply to them. Infact having popcorn during a movie is a desire and maybe borderline greed. Would consumers rather prefer an inflated ticket price for everyone or cheaper tickets and expensive food for those who want to buy?

Coming back to the financial part of things, I don’t see how this trend will bring any good for PVR. They’ve been expanding really well while bringing value added and high margin offerings like IMAX and 4DX. With the increasing urbanization and disposable income, demand is going to surge. This is corroborated by the recent series of movies making 200cr+ and more international launches in India.

I’ll be willing to invest in PVR once this issue settles or atleast becomes evident that this will be restricted to Maharashtra only.

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yet PVR struggles to make money from movie screening biz. Can you tell me path to profitability for PVR’s movie segment? This is not in incubation stage. I would be very worried if I am invested here. IMO, the industry structure is such that consumers and movie producers have bargaining power which will rssult in subpar returns from its core operations. One can’t bet big on its anciliary operations.

Value migration in the long term. The point where people start treating moviegoing as an experience and not just for the sake of watching the latest movie for the bragging rights. That’s where PVR will be able to segregate its offering and charge a premium for luxury offerings. It still does (PVR Gold class/ recliners/ IMAX/ Play house) but the acceptance is very low. A gold class ticket costs 3x a regular ticket with marginal increase in costs. This is a segment where producers and consumers do not have pricing power and PVR is the only player in a position to offer this.

But the overhang is govt meddling. For instance, flavored and roasted makhanas are sold in supermarkets as well but no one bats an eyelid. But if PVR is restrained from pricing its products, it will apply to all products. Surprisingly, the management did not consider this as a threat in its AR (16-17).

https://www.nagpurtoday.in/multiplexes-disallow-outside-food-parking-fee-hiked-at-pvr-in-nagpur/08021727

As per this news, next hearing of the high court case for PlL filed to allow outside food is on 8th Aug but from today’s price action, it seems market expects favorable decision for multiplex owners

Disc- Don’t own PVR but own Inox Leisure

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Positive news to certain extent , though this may not be a major benefit to PVR as it falls in Rs.100 + ticket brackets and people going their wont make a decision to watch or not watch movie based on the tax they are paying.