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PVR Ltd: Unable to get numbers right - Outside View by Luke Verghese
 
 
PVR Ltd: Unable to get numbers right

The company has to pump in more equity to get its house in order

Spawning a multiplex revolution

Incorporated in 1995, PVR is an acronym for Priya Village Roadshow and is the consummation of an agreement between Priya Exhibitors Pvt. Ltd, and Village Roadshow Ltd. (Two other group companies, Sunrise Infotainment Private Ltd and Leisure World Private Ltd have been amalgamated with PVR in 2009 and 2010 respectively. Sunrise Infotainment was in the business of film exhibition. The vast bulk of Leisure World's total assets of Rs 323 m which was merged with the parent consist of freehold land). PVR Ltd also advertises itself as Priya Cinemas, just to get the message across to the public. It claims to have spurred the multiplex revolution in India having set up the country's first multiplex cinema in Delhi in 1997. Then in 2004 it launched in Bangalore the country's largest multiplex with 11 screens. In an effort to ramp up its presence in the retail entertainment landscape, PVR in 2008 entered into a JV with Major Cineplex Group, a leading film exhibition and retail entertainment company based out of Thailand to bring lifestyle entertainment concepts to Indian consumers. The joint venture enjoined the setting up of bowling alleys, karaoke centres, ice skating rinks and gaming zones across the country. The company has its registered office in New Delhi.

According to the latest annual report the company presently operates 33 properties with 142 screens in 18 cities across the country. This includes 19 screens in 3 locations across Chennai, Ahmedabad and Lucknow that it added in 2010-11.I t has also signed agreements for 75-80 screens for the financial year 2011-12 in several cities across the country.

Its operating results

The company was able to register a 27% increase in operating income to Rs 3.49 bn during the year. To its good fortune the non-operating income grew 84% to Rs 108 m. Thus the gross income grew 28% to Rs 3.6 bn. The company attributes this 'to its ability to demonstrate promising growth in revenues led by a 7-10% growth in ticket pricing and food & beverages realisations across the same stores. The success of blockbuster movies helped to up revenues' it adds. To what extent the merger of group companies helped to ante up higher revenues is not known.

The report adds that the pipeline of movies for the financial year running looks exciting and the company expects its revenues to consolidate further on the strength of its properties in the best locations. It can do with all the help that the movies business can give it, because the company's ability to generate margins is skating dangerously on thin ice for the present. There are some fundamental reasons for this disability which we will examine as we go along.

The way the operating revenues add up, the gross operating revenues is made up of several income streams. At the top of the heap is 'Income from sales of tickets of films' amounting to Rs 2.05 bn, or 59% of all operating income. Then there is an income stream labelled 'Income from revenue sharing, which in all likelihood connected to the above, and accounting for another Rs 239 m or 6.8% of all operating revenues The two receipts together account for 65.8% of all operating income or Rs 2.30 bn. Sale of food and beverages at Rs 643 m accounts for another 18.4%.Then there is advertisement income of Rs 492 m bringing in another 14%. Bringing up the rear is convenience fees (whatever that means) with Rs 48 m and management fees with Rs 13 m.

Earning its bread

The income from sales of tickets and from revenue sharing, advertisements and management fees comes at the cost of tax deducted at source (TDS). The total TDS on these incomes collectively came to Rs 446 m against Rs 333 m previously. This affects gross cash flow to a like extent. But the real catch here is the tithes that it has to pay the film distributors to get the right to screen then films. In 2010-11 it paid out Rs 1 bn on this count against Rs 784 m previously. This expenditure accounted for a neat 44% of the total receipts that it earned from the sale of tickets and from income from revenue sharing, against a marginally lower 43% previously. This outgo looks more like a Shylock rate of tax but that is the reality of the matter. Besides, the income from sale of other goodies, advertisements and such like do not appear to have any preordained plan and appear subjective. Then there are a bunch of other large revenue expenses on which it is not able to exercise any control on. The rent paid for premises is a mean Rs 466 m. Advertisement expenses accounted for another Rs 105 m. Common area maintenance expenses of Rs 202 m and electricity and water charges of Rs 201 m added inexorably to the expense sheet. The company is at the mercy of these expense items.

The other income as stated earlier rose 84% to Rs 108 m. It is made up of a number of receipts and they appear to be of the seasonal variety. The interest income and dividend income together from its subsidiaries in this component adds up to Rs 73 m. Receipts from miscellaneous income/rent receipts add to the bulk of the balance. Then there is the customary book entry write back which all companies resort to. As one can see these are highly indeterminate receipts. What is very interesting here is that the subsidiaries have paid interest on their borrowings during the year of Rs 47 m against NIL previously. (At year end the inter-corporate deposits and loans to subsidiaries amounted to Rs 597 m against Rs 239 m previously). There was a need to force them to put up an act, given the need to bring succour to the parent.

In 2009-10 the company reported a pre-tax profit of Rs 2.5 m. Juxtapose this profit with other income of Rs 59 m that it recorded in this year. The other income is a constituent of this pre-tax profit. In other words the pre-tax profit would have been written in red ink but for this source. In 2010-11 the pre-tax profit amounted to Rs 229 m. The other income component of this pre-tax profit is Rs 109 m. Now you can see the need for the subsidiaries to help the parent in its only full blooded public disclosure to its shareholders.

