My Daredevil Stock of 2023 

Hi guys, this is Aditya Vora... Here's wishing everyone Merry Christmas and a Happy New year in advance.

They say Risk hain to Ishq hain in the stock market. After all you can make money only if you take mindful risks in the stock market.

So as this year comes to an end, I thought let me talk about a stock which is a very risky investment.

It is basically a turnaround story and the performance of the company in contention is likely to depend on multiple factors.

However, if the triggers in the business play out then there can be a huge re rating in the stock and if the triggers don't play out and the management does not live up to what it plans to do in the next 3 years then this stock can become a very bad investment.

Basically, in simple terms it is a binary investment, an all or nothing type stock.

The potential turnaround stock which I am referring to CineLine India Limited.

It is the erstwhile chain of cinemax theatres which was a market leader in West India 2 decades ago.

I am sure now this name rings a bell to many people. For people living in the west especially Mumbai, Cinemax was a go to theatre for all of us as kids and teenagers. It was owned by the Kanakia group which has interests in real estate especially commercial real estate.

Well, in 2012, PVR acquired 69.3% shares of CineMax India from the promoters for Rs 395 crore and as a result had to make an open offer to acquire the remaining shares from the public at Rs 204.

Fast forward to 2022, the promoters of erstwhile Cinemax are back with a second shot at the thriving multiplex business.

The question is why now? That too after 10 years?

The thing is ... PVR while buying Cinemax from the Kanakias had signed a non-compete clause for a period of 10 years. That meant the promoters could not venture in the multiplex business till the end of 2021.

Now that the non-compete clause is over, the Kanakias are back at what they were best known for. That is to run a theatre business and make money out of it.

As I said, this is an extremely risky investment bet as you are betting on the promoter and his vision and execution skills going forward.

So, let's start with the 3 basic factors which influence the exhibition industry and where Cineline India is placed.

The first parameter is the number of screens and the location of screens. After all more screens means more revenues and profitability.

To start with, the company has opened theatres under the brand name Movie Max and has 118 screens across India as on November 2022 while 2 screens in Rajasthan and 7 screens in Hyderabad were opened recently about 2 weeks ago bringing the total to 127 screens.

Just to put things in perspective, PVR which is India's largest multiplex operator has a screen count of 870 screens while Inox which now will be merged in to PVR very soon has a total screen count of 670 screens.

In 1 year, Movie max screens accounted for 15% of PVR screens.

If you look at the table below, it shows the company has a total of 118 screens under the a) Operational screens b) Screens under fit outs and c) Tied up screens.

Under the operational screens, 23 screens were handed over by PVR to Cineline in April 2022 as the lease expired. All these 23 screens are in Maharashtra and are owned by Cineline which gives them a edge to start their business.

Apart from the above 23 screens, for the remaining 17 screens, Cineline has bought out the screens from owners who could not manage their theatres and wanted to exit the business. The advantage is that it gets a good deal and there is no gestation period to build a theatre. The developers provide them with all amenities. These theatres are basically readymade assets on the books of the Cineline and the company doesn't have to pay lease rent on it.

The second and third which are screens under fit out and tied up screens are the screens which Cineline has runs on lease. The tied-up screens are jointly run by the company and the owner of the multiplex. It is estimated that Cineline incurs Rs 2-2.5 crore of capital expenditure per screen for screens under fit out.

Now the question is, how can Cine line compete with these big guys.

Well, the answer is that, while PVR and Inox focus on metros and tier 1 cities, Cineline plans to target tier 2 and 3 towns and buy out standalone theatres at throw away prices which were under stress due to Covid.

Basically, in simple words it is trying to fill the white space between the cities and small towns.

In my view this is a good strategy as large players like PVR and Inox would not set up theatres in small towns as the purchasing power of people living there will not support the average ticket prices and food and beverages.

I mean who is going to buy a popcorn tub or a movie ticket for 400 Rs in smaller towns.

Let us look at the current operating metrics of Cineline.

With roughly 127 screens, Cineline's average ticket price is Rs 179 and the SPH which is spends per head, which is nothing, but the average spends a customer does on food and beverages stood at Rs 61 per customer.

If you compare those statistics to market leader PVR, the average ticket price comes to Rs 239 while the spends per head comes to Rs 130 which is more than double.

There is no way Movie max can reach PVR in terms of the above operating customer spending parameters, due to its focus on tier 2 and tier 3 towns, another way to look at it is the headroom which Cineline has is higher than PVR. Even an 10-12% increase on ticket price and food and beverages per year will be absorbed as the rates are low.

It won't make any sense to take about the valuations and multiples as they mean very little from an analysis point of view at this stage since the company has just started operations this year.

Now let's talk about the strategy of the management for growth and why I believe this could be a typical turnaround story which will surprise people.

Moviemax plans to have a total of 300 screens by the end of FY25, which is an addition of roughly 185 screens over the next 2 years. That's a 2 and a half times increase in screens.

Currently the company operates in 20 cities and by FY25 it plans to open multiplexes in 35 plus cities in India with higher focus on Tier 2 and 3 towns.

The average ticket price and spends per head which is spending on food and beverages stood at Rs 179 and Rs 61, adding that to Rs 240 per person. The management wants to take this number anywhere to Rs 275-300, which in my view is a very practical and achievable number over the next 2 years.

Now for this ambitious target of 300 plus screens, the company needs funds.

While last year it raised Rs 25 crores by issuing preferential warrants which got converted to shares to the promoter group and an investment firm at Rs 71 per share.

That helped it with initial costs of setting up screens and working capital.

Now there are 2 issues which the company faces.

One is that it needs funds for future expansion and second is the high debt the company is sitting on.

The management has devised a plan which is as follows.

The Kanakia group and Cineline with its subsidiaries has interests in the commercial real estate along with a hotel and shopping malls.

The current gross debt stands at 257 crores as of September 2022 and the net debt after taking the cash stood at Rs 225 crores.

Cineline has targeted monetization of its non-core assets which will generate Rs 350-450 crores according to the management.

In pursuit of this, it has already monetized 2 commercial offices in Mumbai for Rs 21 crores and a mall in Nagpur for Rs 60 crores, thereby generating Rs 90 crores till date.

Over the next few months, it plans to monetize its hotel in Goa, hotel Hyatt Centric which is 5-star hotel in Candolim.

Let me end this video by a rough back of the envelope calculation of what the company could make 2 years down the line.

As per the management, Moviemax is targeting a screen count of 300 screens. In my view, lets take a realistic estimate of 250 screens.

The company is expected to close FY23 with total admits at 26.5 lac people and an average spend of Rs 226 per person. That gives it a revenue of about 60 crores for the year. Now in FY25 if you take 250 screens and estimate total admits being 4750000 people and multiply it by the average spend per person at Rs 265, that gives you a revenue of Rs 126 crores for FY25.

A reasonable EBITDA margin of 16% and net profit margin of 5% would give it a profit of Rs 6 crores in FY25 translating to an EPS of Rs 2 from the 40 paise per share estimated in FY23.

Now the question is a lot of things from debt reduction to expansion to industry dynamics have to fall in place to achieve the strong growth guided by the company.

So dear viewers do let me know of what you guys think of this risky investment. Is it an all or nothing stock?