Biased
Pointers:
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Will footfalls drop due to rise in internet usage in US? Will rising penetration of alternate forms of experience-entertainment (like Escape Room, Play Arena, Wonderla…) impact Cinema industry?
Lots of people are comparing with the US and saying that the cinema industry in US is not non-existent and the same would repeat in India. However, US is a high per-capita income country while India is a poor country. So I don’t find this comparison very apt. Also the more important question is “Is US cinema industry thriving?” and not “Is US cinema industry surviving?”
Anyways, by getting some numbers from the Annual Reports I could compute that number of customers who have used a seat in a single day has dropped from 1.625 in 2016 to 1.492 in 2018.
So overall usage of a seat is dropping YoY. -
Lets look Revenue / # of Seats. This helps us understand if revenues from old exhibitions is increasing or not. This number is increasing from 1.47 lakhs in 2016 to 1.67 lakhs in 2018. However, I believe this is not sustainable as footfalls are falling as per above point. If footfalls reduce below a tipping point, brands would stop advertising and would lead to loss in Ad Revenue. And if footfalls fall at a higher pace than ticket price inflation, then loss in revenue in the box office segment can be observed too.
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The company’s growth is dependent on commercial real estate. Any slowdown in real estate (which is anticipated according to me) can lead to slowdown in PVR’s growth.
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Management has been promising about 1000 screens since long. They have already missed one self-imposed deadline. Now they are still saying 1000 screens by 2020, which I again think it is impossible. Why didn’t they learn to under-promise and over-deliver from their previous experience?
Questions:
- No points / notes are mentioned about “Movie Exhibition Cost” by the management in any of the annual reports. What does it mean? And why are there no notes on this point?
Discl: No holdings. Not a buy / sell recommendation. Not a SEBI registered analyst.
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How is pvr linked to real estate demand?
Cinema exhibition occurs in malls (i.e. commercial real estate). Hence a slowdown in mall development could hamper PVR’s growth.
This is mentioned as one of their risks in Annual Reports.
If JIO is coming up with first day first show, PVR and INOX could be in trouble?
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As far as I know, Exclusivity agreement for period of 8 weeks is there between the cinema owners and the producers.
Hi All
There appears to be a unique accounting fallacy in the numbers of PVR Ltd.
With characteristics of a real estate business, PVR’s expansion has come largely from renting space (mostly inside malls) and putting up furniture and fixtures to create a multiplex, and thus rent forms a large part of company’s expenses. Further, since, company enters into non cancellable lease of multiple year durations, there is some liability that is off balance sheet and thus needs to be examined in greater detail since with shutting of a multiplex, company has significant rent payments to be made. Company presents these as future operating leases -
| Particulars | 2015 | 2016 | 2017 | 2018 | 2019 |
|---|---|---|---|---|---|
| Rent Expense for the year | 2,800 | 3,378 | 3,956 | 4,095 | 5,079 |
| Rent accounted in WIP | 11 | 25 | 8 | 3 | 76 |
| Revenues | 14,771 | 18,496 | 21,194 | 23,341 | 30,856 |
| Rent as a % of revenue | 19% | 18% | 19% | 18% | 16% |
| Minimum Lease Payments- | |||||
| < 1 year | 2,045 | 2,028 | 2,427 | 2,508 | 3,075 |
| 1-5 years | 6,322 | 5,928 | 7,309 | 6,950 | 9,471 |
| > 5 years | 4,614 | 3,887 | 5,224 | 4,854 | 7,435 |
| Total | 12,981 | 11,843 | 14,960 | 14,311 | 19,981 |
| Rental Duration (Years) | 4.6 | 3.5 | 3.8 | 3.5 | 3.9 |
| Screens | 474 | 552 | 579 | 625 | 763 |
As can be seen from above, despite the location being essential to company’s operations, the term of lease across properties for PVR is quite less (only 3 to 6 years). The number is further undervalued since it does not take into account the escalation of rent as years go by. This discrepancy becomes even more glaring when we compare it with Inox, its closest competitor, and 2nd largest exhibitor in India –
| Particulars | 2015 | 2016 | 2017 | 2018 | 2019 |
|---|---|---|---|---|---|
| Rent Expense for the year | 1,342 | 1,576 | 1,804 | 1,984 | 2,437 |
| Rent accounted in WIP | - | - | - | - | 32 |
| Revenues | 10,168 | 11,605 | 12,207 | 13,481 | 16,922 |
| Rent as a % of revenue | 13% | 14% | 15% | 15% | 14% |
| Minimum Lease Payments- | |||||
| < 1 year | 1,330 | 1,627 | 1,804 | 2,028 | 2,455 |
| 1-5 years | 4,606 | 6,523 | 7,292 | 8,240 | 10,656 |
| > 5 years | 11,598 | 16,202 | 16,997 | 15,961 | 28,300 |
| Total | 17,534 | 24,352 | 26,093 | 26,229 | 41,411 |
| Rental Duration (Years) | 13.1 | 15.5 | 14.5 | 13.2 | 17.0 |
| Screens | 372 | 420 | 468 | 492 | 574 |
Inox renews the lease on its properties in 13-17 years.
