inox leisure ltd buy - ventura1.combeing concentrated in mumbai and the northern hindi speaking belt...

Inox Leisure Ltd BUY

- 1 - Tuesday, 21st Feb, 2017

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

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Target Price ₹340 CMP ₹ 246

Index Details Over the period FY12-16, PVR has outpaced INOX on several

parameters, viz, operation and financial performance, service

offering and brand recall. This has lead to a sharp re-rating of the

former while INOX has been a laggard. However, we believe that

this is set to change as INOX ups its ante to raise its game and

play catch up with its peer. We expect revenues to grow at a

CAGR of 20% over FY16-19 to Rs 1981cr driven by

1. Aggressive screen roll out to 600 screens (with an

emphasis on premium properties) in FY19 from the current

449 screens.

2. NBOCs to experience a brisk growth of 17.8% CAGR from

Rs 731cr in FY16 to Rs 1,197 cr by FY19E.

3. F&B revenues to grow at a faster clip of 22.3% CAGR from

Rs 266cr in FY16 to Rs 485 cr in FY19E.

4. Advertising revenues to grow at a CAGR of 25.4% to Rs

180 cr by FY19 from 91 cr clocked in FY16.

5. Margins are set to improve by 300bps to 19.4% in FY19

while profitability is expected to improve by 190bps to 8.6%

in FY19. Albeit this is expected to dip first in FY17 before

resuming its upward territory.

We initiate coverage on INOX as a BUY with a price objective of Rs 340 representing a potential upside of ~38.2% over the next 18 months from the CMP of Rs 246. We have used the DCF method to value INOX.

Sensex 28762

Nifty 8908

Industry Entertainment

Scrip Details

MktCap (` cr) 2362

BVPS (`) 64.3

O/s Shares (Cr) 9.6

AvVol 1.6

52 Week H/L 292.9/184.1

Div Yield (%) 0.0

FVPS (`) 10.0

Shareholding Pattern

Shareholders %

Promoters 48.7

Public 51.3

Total 100.0

Inox vs. Sensex

0

50

100

150

200

250

300

0

5000

10000

15000

20000

25000

30000

35000

SENSEX Inox

Key Financials (Rs in Cr)

Y/E Mar Net

Sales EBITDA

Adj

PAT

EPS

(Rs)

EPS

Growth (%)

RONW

(%)

ROCE

(%)

P/E

(x)

EV/EBITDA

(x)

2016 1159 190 77 8.4 281 12.2 12.8 29.1 13.7 2017E 1241 159 33 3.6 -57.6 5.4 8.8 68.7 16.8 2018E 1590 262 93 10.2 183.8 13.9 17.2 24.2 10.0 2019E 1981 384 170 18.6 82.7 21.2 26.4 13.3 6.6

- 2 - Tuesday,21st Feb, 2017


Company background

Incorporated in 1999, INOX Leisure Ltd is a diversification foray of the INOX

Group into entertainment. Compared to its peers, INOX has established a strong

presence in the cinema exhibition industry in a very short span of time. It

operates 113 multiplexes and 425 screens in 57 cities making it a truly pan-Indian

multiplex chain.

INOX accounts for ~20% share of multiplex screens in India and 8% share of

Box Office collections.

Business Verticals of INOX Leisure Ltd (INOX)

Source: INOX Leisure Ltd, Ventura Research

INOX – 2nd largest incumbent player

557

440

325

244

0

100

200

300

400

500

600

PVR INOX Carnival Cinepolis

No of screens

S Source: Ventura Research



Key Investment highlights

Curtains down for single screens; multiplex revenues soar at the cost of the

former

Over the last decade, the film exhibition industry has undergone a metamorphosis

since the onset of multiplexes in India. Many single screen cinemas have shut

shop as they lost market share to multiplexes and the trend is only expected to

accelerate given the unparalleled movie viewing experience that the latter have to

offer.

What went wrong with single screens

No Operational Metrics Single Screen Multiplex Drawback of for single screens

1 Business model

1.a No of Screens 1 4

1.b No of shows per day (in total) 4 20

2 Seating capacity per screen 500-1000 220-250Lower occupancy results in lower

profits

3 Quality and Experience Outdated technology

State-of-the- art equipment

(high quality video and

audio), superior interiors,

ambience and service

Lack of cinema viewing experience

fails to have an impact in the

minds of customer

4 Economics Tilted

4.a ATP and F&B Low High

Pricing - no more a limiting factor

due to rising disposable income &

discretionary spends

4.bAdvertising & Other

operating incomeLow High

Low negotiating power with the

advertisers as it lacks

geographical coverage

Lacks flexibility in showcasing

different movies at a single point

in time

Source: Ventura Research



Multiplexes quickly filling in for the vacancies created by single screen shut downs:

1) A whopping 3,308 single screens out of 9,308 (CY2010) have shut shop over the

period CY 2010-16. CY2015 saw the largest decline of ~2,000 screens. During the

same period CY2010-16, multiplex screens have more than doubled (grown at a

brisk rate of 13% CAGR to 2,225 screens from 1,075 screens clocked in 2010).

