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INOX Leisure: Competitive edge!

Aug 24, 2006

In India, movies have always been a very important source of entertainment. The large interest in movies, dating back to almost 100 years, resulted in a number of cinema halls/theaters being set up all over the country. Film exhibition is a key interface between the film audience and the movie content. Exhibition centres in India range from the open air to air-conditioned cinema halls and multiplexes. The chart below (FY05) shows the geographical distribution of theaters across India. In this article, we take look at INOX Leisure, one of the leading multiplex operators in the country. We analyse the company strengths and also its financial performance over the past few years.

Company background
INOX Leisure is primarily engaged in the exhibition of films. The company, after being incorporated in 1999, became a subsidiary of Gujarat Fluorochemicals Ltd. (GFL) as part of the latter's growth and diversification strategy. The company is engaged in the films exhibition business. It operates and manages a national chain of world-class multiplexes under the brand name, INOX. After opening its first multiplex in Pune in May 2002, it has since then reached a total base of 11 properties with 41 screens across the country. Further, it recently ventured into the films distribution business, albeit on a limited scale. The company is planning to expand its capacity by to 25 multiplexes and more than 90 screens.

Key strengths
Locations: Locations plays an important role in the growth of the multiplexes. Most of the INOX multiplexes are located in the heart of high traffic commercial business districts or in the midst of affluent residential areas. INOX already has a huge national presence, unlike PVR, which is currently largely concentrated in the Northern states of India. Currently, INOX has presence in Jaipur, Mumbai, Pune, Goa, Banglore and Kolkata. Further, it intends to set up multiplexes in Indore, Chennai, Hyderabad, Lucknow and many more places in the country. All these projects are going to be set up in the prime locations, which will bring in better realisation for the company.

Economies of scale: The company enjoys economies of scale. The company is having an edge over local competition in accessing content. It is among the few players to establish a national presence at such a early phase. Beside this, the company has a better bargaining power with film producers and sharing of cost between screens.

Film Distribution: While consolidating their position in the exhibition business, INOX has also made an entry in the film distribution business. The company has acquired distribution rights for certain Hindi films titles, in select distribution circuits. Apart from providing it with an additional stream of revenue growth, it will also help the company in derisking is business from the multiplex business.

Analysis of the past...
Growing Revenues: Inox drives its revenues from patrons (which include ticketing, parking, F&B), advertising and conducting fee. If we peep into the past then we will find that in FY03, the total revenues were Rs 160 m, which increased to Rs 1,071 m by FY06, translating into a CAGR of over 88%. The company's major revenues come from ticket sales, which accounted for 71% of total revenues during FY05.

Beside this strong growth in topline, the company has also managed to per up its operating margins and has maintained it at 34% during the past two years. Better bargaining power and locational advantages have seemingly aided the profitability of the company in the past and this, we believe, will be an important factor going forward as well. As for the net margins, these have improved from 8% levels in FY04 to 16% in FY06.

FY03 FY04 FY05 FY06
Net sales(Rs m) 160 300 615 1071
% growth 87% 105% 74%
PAT 1 25 82 175
%growth 2400% 228% 113%
Profitability ratios
EBITDA margins (%) 29% 33% 34% 34%
EBIT margins (%) 22% 29% 32% 31%
Net profit margin(%) 1% 8% 13% 16%

What to expect?
At the current price of Rs 153, the stock is trading at a price to earnings multiple of 52 times its FY06 earnings. In being a participant to media creation and growth in the country in the past, we believe that INOX has attained a critical mass in terms of profitability and coverage. While the broad outlook remains positive, considering the increasing levels of discretionary spending (like entertainment and tourism) by Indian households, investors need to be cautious on the valuations front.

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