A very capital intensive business

What adds to this company's travails is that it is operating in a very capital intensive business. Take a look at some of the figures on display here. In end 2009-10 it boasted a gross block of Rs 2.8 bn excluding capital work in progress of Rs 343 m. It earned operating revenues of Rs 2.7 bn .Cut to the next year. In end 2010-11 it had a gross block of Rs 3.5 bn excluding capital work in progress of Rs 416 m. It earned operating revenues of Rs 3.5 bn on this. That infers a 1:1 ratio in gross block to sales that it recorded in either year. What adds to the mirch masala here is that the bulk of the additions to the gross block are financed through debt, as the cash generated from operations is simply inadequate to take care of its grand capex plans. Well for starters it also has very low capital base of Rs 271 m. (The fact that the promoters holding in the company is only a shade above 42% could be a factor here). This is simply inadequate for a company of the size and operations that it boasts of. So there is an excessive dependence on debt. The year-end debt was Rs 1.6 bn, up from Rs 1.4 bn previously. Then factor in the confetti that it showers on its junior siblings through loans amounting to Rs 597 m, as also the investments in its three subsidiaries valued at Rs 495 m. Factor in deposits that it has made of Rs 519 m which are probably interest free outlays and represent rent deposits and you have a whammy of mega proportions. On the flip side however it appears unable to increase the pricing of its ticket sales to match the higher revenue expenses.

Not that the company is not making an effort to make its funds sweat. It is able to exercise considerable control on its year end inventories and dues from trade debtors. It bought and sold a humungous quantity of liquid debt instruments during the year in an apparent effort to get some mileage, but if it has, then there is very little to show for it in the other income schedule. Cumulatively it bought and sold debt instruments of the value of Rs 7 bn. In the preceding year end it also possessed other liquid investments to the tune of Rs 640 m which were almost completely flogged during the current year to fund other expenses including mollycoddling its siblings. It has also shown dividend receipts of Rs 2.6 m, but this has definitely not emanated from its siblings - none of whom have declared any dividend. Who then is the kind benefactor of these dividend inflows?

The siblings

This brings us to the three little ones - PVR Pictures Ltd, PVR bluO Entertainment Ltd and CR Retail Malls (India) Ltd, varying percentages of which are owned by the parent. In reality they are not all that little, but again that depends on which figures one is looking at. The biggest of the three is PVR Pictures. It is in the business of film production and distribution. This company is an oddball of sorts. It has a capital base of Rs 358 m, reserves and surplus of Rs 1 bn, total assets of Rs 946 m and separately, investments valued at Rs 415 m. Whether these investments relate to yet other group companies or not is not known, (though the investment schedule has a totally muddled explanation to it), but in any event these investments were acquired during the year. It also has negligent liabilities amounting to Rs 1.3 m. On a turnover of Rs 285 m it also managed a pre-tax loss of Rs 60 m. (In the preceding year it incurred a pre-tax loss of Rs 164 m. On this loss it made a tax provision of Rs 58 m, and thus the post tax loss stood at Rs 221 m!) As the results show producing films is a mugs game and consequently its foreign equity partners are now exiting their 40% stake in this company. Given the various positive balance sheet parameters that the company boasts of, its revenue and balance sheet figures simply do not add up. The point is that the company was operating at a loss during the year. But despite this fact the reserves and surplus accelerated by Rs 222 m during the year, though the paid up capital remained constant. Besides, the large investments appear to have been acquired through its own internal cash generation, as the liabilities at year end are almost negligent, a point that I had made earlier. This is whacko cash flow management by any yardstick.

Cut to the performance of the weirdly captioned second offspring PVR bluO Entertainment. This company is a lot less colourful than it larger sibling. It operates India's largest bowling alley in Gurgaon. Its asset base is miniscule in comparison and includes investments of Rs 3.5 m. But it still trotted out a turnover of Rs 139 m and posted a pre-tax profit of Rs 29 m. This company plans to open a few more bowling centres in India in this financial year.

The third offspring, CR Retail Malls, which is 100% owned by the parent too operates on a subdued note. This company operates the 7 screen multiplex in Mumbai. It has an equity base of Rs 200 m and total assets of Rs 875 m and separately investments of Rs 7 m. On a turnover of Rs 252 m, it notched up a pre-tax profit of Rs 35 m. This company is also the recipient of the entire loans and advances portfolio of Rs 597 m (Rs 236 m previously) of the parent to its subsidiaries. This borrowing appears as a part of CR Retail's current assets portfolio. Hence this company would have paid the interest on this deposit of Rs 46.6 m. And, judging from the limited financials of the three junior siblings on display, why this company alone was favoured with such a large handout is not very clear. Especially so since post year end the company has apparently sold its entire stake in this company for Rs 1 bn. But PVR will continue to operate the multiplex on lease.

This in sum total is what PVR is all about. It would appear from the limited financials that have been furnished that the siblings are on a lot better wicket than the parent - whether intended or otherwise. As things stand today PVR Ltd does not appear to be an investment option worth considering. Hopefully the funds that it realised from the sale of CR Retail will be put to good effect.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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