CY2015 saw a prolific jump in the number of screens with the highest ever 500+

screens being commissioned.

2) However, one encouraging trend is that the decline in the total count of screens

has bottomed out and we should see an upward reversal in exhibition screens

going forward.

3) Multiplexes which currently account for an ~ 27% market share of the screens,

account for more than 40% of box office collections.

4) The share of multiplexes in total screens is expected to get a substantial leg up.

This in turn should mean an increased share of box office collections.

Multiplex screens-Future

9,308 9,121 8,685 8,451

8,002

6,000 6,000

1,075 1,225 1,350 1,500 1,630 2,134 2,225

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2010 2011 2012 2013 2014 2015 Oct-16

Single Screens Multiplexes

No of screens

S Source :Inox Leisure Ltd Ventura Research

of cinema exhibition business

4,723 6,256

9,200

13,118

18,195

22,000

31,627

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015

No of screens U.S. ~40,547

w

S S Source :Inox Leisure Ltd Ventura Research



Significant Upside Potential:

The Indian multiplex industry is dominated by 4 incumbent players (viz PVR

Cinemas, INOX Leisure, Carnival Cinemas and Cinepolis) accounting for more

than 70% of the multiplex screens in the country. The multiplex industry growth

story is only expected to strengthen going ahead. We are optimistic of the

prospects given that:

1. Opportunities galore for the multiplex film exhibition industry

Amidst the glamor of Hollywood, people often forget about the world's other movie

capital – India. India tops in terms of number of films produced each year and has

the highest number of movie goers. Yet the box office collections, the multiplex

screen density and average ticket price have trailed that of other countries. This

presents a huge latent opportunity.



Although India has Yet has

Highest number of film releases

12.8

10.9

8.1

5.5

2.7

0

2

4

6

8

10

12

14

16

Japan UK US China India

Avg. ATP in $


Lowest Box office collection

126

61

26 23

6

0

30

60

90

120

150

US UK Japan China India

Screens / Million population


2nd highest in footfalls globally

2178

1930

1364

176 171

0

500

1000

1500

2000

2500

China India US UK Japan

Footfalls in mn


Minuscule screen density

126

61

26 23

6

0

30

60

90

120

150

US UK Japan China India

Screens / Million population


Dwarf ATP changed

12.8

10.9

8.1

5.5

2.7

0

2

4

6

8

10

12

14

16

Japan UK US China India

Avg. ATP in $




2. Increasing Screen Density to unlocking value:

We believe that improving the screen density is the one variable that can trigger a

boom in the fortunes of the multiplex industry. A case in point is the prolific growth

of the Chinese box office collections. In CY2009, China’s box office collections

were less than that of India. Over a short span of 5 years it has overtaken most

countries to be the second largest market (next only to the United States) driven by

an aggressive thrust on screen additions (18 screens per day compared to 3

screens per month in India). In no-time, it is expected to surpass the U.S as the

world’s largest cinema market.

From the above it is clearly discernible that screen additions can lead to unlocking

pent up demand and boost box office collections, which in turn will drive revenue

growth for multiplexes. According to FICCI-KPMG 2016 report, nearly 20,000 more

screens are required to be built to reach the target of at least 25 screens per million

population.

This presents incumbent players with a huge opportunity.

China’s cinema building frenzy

4,723 6,256

9,200

13,118

18,195

22,000

31,627

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015

No of screens U.S. ~40,547

S Source : FICCI-KPMG 2015,The Wall Street Journal, Statista.com, FICCI-KPMG 2015,The Ventura Research

Turnaround in Box office collection

1.1 1.0 1.11.4 1.6 1.6 1.6

0.9

1.52.0

2.7

3.5

4.7

7.2

0

1

2

3

4

5

6

7

8

2009 2010 2011 2012 2013 2014 2015

India China

Domestic Box Office collection (in $bn )

U.S. ~10.2

S Source : FICCI-KPMG 2015,Statista.com, Ventura Research FICCI-KPMG 2015,The



3. Small towns have the potential to drive growth

Till date, the box office collections were grossly skewed with 50-55% of collections

being concentrated in Mumbai and the northern Hindi speaking belt of NCR and

UP. A study of the box office collections of the top 3 movie grossers of recent times

seems to validate the same.

We believe that these areas are fast getting saturated. Most of the plexes in these

regions are housed in malls and the slowdown in commercial real estate is going to

impact the growth given that:

New mall additions are slowing down

Lower additions of commercial real estate will in turn mean unattractive

economics as competition between incumbent players for the same space

intensifies.

Geographic expansion - key to multiplexes growth

The next phase of growth for multiplex screens is only by geographic expansion

into tier II and tier III towns which have much better economic attractiveness than

the saturated tier I towns. Since 2014, most screens added by various exhibitors

have been in smaller cities and the trend is expected to continue.

