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Inox Leisure- A faster running horse?

A few things to understand about the Cinema/multiplex space.

ATP- is the average ticket price
F&B SPH- is the food and beverage spend per head
Occupancy- The number of seats filled per screen
Footfalls- number of people visiting the establishment in a given period. (could be yearly or quarterly)

Lets say you are interested in the business and want to build a multiplex:

Capex required would be 2.75-3 cr per screen (Acc to Inox’s management)
ATP is 197, Occupancy is 28%, Number of seats in the screen are 235, F&B SPH is 73 (Current q4fy19 numbers)

So every day you will earn= Occupancy*(ATP+F&B SPH)
So, 28% of 235 is 66 Seats. So your earnings from one show will be= 66 (197+73)=17820.
Every screen plays 4 shows per day. So daily earnings will be 17820
4=71280.

Along with this the burdensome time we spend watching the vicco vajdradanti and lyra ads during interval and start of the movie, also provides us with additional revenue.

Other sources of revenue would be any ticketing platform use, renting out some space to different vendors, etc.

This would bring our daily average sales to around Rs.85000. So on an average a screen will provide with revenue of 3.10-3.5 Cr per year. With a 8% net profit margin, in our pockets is 27- 30 Lakh.
This is 10% cash generation for the capex.

The footfall generally increases, after a year or two of operations. So in 10 years time, we will own the infrastructure of the screen as well as a free cash flow machine. Due to dealing with customers we get upfront payment and there is no bad debt scenario, giving us a negative working capital.

Before we get too excited by this, lets see the challenge in opening a screen. The regulatory approvals take time. If you’re ready to build a multiplex right now, it takes 4-5 years to carry out the plan. Why so? Multiplexes are generally built in a mall. So, the plan needs to be present when the mall is being planned as well. Plus there is usually an exclusivity given to only one multiplex per mall, as multiplex brings a lot of footfall for the mall as well.

INOX LEISURE:
It is a company of the Inox group which consists of a lot of companies in Chemical sector.

This is how Inox’s revenue is divided:
Net Box office (60-65%)
Food & Beverage (20-25%)
Advertisement (8-10%)
Others (6%)

This is why single screen lost popularity and how soon they lost it:

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After a screen has matured, nothing other than external content will be able to drive revenues. So, geographical expansion is key to grow.

Inorganic acquisitions are done to boost growth.

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The GST point:

  • Entertainment tax was levied which was of 25%. GST is 18% and hence the 7% difference gave a good margin expansion. They have passed on this benefit to customers, which is why you may see a dip in ATP when GST was rolled out.

  • F&B had a tax of 12% which got revised to 18%. Company has increased F&B prices.

Following is the growth strategy for Inox:

  • They are increasing screen presence like never before. They used to have a 3 screen addition per month as their growth. However this year company has grown to opening 17 properties and 85 screens bringing the total number of screens to 583. This is the highest ever new screen opening for the industry in a year. Inox was adding lesser screens in a year than PVR and is one of the reasons why it was trailing PVR’s growth.

  • Inox had 250 seats per screen, which has now been reduced to 235, and they aim to reduce this more. Lesser seats more screen.

  • Company is net debt free.

  • image

  • Company’s screens are divided as:
    42% in West
    22% in South
    21% in North
    15% in East

  • Current Segmental Revenue Breakup:-
    image

  • Company has also paired up to broadcast Cricket matches and leagues in 8-12 locations to boost revenue.

  • A fact to note is that movie business do good in recession as it is the cheapest form of entertainment compared to any travel and tourism.

Risk:

  • Content
    There is content risk as company provides a service based on someone else’s product. Revenue will differ with onset of blockbusters. In 2018 when Padmavat was banned to be released in certain states, revenue was hampered.

  • Government:
    Government in the past have promoted the multiplex sector by providing subsidies, cheap land and electricity etc. Govt may take all of this away and impose more restrictions. Regulations such as allowance to bring your own food can be bad for the company.

  • Valuation:
    Stock has recently touched its all time high. It is not the cheapest valuation and that needs to be taken in consideration.

With the entry of Insignia, Inox IMAX, and the aggressive expansion with no net debt seems like a good opportunity.

This is my first post on ValuePickr and I have gained a lot of knowledge here. Do let me know if I have made any mistakes or breached any community guidelines.

Disclosure:- Not invested but interested.

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I have been tracking this stock since a while now and I feel that the stock will soon get re-rated. Here is my thesis which I had posted on a different thread:

Inox Leisure Ltd. is in the business of exhibiting movies through its chains of multiplexes run under its brand name ‘Inox’. It is the second largest chain of theatres in India with around 583 screens after PVR which has 748 screens.

