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Cinemax: House 'not' full

Jun 21, 2007

Cinemax, one of India's leading multiplex operators, has declared a subdued operating performance for the year ended March 2007. For FY07, while the topline grew by 63% YoY, the bottomline fell by 13% YoY mainly due to large increase in entertainment tax, film distributors share, staff cost which also contributed to contraction in operating margins by 370 basis points (3.7%).

Standalone financial performance: A snapshot...
(Rs m) FY06 FY07 Change
Sales 424 690 62.8%
Expenditure 306 523 71.3%
Operating profit (EBITDA) 118 167 41.1%
Operating profit margin (%) 27.9% 24.2%  
Other income 15 21 38.0%
Depreciation 13 41 221.4%
Interest 25 39 59.6%
Profit before tax 121 108 -11.1%
Tax 32 30 -5.1%
Profit after tax/(loss) 90 78 -13.3%
Net profit margin (%) 21.2% 11.3%  
No. of shares (m)   28.0  
Diluted earnings per share (Rs)*   2.8  
P/E ratio (x)*   53.6  
* On a trailing 12-month basis

Company background
Cinemax has at its focus exhibition and gaming business with a limited interest in mall development. The group premiered into the film exhibition business in 1997, by acquiring a single screen theater at Goregaon, Mumbai from where it has grown into a business that operates 12 properties with 38 screens and has a seating capacity of just around 10,900 seats. Combining its background in real estate development and seizing the opportunities offered by the Multiplex policy of the Maharashtra state government, the company has successfully developed 6 multiplexes in the past.

What has driven performance in FY07?
Higher ticket sales drive topline: Cinemax recorded a topline growth of 63% YoY during FY07, which was driven largely due to increase in ticket sales. Also, the company managed to increase its average ticket realisations from Rs 105 in FY06 to Rs 125 in FY07. The company's occupancy rate stood at around 40% and the management expects it to maintain at that level.

The company currently has 12 properties out of which 8 are owned and the upcoming multiplex in Nagpur will be the last property, which it will own. All other properties, which will come up till FY10, will be leased. Of the 77 properties, which it expects till FY10, 30 properties will qualify for entertainment tax exemption which we believe will help the company in cutting down its costs. The company's current lease income is about Rs 50 m and it expects its gaming business to scale up nicely in future.

Significant operating parameters
FY06 FY07 Change
Properties under operation 10 12 20.0%
Screens under operation 33 38 15.2%
Seats under operation 9,200 10,868 18.1%
Footfalls 3,700,000 5,300,000 43.2%

Rising costs dents margins: While the sector is already plagued with rising costs, the government is also not keeping any stone unturned to ensure that it collects maximum revenue from this high growth industry. The company's operating margins contracted by 3.7% during FY07, largely due to increase in entertainment tax, film distributors share and staff costs. As a matter of fact, the film distributors share and staff costs rose by 212% and 415% respectively on YoY basis. Film distributors share, which formed 13% of total expenditure in FY06, was 23% of total expenditure in FY07.

Cost analysis
FY06 FY07 Change
Entertainment tax - 8.0%  
Film distributors share 9.2% 17.7% 91.5%
Cost of project 49.4% 16.4% -66.9%
Staff cost 2.4% 7.7% 216.0%

Higher depreciation, interest dents bottomline: Cinemax's net profits declined by 13% YoY during FY07. Apart from the contraction in operating margins, the other culprits for this pressure on the bottomline were depreciation and interest cost. While interest cost rose by 60% YoY, depreciation made a bigger dent by rising 221% YoY. While taxes showed a marginal decline as profits were below expectations, the company's effective tax rate rose by 200 basis points (2%) from 26% in FY06 to 28% in FY07.

The company has announced an aggressive capex plans which includes a 6.5 times increase in their properties under operation by FY10. The company will also increase its screens under operations from current figure of 38 to about 300 during the said period. This capex will be covered out of the IPO proceeds.

Capex plans
FY07 FY08E FY09E FY10E CAGR 07-10
Properties under operation 12 34 49 77 85.8%
Screens under operation 38 108 165 299 98.9%
Seats under operation 10,868 28,524 42,483 75,695 91.0%
Source: Company estimates

What to expect?
At the current price of Rs 149, the stock is trading at a multiple of 54 times its FY07 earnings. Going forward, we believe there are two concerns for the company. The first one is the service tax on lease rent, which will severely impact its profits considering all other upcoming properties will be on lease basis. Secondly, the company has lined up a massive expansion plans. Considering that the estimated capex per seat will be some where around Rs 60,000 to Rs 80,000, we are more concerned about the scalability issues, considering that operating margins are already moving southwards.

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