Box office collections of major towns appears to have reached saturation

31.4 32.2 32.7

22.6 22.5 20.9

46.0 45.4 46.4

0

10

20

30

40

50

60

70

80

90

100

Sultan Bajrangi Bhaijaan PK

Mumbai Delhi / UP Rest of India

% of Domestic Box Office Collection

Source : Indiamoviestats, Ventura Research - V



4. Inorganic growth opportunities

All the large incumbents have grown via acquisitions and while the opportunities

available are fewer yet there exists scope for inorganic growth through:

Acquisitions of smaller plexes (2-3 screen properties)

Retrofitting of large single screens into plexes (with 2-3 screens)

Management partnerships with exisiting single screen / multiplex owners

New franchisee arrangements

5. Content Proliferation to improve occupancies

Hindi genre content- The dominant theme

Hindi genre movies have been the chief form of entertainment pan India, except in

the southern states where regional content has been the dominant theme.

Typically blockbuster movies, casting popular actors in the lead, grab the bulk of

the box office collections. The recent trend of collaboration & understanding among

production houses / distributors on timing of new releases of blockbuster movies is

leading to better revenue collections for the movies which in turn are driving

footfalls and occupancies at multiplexes.

Stare cast driven box office collections

3.2

4.3

6.5

0

1

2

3

4

5

6

7

CY2013 CY2014 CY. 2015

Box Office collection of top 10 Hollywood movies(Rs 'bn)




Non Hindi genre quality content makes its presence felt

However, this is fast changing. With rising disposable incomes and discretionary

spends, cinegoers are more willing to spend on movies that may not feature a star

cast but are rich in content and story or cater to contemporary themes. Hollywood

and Regional content are also seeing a leg up. And the phenomenal success of the

following movies bear testiment to the acceptance of the non Bollywood content.

This is changing the exhibition space significantly with Hollywood and Regional

content now vying for prime time in competition with Bollywood films.

Hollywood content steadily growing its allure

Till now Hollywood movies have been popular with certain segments of the English

speaking and metro populace. However the new differentiated offerings, which

emphasize on technological inputs (3D / special effects) have been drawing

crowds among the masses. Moreover these movies also being dubbed in regional

languages has unlocked latent demand for them.

Non Bollywood content getting increasing eyeballs

Segment PVR INOX

NBOC as a % of net revenues 54% 63%

ATP (Rs) 188 170

Footfalls (in mn) 69.6 53.4

Occupancy rate (%) 34.6 29.0

F&B as a % of net revenues 25% 23%

F&B SPH (Rs) 72 58

Advertising as a % of net revenues 11% 8%

Ad revenue per operating screen

(Rs in mn) 3.9 2.5

Other operating income 10% 6%




Movie sequels also drawing crowds

Further the trend of sequels to hit movies of yesteryears are also contributing to increased footfalls. Box office collections which have grown at a CAGR of 10% since FY11-15 are

expected to continue at the pace of 10% CAGR growth to reach Rs 160 bn by

FY20.

Surge in collections from Hollywood movies

Year of acquistion Acquired Multiplex Geography

2007 89 cinemas West Bengal and Assam

2013 Fame India

Maharashtra, Gujarat, West Bengal,

Tamil Nadu and Karnataka

2014 Satyam Cineplex Majorly based in northern India

Source : FICCI-KPMG 2016,Ventura Research FICCI-KPMG 2016, - V

Box office revenues set to surge

69

85 93 94

101

116 126

136

148

160

0

20

40

60

80

100

120

140

160

180

2011 2012 2013 2014 2015 2016P 2017P 2018P 2019P 2020P

Revenues (Rs in bn)

Source : FICCI-KPMG 2016,Ventura Research FICCI- - V



6. State governments are also promoting regional content and numerous tax incentives and sops are being offered: Maharashtra Government:- Exempted multiplexes from entertainment tax –

a. Completely for the first three years and

b. Upto 75 per cent for two years thereafter.

West Bengal Government:- Incentives include –

a. New cinema halls - Entertainment tax subsidy upto 2 years b. New multiplexes - Entertainment tax subsidy upto 4 years

Punjab Government:- Has recently given a bouquet of incentives starting

with PVR which include subsidised electricity, land at a concessional rate and stamp duty exemption to promote multiplexes and cinemas in the state.

UP Government:- Exemption / concession from stamp duty on transfer/

lease / acquisition of land to multiplex cinemas.

These measures are aiding the growth of multiplexes.

Introduction of GST to lower overall taxation

Average entertainment tax rate is ~25% of NBOC, and on the assumption that the revenue neutral rate would be 18%, the company will have to pay ~ 7% of NBOC lesser on GST, as compared to Entertainment tax. We expect the tax savings to be passed on to the consumers which in turn should lead to improved footfalls and hence higher revenues. This seemingly large gain will be watered down as part of the spoils would be shared with the distributor. However, on a net basis, the impact would be positive on the topline.

Assuming that the F&B prices remain unchanged, the average F&B tax rate which is ~12% is expected to go up to ~18% and hence this will have a negative impact on margins. Despite a rise in the rate, the company will get some relief by offsetting it with the taxes paid on inputs. But overall, there would be a net negative impact on the F&B sales.