As per Inox’s filings, “ These arrangements are for an initial period of 3-30 years with a minimum lock-in period of 2-15 years and the agreements provide for escalation after pre-determined periods.” (PVR AR does not give away this information)
Further, PVR has much smaller land holdings than Inox while assets like Furniture & Fixtures and Plant & Machinery are corresponding to the number of screens in each company’s portfolio.
If we were to assume that both Inox and PVR source properties in a similar manner, then there are 2 possibilities here –
a. PVR is under reporting its potential lease obligations.
b. The renewal of lease is much faster in PVR.|
If these obligations are under reported, a lot of potential risk remains undisclosed in PVR’s books, especially when the company is expanding at a scorching pace. While it may not happen that all the company’s properties might have to face closure at once, but lack of disclosure does not give an ability to stress test company’s liquidity.
If the rate of renewals is higher for PVR, it greatly undermines the operational stability since the company faces higher rental escalation along with uncertainty from the property owners with respect to stable renewals.
For the entire post, and my thoughts on the film industry, you could refer here -
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Q3 FY 20 PVR presentation: https://www.bseindia.com/xml-data/corpfiling/AttachLive/791f54cb-317a-41d4-b11f-3155ef8c6ecd.pdf
PVR
Key takeaways
Added 67 screens in the past 10 months. Another 30-40 screens are in the
pipeline, which will be opened in the next two months.
Should open 90-100 screens in FY20.
For FY21, screen opening guidance is in the range of 75-100; will give a more
specific figure towards the end of the year.
Plan to monetise the presence on Swiggy and Zomato; PVR is working on creating
products more pertinent to delivery.
Delivery will be another revenue stream for the F&B segment and management
believes this can pick up well.
Strategy for ad growth—ad segment has been under pressure as corporates have
been cutting ad spends.
PVR is working towards building long-term partnerships with corporates.
Near-term outlook not great, but believe this will rise when the business
environment improves
PVR custom-fits solutions for each brand they work with and shares data with
specific clients; this happens both at regional and national levels.
Cutting on traditional advertising and focusing on national media as PVR has
become a national player.
PVR Privilege – Company runs 50 odd campaigns every month to drive footfall and
other consumption. It usually takes longer (around two years) for a loyalty
programme to stabilize.
Net debt position at INR8.25bn. Leverage at 1.2-1.3x debt/EBITDA from over 2.0x
last year. Most of the capex is being funded via internal accruals.
Can you do comparison with INOX Leisure?
As main listed player next to PVR
Using screener data, I have a query
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PVR debt as of September 2019 is INR 1220 cr. and finance cost outflow TTM is INR 404 cr. Debt is almost flat since March 19.
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PVR gross block has doubled since March 2019, How much of this is because of the SPI acquisition/ organic capex and lease accounting adjustments? Are the new additions yet to bear fruit? As a result depreciation has also gone up.
Has anyone looked at the new accounting methodogy in conjunction with the company’s lease agreements? Are they following prudent asset amortizing norms? Also what is the amount of maintenance capex PVR or INox need to incur in case their leases keep getting renewed. Is there any data of maintenance vs. fresh capex shared by the company.
While the company’s operating cash flows broadly look OK. I am trying to understand if any losses are hiding behind the lease assets and whether PVR and INOX continue to be cash profitable and by how much after maintenance capex of a seasoned cinema location
Are you looking for a stimulus package for the industry?
Yes. We have written to the prime minister and the finance minister through the multiplex association, cinema association and the film fraternity. We have requested for a relief package. The industry has sought interest-free loans for three years with a one-year moratorium. It has asked for exemption on taxes and duties, including GST (goods and services tax). We have also asked the government to help in underwriting part of the employee cost.
