Adlabs Films: Utilisation worries - Views on News from Equitymaster

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Adlabs Films: Utilisation worries

Apr 4, 2002

Adlabs Films, the film processing major continues to be hit by poor peformance of film industry in the current year. The company recorded a 25% growth in sales due to multiplex project becoming operational and also higher trading income. However, operating margins of the company have taken a severe hit.

(Rs m)3QFY013QFY02% Change
Sales112 140 25.2%
Other Income6 11 70.7%
Expenditure69 102 48.9%
Operating Profit (EBDIT) 44 38 -12.0%
Operating Profit Margin (%)38.8%27.3%
Interest 2 4 144.7%
Depreciation3 8 224.6%
Profit before Tax 46 37 -19.6%
Tax0 8 NA
Profit after Tax/(Loss) 46 29 -36.0%
Net profit margin (%)40.7%20.8%
No. of Shares (eoy) (m) 20.5 21.5
Diluted Earnings per share*8.95.4
P/E (at current price) 12.5
(*- annualised)

The incremental operating profits of the company expands more than proportionately with the increase in number of prints for a particular movie. That effectively means total number of films processed remaining constant, bigger copy size of a blockbuster film would earn higher margins than processing multiple films. This reasoning explains the drop in company's margins. Unlike last year, where the company had couple of blockbuster movies, the same was missing in the current year. Income from film processing has dropped more than 7% during the last nine months.

Adlabs- Revenue Mix
Rs m3QFY013QFY02% change
Income from film processing 76.268.2-10.5%
Income from Imax/ Multiplexes0.027.4NA
Trading Income35.944.724.6%

The four screen multiplex venture of the company become operational in the midst of the last quarter. Both the Imax and multiplex venture of the company has met with reasonable success with a contribution of more than Rs 27 m in the last quarter. Though capacity utilisation of multiplexes have been encouraging, lower capacity utilisation of IMAX, remains a cause of concern. The company's multiplex theatres have been given an exemption from entertainment tax as per the new Maharashtra government entertainment policy.This should help the company in improving capacity utilisations.

At the current market price of Rs 68, the stock trades at 13x its 3QFY02 earnings. The four screen multiplexes have only started full operations in the current quarter and the impact of revenues would only be felt in FY02-03. Considering this, there seems to be some room for improvement in valuations, based on forward revenues. Though margins have dropped in the film processing business, this business remains a cash cow for the company with a virtual monopoly status in 'Bollywood'. As far as other ventures are concerned, most of the company's expansion is now complete. However, here the company runs a huge fixed cost bill and hence the fortunes are directly linked to capacity utilisation. This should hopefully improve post the entertainment tax exemption. If it doesn't the company could take a severe hit on its operating margins.

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