At present, service tax is a cost to the company, as it is unable to offset the service tax paid against the entertainment tax collected. In the GST regime, the company will be able to offset the taxes paid for availing services with the ones collected on ticket sales and hence this will cease to be a cost.

All of this put together, we expect a possible margin expansion of

~200bps to 400bps



Multiplexes outperform alternate entertainment avenues like theme parks:

The average ticket price at PVR / INOX is Rs ~170-200 while that of an

amusement park is ~800-1,000. Besides price, the craze for movies among people

is much more than for theme parks.

Footfalls in multiplexes vis-à-vis theme parks (FY15)

2.4 1.8 1.5 1.5 1.1 1.1

41.1

59.2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Wonderla (Banglore &

Cochin)

Essel World & Water Kingdom (Mumbai)

Nikko Park (Kolkatta)

Ramoji Film City

(Hyderabad)

Adlabs Imagica &

Acqua Imagica

(Mumbai)

MGM Dizzee World

(Chennai)

INOX PVR

Footfalls in mn

Source : Ventura Research - V



INOX’s attempt to catch up with PVR

At present, INOX is next only to PVR, accounting for a share of ~20% of multiplex

screens in India and an 8% share of the Box Office collections. However, INOX

trails significantly on a number of growth drivers:

In order to close in on its peer, INOX has embarked on a multi-pronged strategy

which is expected to drive future growth. The growth drivers are enumerated

below:

1) Increasing screen presence – Crux of INOX growth

In the past, INOX has grown not only through organic screen additions, but also through acquisition of smaller regional multiplex chains and single screen players. It has pro-actively being exploring the acquisition and expansion opportunities on a continuous basis with a view to consolidate their position in the multiplex industry.

_________________________________________________________ Source: Ventura Research

INOX trailing PVR on every parameter

Segment PVR INOX

NBOC as a % of net revenues 54% 63%

ATP (Rs) 188 170

Footfalls (in mn) 69.6 53.4

Occupancy rate (%) 34.6 29.0

F&B as a % of net revenues 25% 23%

F&B SPH (Rs) 72 58

Advertising as a % of net revenues 11% 8%

Ad revenue per operating screen

(Rs in mn) 3.9 2.5

Other operating income 10% 6%

Source : FICCI-KPMG 2016,Ventura Research FICCI- - V

Consolidation-the trump card

Year of acquistion Acquired Multiplex Geography

2007 89 cinemas West Bengal and Assam

2013 Fame India

Maharashtra, Gujarat, West Bengal,

Tamil Nadu and Karnataka

2014 Satyam Cineplex Majorly based in northern India

Source : FICCI-KPMG 2016,Ventura Research FICCI-KPMG 2016,



Over the last decade, INOX has added ~3 screens per month and at present, is

well poised to pursue strategic acquisitions – those that are lucrative and will

enable it to capitalize on the core business strengths. Backed by robust plans to

expand its footprints, we expect the no of screens to reach ~600 by FY19 from 420

in FY16.

PVR will sustain its

144 166

351

421467

524

612

682

752

0

100

200

300

400

500

600

700

800

FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

* Includes acquisitions

No of screensPVR

Source :Inox Leisure,PVR, Ventura Research FICCI-KPMG 2016, - V

screen leadership through FY19

239 257279

310

372420

480

540

600

0

100

200

300

400

500

600

700


* Includes acquisition

No of screens INOX

S Source: Inox Leisure,PVR, Ventura Research FICCI-KPMG 2016, - V

New screen addition % for INOX to be on par with PVR

0%

20%

40%

60%

80%

100%

120%

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

PVR INOX

New screens as a % of total screens

*Includes Acquisition

Source : Inox Leisure, PVR, Ventura Research FICCI-KPMG 2016, - V



PVR clearly leads INOX in terms of new screen additions and over the forecast

period, while PVR will be adding ~70 screens per annum, INOX’s run rate of ~60

screens per annum will mean that INOX will trail PVR. This single facet will ensure

that PVR will maintain its numero uno status.

INOX trails PVR in the premium segment:

Post the acquisition of DT Cinemas, PVR’s number of high-end screens has gone

up significantly. This will boost its ATP & SPH and will also attract premium brand

spends for in-cinema advertising.

INOX, which had a dearth of premium cinemas as part of its portfolio, has been

scouting pro-actively to beef up its contribution from the premium.

Inox lags PVR in the lucrative northern markets

Geography Screen Count % of screens Screen Count % of screens

West 217 39% 180 40%

South 125 23% 100 22%

North 191 35% 94 21%

East 18 3% 72 16%

Total 551 100% 446 100%

PVR INOX

S Source : Inox Leisure, PVR, Ventura Research



Inox screen presence across India

________________________________________________________________________________

Source: Inox Leisure Ltd, Ventura Research




2) Growth directly linked to footfalls

With the shift in focus from seeing to experiencing films, the standards and

specifications of high-quality films are expected to undergo a significant change. In

FY16, INOX registered footfalls of ~53.4mn. Factors that predominantly drive

footfalls include 1) Content and 2) Viewing experience.

