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Inox Leisure: Ills of entertainment tax - Views on News from Equitymaster
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Inox Leisure: Ills of entertainment tax
Jun 20, 2007

Inox Leisure, one of India’s leading multiplex operators, has declared a subdued operating performance for the year ended March 2007. For FY07, the topline grew by 43% YoY while the bottomline grew by 41% YoY. The operating margins however, contracted by whopping 10.1% largely due to huge increase in entertainment tax and cost of film distribution rights. The real disappointment has been the distribution business where the topline and bottomline fell by 38% and 346% respectively on YoY basis. About Inox Leisure
INOX Leisure is the diversification venture of the INOX group into entertainment and is a subsidiary of Gujarat Flurochemicals. INOX is successfully running 14 multiplexes in 12 cities namely - Bangalore, Baroda, Chennai, Darjeeling, Goa, Indore, Jaipur, Kolkata, Kota, Mumbai, Nagpur and Pune. Further, it has an aggressive expansion plan covering cities like Mumbai (Borivali), Bharuch, Vijaywada, Lucknow, Faridabad, Jaipur, Kolkatta, Hyderabad, Raipur, Bangalore, Nagpur, Jodhpur, Pune, etc.

Consolidated financial performance: A snapshot…
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Sales 277 361 30.5% 1,071 1,530 42.9%
Expenditure 198 301 51.8% 711 1,170 64.6%
Operating profit (EBITDA) 78 60 -23.8% 360 360 -0.1%
Operating profit margin (%) 28.3% 16.5%   33.6% 23.5%  
Other income 11 31 171.9% 20 95 380.7%
Depreciation 14 20 36.8% 52 64 23.8%
Interest 21 11 -45.4% 79 67 -15.6%
Profit before tax 55 60 9.1% 249 324 30.0%
Tax 11 13 22.0% 74 76 3.1%
Profit after tax/(loss) 44 46 5.9% 175 248 41.3%
Net profit margin (%) 15.8% 12.9%   16.4% 16.2%  
No. of shares (m)         59.5  
Diluted earnings per share (Rs)*         4.2  
P/E ratio (x)*         30.9  
* On a trailing 12-month basis

Higher ticket sales drive topline: Inox recorded a topline growth of 43% YoY, driven largely by increase in ticket sales along with proportionate capacity expansion. The company sold 9.3 m tickets in FY07 compared to 6.3 m in FY06, recording a 48% YoY growth. Ticket sales formed 75% of total revenue while food and beverages (F&B) formed 14%. Average ticket size during FY07 was Rs 126 and the company had an occupancy rate of 45.3%, which it expects to increase only if the quality of content increases.

The proposed merger with CCPL will give INOX access to an additional 9 multiplexes in West Bengal and Assam. The merger will be w.e.f 1st April 2006 and the company has also received the approval of West Bengal high court to this effect. INOX is also in an alliance with the Pantaloon Group - a partnership that provides INOX preferential access to all real estate development, which Pantaloon takes up for its retail chain. The properties acquired through this alliance will be in addition to the properties that INOX has locked in on its own, thus exponentially increasing its reach across India.

Significant operating parameters
FY06 FY07 Change
Properties under operation 9 14 55.6%
Screens under operation 35 51 45.7%
Seats under operation 10,393 15,251 46.7%
Footfalls for the period 6,268,669 9,283,496 48.1%

Entertainment tax dents margins: The operating margins of the company contracted by a whopping 10% largely due to increase in entertainment tax and cost of film distribution rights. The entertainment tax increased 137% on YoY basis and film distribution rights increased by 69% on YoY terms. The company also recorded a 64% YoY rise in film distributors share and 52% YoY rise in the staff cost, which also contributed to the operating margin shrinkage. The blended entertainment tax rate on sale of tickets is 7.8%. After a deeper analysis, one could conclude that the multiplex sector pays around 25% to 30% of their topline as entertainment tax in addition to the normal income taxes.

Cost analysis
4QFY06 4QFY07 Change FY06 FY07 Change
Entertainment tax 19.6 28.6 45.9% 50.4 119.4 136.9%
Film distributors share 43.4 85.5 97.0% 211.4 347.6 64.4%
Film distributors rights and print cost amortised 29.2 9.6 -67.1% 57.4 97.2 69.3%
Cost of food and beverages 14.3 18.4 28.7% 54.1 74 36.8%
Staff cost 18.3 32.1 75.4% 76.5 116 51.6%

Other income aids bottomline: When operating margins drastically contracts, then one will expect bottomline to also fall, but in this case bottomline actually expanded by 41% YoY, largely due to a whopping 381% YoY increase in other income (which mainly consists of investment income) and a steep fall in effective income taxes. The company’s effective income tax rates decreased from 30% in FY06 to 23.5% in FY07. The company plans to bring up 10 new multiplexes each in FY08 and FY09, for which the expected capex will be around Rs 90 crore per annum for the two years under consideration.

Segment wise performance
4QFY06 4QFY07 Change FY06 FY07 Change
I. Segment revenue            
Multiplex 256.4 372.1 45.1% 1005.7 1511.1 50.3%
Distribution 35.6 28.0 -21.3% 82.7 51.7 -37.5%
II. Segment result            
Multiplex 53.8 61.5 14.3% 299.5 367.2 22.6%
Distribution 11.5 -8.8 -176.5% 12.1 -54.0 -546.3%
III. Segment capital employed*            
Multiplex 1692.4 2086.2 23.3% 1692.4 2086.2 23.3%
Distribution 75.8 27.8 -63.3% 75.8 27.8 -63.3%

What to expect?
At the current price of Rs 129, the stock is trading at a price to earnings multiple of 31 times its trailing twelve months earnings. Going forward, we expect the service tax on lease rent to be matter of concern for the sector and could easily eat up to the extent of Rs. 15 m to Rs. 20 m of company’s profits. The company has also lined up an aggressive expansion plan for the coming two years but will face stiff competition from other players like PVR, Cinemax and Adlabs, which is already evident in their falling operating margins.

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