In my opinion, it will be important to monitor what relief package do they receive
Disc : No investment. Tracking
Cinema exhibition has survived recessions but have they survived a global pandemic?! 
If they get a relief package that would be first time in recent history . There are some sops to promote local film industry (kannada films tax free in karnataka etc) but nothing at film exhibition industry that i can recall.
Entertainment industry like Alcohol industry is one of those industries that Governments can tax with impunity without any political fall out . Infact governments have shown tendency to cap their profits by capping ticket prices to please the middle class.
Either way , if people don’t show up at multiplexes post lockdown it won’t matter what government does . China tried to open multiplexes few days back , hardly anyone showed up . Then government ordered them to be shut again .
PVR gets most of their revenues and disproportionate profits from urban middle class in big cities like bangalore,delhi,mumbai etc ,really doubt these people who are hoarding and dousing themselves in sanitizers would be too enthusiastic about cramming themselves in to a congested auditorium with strangers in the medium term . Multiplex industry would be one of the last industry to get back on its feet post lockdown.
Personally , i would consider PVR if we can get it at or below replacement value as lot of weaker players/single screens may fold up . It has a chance to be true national duopoly along with inox .
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Going by this logic - do you think people would go to Malls, Restaurants, Shops, Hotels, Amusement Parks???
And if someone presents a futile argument that you are not literally breathing in each others space like you’re in cinema halls, then cinemas can always sell tickets 2-3 seats apart.
So either things are going to be terrible for all and sundry mentioned above or cinemas will also come out like the others with probably 10-15% higher impact due to initial skepticism.
However stock price is something I can’t comment on. Have no idea how much disruption markets have factored in with 55% cuts from their highs in PVR/INOX.
Disc: Invested in Inox
You don’t sit at one place at 3 hours at a stretch sealed in darkness with about 100-300 people in close proximity in a amusement park or malls or shops or even restaurants for what is essentially a highly discretionary activity.
Iam saying multiplexes will be one of the last to return to normalcy among consumer discretionary ,not that they wouldn’t return to normalcy ever.
Regarding altering seating arrangement ,Quite possibly they could do that . But they lose 2/3rd of their capacity ,Same Fixed costs and run in losses as the whole model depends on cramming audience every weekend by saturate releasing new films in 1000s of screens and make them buy expensive popcorn/soda as weekdays run at less than quarter capacity for almost every film.
Even Best of times they have hard time crossing 35-37% avg quarterly occupancy , Occupancy below 32-33% drastically reduces their operating leverage and even results in them reporting losses . Now imagine starting out with a 35% capacity , effective avg quarterly occupancy rate will be 10-20% in a optimistic scenario for few months/quarters.
Unlike multiplexes - People’s other discretionary leisure activities like amusement parks , mall shopping , dining out,beach hopping,sight seeing,mountain climbing,go-karting ,river rafting etc don’t have a strong in-house replacement option.
Very interested to see how they adapt as finally after a century they have their strongest challenger yet - the streaming services, which were getting strong even before corona and now people have months to get habituated to them . will it change people’s behavior dramatically towards their attitude to watching movies in theatres?
I have invested in PVR in the past as a growth stock but now Iam interested in it as more as value/bargain stock . at or Substantially below replacement value of 3000-3500 cr market cap would make it very interesting. If some growth does return along with some fixed cost reductions via rent/distributor share re-negotiations etc would be cherry on top
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AMC entertainment which would be PVR of US is down 80% from its highs ,so comparatively Indian markets seems to be more sanguine about multiplex operators .
Comparing AMC with Indian companies doesn’t make sense
D/E of AMC is 8 !!!
PVR has some debt and inox is debt free.
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Yes.Thanks for pointing that , Didn’t realize the D/E ratio gone up for 4 days since i last looked at it in 2017-18
I agree to your point. Business is going to be disrupted for as long as the covid19 fear stays in the air. As far as govt is considered , the business would be in the last of pecking order , when lockdown is going to be lifted. Now PVR along with inox has invoked force majeure to not pay rentals. Once they open the Multiplexes they will have to start paying rent and on top of that work at lower capacities. I feel demand from consumers will also be lower. For instance , I would myself prefer to be staying @ home rather than take the risk to go out and watch a movie. I think even the producers and distributors may not be very eager to release the movie immediately after the lockdown. So there will be a drag on revenues due to that too. But I don’t see any reason for the business not to bounce back to the normal levels once the covid crisis is over. But that may take atleast a quarter or more. But will the stock be available at these valuations then, is something we need to think about