Enchancing content diversification:

The fate of the content at the box office directly impacts footfalls which in- turn

impacts the revenues of multiplexes. Recognizing the changing preferences of

cinegoers and emphasis on quality content, PVR has consciously enhanced the

regional content in its content mix. This will help lower the dependence on Hindi

and English content. Further, this move is expected to stabilize the occupancy in

the long run.

At the forefront of technological innovations

To meet the demands of discerning customers, INOX has partnered with Harkness

Screens to install Clarus XC 270 3D screen technology in over 100 screens to

provide an experience of fourth-generation screens. Also it has entered into a

pact with IMAX Corporation to install five IMAX theatre systems in Mumbai, Delhi,

Kolkata and Bengaluru theatres.

The recent INOX Insignia – India’s first 7 star luxury movie viewing experience

should boost premium spends, both by consumers and advertisers. Further the

signature F&B menu by master chef Vicky Ratnani is expected to improve F&B

revenues through fine dining. Success of this format should lead to more such

lazer plexes being launched, enabling INOX to beef up the contribution from the

premium segment.

Paperless Entry and Q Buster- A Big Positive

INOX has developed its own mobile app for booking tickets. Ease in selecting the

seats without waiting in queues, not only encourages the overall footfalls but also

enhances the film watching experience. An added trait of this app is online

booking for Food & Beverage services directly delivered at seats. Patrons can

also place their order while watching a movie.



Tie-ups with mobile companies like Paytm, Pay-U-money, etc with their alluring

schemes and discounts are expected to ramp up footfalls.

Based on the above, we expect INOX to register a healthy growth in footfalls of

14.8% CAGR from 53.4mn footfalls in FY16 to 80.8mn footfalls by FY19.

This will help diminish the wide gap between the occupancy rates of the company

and its peer PVR.

Vigorous footfalls to continue

0

20

40

60

80

100

120


PVR INOX

Footfalls in mn


Diminishing gap in occupancy rate

10%

15%

20%

25%

30%

35%

40%


PVR INOX

Occupancy rate

S S Source : Inox Leisure, PVR, Ventura Research



ATP and SPH set to surge

Content being the king, better content and premium location provides impetus to

charge a higher ticket price and hence higher realizations on F&B and in-cinema

advertising. Here PVR has scored significantly over INOX and has even widened

its leadership.

Over the period FY12-16, INOX has increased its average ticket price (ATP) at a

snail’s pace, a CAGR of ~2.2% from ~Rs 156 in FY12 to Rs ~170 in FY16. In

contrast, PVR commanded an increase of ~4.8% CAGR from Rs 156 to Rs 170

over the same period.

The F&B SPH at INOX rose at a tepid ~7.2% CAGR from FY12 to FY16 to Rs 58

while PVR’s SPH of Rs 72 (CAGR of ~13.8% over FY12-16) has been

considerably higher.

Significant room for

156

167 168

178

188

156160

156

164 170

100

110

120

130

140

150

160

170

180

190

200

FY12 FY13 FY14 FY15 FY16

PVR INOX

Rs


sac increasing ATP

4348

54

64

72

4447 49

55 58

0

10

20

30

40

50

60

70

80


PVR INOX

Rs




This lag itself represents an opportunity. And INOX in order to redress this lag has

undertaken several initiatives to improve content offering and consequent footfalls

(as explained earlier) besides turnaround in its F&B business.These are

enumerated below:

Array of items on the menu being offered likening it to a Quick Service Restaurant

(QSR).

Further, to avoid menu fatigue, changes in food menus are made at regular

intervals, based on the movie running and also the season.

INOX has a food app embedded in the mother app and provides on- seat delivery.

Driven by the robust plans for increasing footfalls, strong content pipeline and a

lucrative opportunity for reducing the wide gap in ATP and SPH (compared to

PVR), we expect.

NBOC’s to experience a brisk growth of 17.8% CAGR from Rs 731cr in FY16 to Rs

1,197 cr in FY19E and

F&B revenues to grow at a faster clip of 22.3% CAGR from Rs 266cr in FY16to Rs

485cr in FY19E

NBOC revenues to surge

227

389 457 490

552

731 758

968

1,197

-

200

400

600

800

1,000

1,200

1,400



F&B revenues imminent boom

60

114 142

162 191

266 287

380

485

-

100

200

300

400

500

600


Rs in cr




Radical shift in advertising strategy to lead to strong ad revenue growth; notwithstanding the short term challenge

Unlike any other medium, advertisers can use cinema premises to not only display

their product on-screen, but also use various off-screen means to make the

patrons engage with their product.

According to the FICCI-KPMG 2016 report, the revenues from the in-cinema

advertising grew by at a faster clip of 28% over 2014 and are estimated to have

reached Rs 6.27bn by the end of 2015. The size of this in-cinema advertising

market is projected to grow at a CAGR of 21.9% to INR13.82 billion by the end of

2019.

Wide Portfolio of advertisers with INOX

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Q4 Q1 Q2 Q3

Quarterly trend of % growth in Ad revenues YoY

Impact of demonetizationGrowth in ad revenues

post re-pricing strategy

Source : Inox Leisure, Ventura Research



While advertising revenues per operating screen has nearly doubled from Rs

1.3mn in FY12 to Rs 2.5mn in FY16, INOX still lags PVR by a wide margin.