Over the last 4-5 years, Inox has always traded at 40-50% discount to PVR’s valuation and even at current prices (Inox CMP: Rs. 316, PVR CMP: Rs. 1721) Inox is trading at 47% discount to PVR. (Inox is trading at 23X TTM P/E and PVR at 43.5X). However, given the improvement in Inox’s performances on various metrics warrants a re-rating of the stock vis-a-vis PVR and also given the growth prospects and financials of the company. My bullishness stems from the following factors:

  1. Improvement in key operating metrics viz., ATP, F&B revenue and ad revenue:

Historically, PVR scored well on above metrics compared to Inox by wide margins. However, in last 3 years, Inox has capitalized on those levers and have improved its performance across metrics.

Capture

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However, as you can see from above, Inox is catching up fast with PVR on all those metrics which is showing up in their margins.

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  1. Strong screen addition in an efficient manner and robust pipeline for next 5 years.

Inox has seamlessly added screens over the last 3-5 years without stressing its balance sheet. Moreover, it has also not faced much delays and has been on time in adding newer screens. In addition to this, the company has signed definitive agreements with developers to add 830 more screens over the next 5-7 years. Moreover, nearly all of company’s screens are coming in new cities where they don’t have a presence, thus it’ll increase its target audience.

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  1. Healthy balance sheet despite strong screen addition.
    Despite aggressively adding screens, Inox has kept its balance sheet in a healthy shape. Recent preferential allotment by the promoter razed of nearly all the debt from the company’s balance sheet. In FY19, the company also generated cash of ~200 cr which will enough to meet the capex. Going ahead also, I think company will be able to meet the capex through its operating cash flow only and it’ll continue to remain debt-free. Besides, company also has treasury shares worth Rs. 150 cr which they can sell off to fund any future investment.

  2. Increasing content which is grossing huge at the box office.

Bahubali 1 had set the box office on fire with its humongous collections of Rs. 515 cr. (gross) At that time it was believed that this was a one-off instance and to be treated as an aberration. However, since then every year there have been movies which have outpaced the previous ones. Bahubali 2, Robot 2.0, Avengers Endgame, Uri, Sanju and Dangal are examples of movies which deed extremely well at the box office and the pipeline going ahead also continues to be strong.

  1. Industry consolidating as single screens continue to struggle and are facing a shutdown.

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And despite the increase in the number of multiplexes screen, per capita screen ratio is still lowest in India with 8 screens per million people, compared to 125 screens in the USA and 37 in China.

So given the strong macro headwinds, and improving micros I think the huge valuation gap between Inox and PVR is unwarranted and we should see the re-rating happening over next few quarters as company delivers even better performance and closes the gap with the industry leader.

Key risks: In terms of key risks are

  • Fellow company Inox wind going bust. However, given the strong pedigree of the promoter entity, Gujarat Fluorochemicals, the chances are mitigated. In fact in FY19, the company sold several assets in Inox wind and brought down D/E ratio at 0.7x.

  • Poor content and lower than expected BO collections. Partial threat from OTT as well (though I personally believe is that movie-going is an experience and not just plain watching.)

  • Delay and cost overruns in screen addition can lead to financial deterioration. A lot of company’s prospect depends on its ability to add screen as efficiently as it did in the past.

Disc: Invested in the stock at Rs. 310-320 (10%), so slightly bias views.

Views and criticism invited.

Thank you for your patient reading.

4 Likes


Great comparison in this article nice read

Good analysis @Akshada_Deo . One more reason why I like Inox over PVR is due to the promoter holding and also the fact that PVR top management has been previously fined by SEBI for price manipulation. Bijli family’s name had cropped in the PANAMA papers also. Have not come across any such instances of the Inox management . If anyone here at the forum has any information about the Inox management , then please correct me.

Regards

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I have met once in noida.
But had very good and long business relationship with Gujarat fluoro and what you said very correct. Super management. No hanky panky and very dependable.
Other such company that I know is Balaji Amines.
Both are super.

Had both the stocks at one time. Now none.

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Any reason as to why you sold off INOX?

Profit booking only. There is no reason.

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Just went for a show at INOX Nariman Point. Ordered over Rs.1000 worth of food and wasn’t given a bill. Offered to pay via PayTM initially and they requested to do the payment after the show as they had not ‘input the order in the system’. Ended up paying cash. Went back during the interval to ask for the bill and was told they would send it to my seat. Nothing came.

Anyone else experience this?

If you booked online , check your inbox for feedback mail . You can mention it there. My concerns were addressed same day by the manager of the property .

Inox posted good set of numbers.

Invester presentation:

Footfall has seen good growth:

Box office collection and F&B has grown, while Ads revenue has degrown:

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