To improve its per screen ad revenue, INOX has reworked its strategy and marked-

up prices aggressively. In the Indian context, advertising consumers resist price

hikes. Predictably low paying advertisers have omitted INOX from their media

spend and this had led to a decline in the ad volumes and consequently revenues

in Q4FY16. However, the growth resumed from Q1FY17 itself and had it not been

for the impact of demonetization, ad revenues would have been far higher than

reported in 9MFY17 (+5% YoY at Rs 75.3 crore).

_______________________________________________________________________________


Significant potential to increase advertising revenue per screen

3.9

2.5

3.6 3.7 3.9

1.3 1.4

1.9

2.5 2.5

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5


PVR INOX

Rs in mn


Unprecedented decline in advertising revenue

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Q4 Q1 Q2 Q3

Quarterly trend of % growth in Ad revenues YoY

Impact of demonetizationGrowth in ad revenues

post re-pricing strategy

S Source : Inox Leisure, Ventura Research



We expect the advertising revenues to grow at a brisk 25.4% CAGR to Rs180 cr by

FY19E from 91cr reported in FY16 driven by:

1. Strong focus on high value long term deals

2. Initiatives to monetize on-screen and off-screen advertising

3. Robust increase in the screen presence across India

At present, INOX showcases ads for ~15minutes as against ~20 minutes at PVR.

This ~5minutes of unused ad inventory represents a significant upside potential

with high spend advertisers filling up.

Advertising revenues to gain momentum

17 29 32

50

81 91

108

140

180

-

20

40

60

80

100

120

140

160

180

200





Strong revenue growth emanating from the change in strategy

We expect the overall net revenues to grow at a brisk rate of 19.6% from Rs

1,159cr in FY16 to Rs 1,981cr by FY19.

EBIDTA margins set to expand

Driven by robust growth in F&B and advertising revenues (drivers to EBITDA) we

expect a faster pick up in EBITDA and margins than PVR

Total Revenues

-

300

600

900

1,200

1,500

1,800

2,100


NBOC F&B Advst Other Operating

Rs in crore

S

Total Revenues

-

300

600

900

1,200

1,500

1,800

2,100


NBOC F&B Advst Other Operating

Rs in crore


Revenue contribution

70.7 69.2 68.9 64.3 61.6 63.1 61.1 60.9 60.4

18.8 20.3 21.4 21.3 21.3 22.9 23.1 23.9 24.5

5.4 5.2 4.9 6.5 9.1 7.9 8.7 8.8 9.1

5.2 5.3 4.9 7.9 8.0 6.1 7.1 6.4 6.0

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0


NBOC F&B Advst Others

%


INOX EBIDTA to experience faster traction than PVR

76113

208 200

334

403

516

620

73 98

122 123

190 159

262

384

0

100

200

300

400

500

600

700


PVR INOX

Rs in cr

S Source : Inox Leisure, PVR Ltd, Bloomberg, Ventura Research

INOX EBIDTA margins to see a sharp spurt

10%

12%

14%

16%

18%

20%


PVR INOX




INOXs debt to de-lever at a faster rate than PVR

Return Ratios to play catch up

INOX at minimal gearing

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0


PVR INOX

Debt / Equity (No of times)


ROE and ROCE

0

5

10

15

20

25


PVR INOX

%

ROE


T to see a sharp spurt

0

5

10

15

20

25

30


PVR INOX

%

ROCE




Strong cash flow on the cards

Strong content line-up to neutralize impact of demonetization

It was feared that the lackluster first half and the demonetization drive

could impact the company’s short term business outlook. However,

Q3FY17 belied expectations and the impending movie launches

promise a good second half of FY17.

_______________________________________________________________


Brisk cash flow generation

830

20391297

452

1690997

20172772

0

2000

4000

6000

8000

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Rs in millions

INOX Leisure

S Source : Inox Leisure, Bloomberg, Ventura Research

to play out for both INOX and PVR

1008

-3196

6287

1553

3373

2670

3715

4511

-4000

-2000

0

2000

4000

6000

8000

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

PVR

Rs in millions

S Source :PVR Ltd, Bloomberg, Ventura Research

Strong content pipeline

Source : Inox Leisure, Ventura Research



Financial Performance

Despite an increase in the screen presence, fairly indifferent content and the impact of

demonetization led to a decline of ~3% in footfalls to 12.5 mn in Q3FY17 as compared to

12.9mn in Q3FY16, As a result, occupancies plunged 200 bps yoy to 26%. Net sales stood

flat at Rs 298 crore for Q3FY17 compared to 297.9 crore in Q3FY16. However, F&B and

advertising revenues (major contributors to EBITDA margins) went for a toss on account of

demonetization and a hike in advertising rates. EBITDA saw a sharp decline of ~41% from

Rs 53.4cr in Q3FY16 to Rs 31.7 cr in Q3FY17 and EBITDA margins plunged by 730 bps to

10.6% (17.9% in Q3FY16). PAT fell by 78% to Rs 3.8 crore in Q3FY17 against 17 cr in

Q3FY16.

For FY16, INOX registered a stellar performance of 31% growth YoY in net sales to Rs

1,332 crore, steered by its increased focus on screen presence across India and better

content providing impetus to higher footfalls. EBITDA grew by ~55% to Rs 189cr in FY16 and

margins rose by 220 bps to 14.3% in FY16 (12.1% in FY15) driven by the increase in the

F&B SPH. Plunge in the finance cost led to a significant rise in PAT margins from 2% in FY15

to 5.8% in FY16. PAT grew 3 fold to Rs 77.5 cr in FY16 (Rs 20 cr in FY15).

_______________________________________________________________________

Source: Inox Leisure, Ventura Research

Consolidated Quarterly statements (Rs in crores)

Description Q3 FY17 Q3 FY16 FY16 FY15

Net Sales 298.0 297.9 1,332.7 1016.8

Growth (%) 0.0 31.1

Total expenditure 266.3 244.5 1142.8 894.1

EBITDA 31.7 53.4 189.9 122.7

Margin (%) 10.6 17.9 14.3 12.1

Depreciation 21.4 19.7 80.3 75.8

EBIT (Ex. OI) 10.3 33.7 109.6 46.9

Non-Operating Income 2.2 1.8 4.3 8.3

EBIT 12.5 35.5 114.0 55.2

Margin (%) 4.2 11.9 8.6 5.4

Finance Cost 6.5 6.1 24.4 38.6

Exceptional Items 0.0 5.0 5.0 0.6

PBT 6.0 24.4 84.6 15.9

Margin (%) 2.0 8.2 6.3 1.6

Prov. for Tax 2.3 7.3 7.1 -4.1

PAT 3.7 17.1 77.5 20.0

Margin (%) 1.2 5.7 5.8 2.0

Minority Interest 0.0 0.0 0.0 0.0

Reported PAT 3.7 17.1 77.5 20.0

Margin (%) 1.2 5.7 5.8 2.0



Financial Outlook

With its robust expansion plans, we expect the consolidated net revenues to experience a brisk

growth of 19.6% CAGR from Rs 1,159 crore in FY16 to Rs 1,981 crore by FY19. Further,

driven by the surge in the F&B and advertising revenues, we expect EBITDA margins to rise to

~19.4% (+300 bps) by FY19. However, increasing operating cash flows, an increased

depreciation and borrowing cost (for setting up screens) would confine PAT margins to ~8.6%

(+190 bps) by FY19. Return ratios ROE and ROCE are expected to shoot up to ~21.2% (+900

bps) & ~26.4% (+1360 bps) respectively by FY19 over FY16.

Sturdy EBIDTA margins

31

73 98

122 123

190 159

262

384

0

5

10

15

20

25

-

50

100

150

200

250

300

350

400

450


EBITDA EBITDA margins

Rs in crore %


Coherent PAT margins

-

10

20

30

40

50

60

70

80

90

100


Inventory days Debtor days Creditor days

No of days


Upswing in Return Ratios

-

3.0

6.0

9.0

12.0

15.0

18.0

21.0

24.0

27.0


ROE ROCE

%


Working capital cycle

-

10

20

30

40

50

60

70

80

90

100


Inventory days Debtor days Creditor days

No of days

S Source : Inox Leisure,Ventura Research



Key Risks

Indifferent content can impact footfalls

Increase in distributor share could dampen margins

Slowdown in mall development to impact new scree roll out

Shrinking gap between Theatre and TV releases to intensify competition from

alternate entertainment media

Increasing piracy to impact footfalls and consequently NBOC

Valuation

We initiate coverage on INOX as a BUY with a price objective of Rs 340

representing a potential upside of ~38.2% over the next 18 months from the CMP

of Rs 246. We have used the DCF method to value INOX.

Key DCF assumptions

Projected Years FY17-FY26

Risk Free rate 6.3%

Risk premium 7.5%

Beta 0.9

Cost of Equity 12.8%

Cost of Debt (after tax) 3.4%

Target D/E 0.0

FCFE 12.8%

Terminal Growth Rate 3.0%

S Source : Inox Leisure, Bloomberg, Ventura Research



Inox PE Trend

0

50

100

150

200

250

300

350

400

450

CMP 24X 28X 32X 36X 40X

Rs

Band chart suggest distress pricing

Source : Ventura Research

Inox EV/EBIDTA Trend

0

500

1000

1500

2000

2500

3000

3500

EV 8.5X 10X 11.5X 13X 14.5X

Rs in crores

Source Source: Ventura Research

Inox P/BV Trend

0

50

100

150

200

250

300

350

CMP 2X 3X 4X 5X 6X

Rs

Source Source: Ventura Research



Peer Comparison (Rs in crores)

Y/E March Net Sales EBITDA PATEBITDA

margin (%)

PAT

margin (%)EPS

EPS

growth (%)ROE (%) P/E P/BV EV/EBITDA

Inox Leisure Ltd

2016 1,158.9 189.9 77.5 16.4 6.7 8.4 281.0 12.2 29.1 3.8 13.7

2017E 1,241.1 158.7 32.9 12.8 2.6 3.6 (57.6) 5.4 68.7 3.6 16.8

2018E 1,589.7 262.4 93.3 16.5 5.9 10.2 183.8 13.9 24.2 3.2 10.0

2019E 1,980.9 383.7 170.4 19.4 8.6 18.6 82.7 21.2 13.3 2.5 6.6

PVR Ltd

2016 1,868.8 323.9 118.7 17.3 6.4 26.4 753.0 18.6 43.2 5.9 16.8

2017E 2,237.9 403.3 133.6 18.0 6.0 25.3 (4.2) 16.0 38.8 5.2 14.2

2018E 2,648.4 516.2 190.1 19.5 7.2 38.6 53.0 20.4 27.2 4.5 11.1

2019E 3,136.2 619.9 251.3 19.8 8.0 55.3 43.0 25.5 21.6 3.7 9.3

Source : Ventura Research



Financials and Projections

Y/E March, Fig in ` Cr FY16 FY17E FY18E FY19E Y/E March, Fig in ` Cr FY16 FY17E FY18E FY19E

Profit & Loss Statement Per Share Data (Rs)

Net Sales 1158.9 1241.1 1589.7 1980.9 Adj. EPS 8.4 3.6 10.2 18.6

% Chg. 7.1 28.1 24.6 Cash EPS 17.2 13.2 21.0 30.6

Total Expenditure 969.0 1082.4 1327.4 1597.3 DPS 0.0 0.0 0.0 0.0

% Chg. 11.7 22.6 20.3 Book Value 64.3 67.9 78.1 96.6

EBDITA 189.9 158.7 262.4 383.7 Capital, Liquidity, Returns Ratio

EBDITA Margin % 16.4 12.8 16.5 19.4 Debt / Equity (x) 0.5 0.5 0.4 0.3

Other Income 4.3 9.0 3.8 6.4 Current Ratio (x) 0.7 0.8 0.9 1.2

PBDIT 194.2 167.7 266.2 390.1 ROE (%) 12.2 5.4 13.9 21.2

Depreciation 80.3 88.6 99.5 110.9 ROCE (%) 12.8 8.8 17.2 26.4

Interest exp 24.4 29.2 25.4 21.0 Dividend Yield (%) 0.0 0.0 0.0 0.0

Exceptional items 5.0 0.0 0.0 0.0 Valuation Ratio (x)

PBT 84.6 49.8 141.3 258.2 P/E 29.1 68.7 24.2 13.3

Tax Provisions 7.1 16.9 48.1 87.8 P/BV 3.8 3.6 3.2 2.5

Reported PAT 77.5 32.9 93.3 170.4 EV/Sales 2.3 2.1 1.7 1.3

Minority Interest 0.0 0.0 0.0 0.0 EV/EBIDTA 13.7 16.8 10.0 6.6

Share of Associate 0.0 0.0 0.0 0.0 Efficiency Ratio (x)

PAT 77.5 32.9 93.3 170.4 Inventory (days) 2 2 2 2

PAT Margin (%) 6.7 2.6 5.9 8.6 Debtors (days) 18 18 18 18

Distributor's share / Net Sales (%) 43.1 43.4 43.4 43.4 Creditors (days) 71 73 73 73

Tax / Sales (%) 8.4 34.0 34.0 34.0

Balance Sheet Cash Flow Statement

Share Capital 96.2 96.2 96.2 96.2 Profit Before Tax 84.6 49.8 141.3 258.2

Reserves & Surplus 494.6 527.5 620.8 791.2 Depreciation 80.3 88.6 99.5 110.9

Long Term Borrowings 216.9 246.9 227.5 172.5 Working Capital Changes (10.1) (42.1) (12.6) (18.7)

Deferred Tax Liabilities (Net) 5.9 5.9 5.9 5.9 Others 14.2 3.3 (26.5) (73.3)

Other Non Current Liabilities & LT Prov 10.1 10.7 12.2 13.8 Operating Cash Flow 169.0 99.7 201.7 277.2

Total Liabilities 823.7 887.2 962.5 1079.5 Capital Expenditure (149.4) (137.5) (145.0) (150.0)

Gross Block 1138.0 1275.5 1420.5 1570.5 Other Investment Activities (7.8) 9.0 3.8 6.4

Less: Acc. Depreciation 433.6 522.3 621.8 732.6 Cash Flow from Investing (157.2) (128.5) (141.2) (143.6)

Net Block 704.3 753.2 798.7 837.9 Changes in Share Capital 0.0 0.0 0.0 0.0

Goodwill on consolidation 0.4 0.4 0.4 0.4 Changes in Borrowings 25.3 45.0 (25.1) (59.4)

Non Current Investments 1.1 1.1 1.1 1.1 Dividend and Interest (24.7) (29.2) (25.4) (21.0)

Long term Loans & Advances 193.8 217.0 236.2 256.4 Cash Flow from Financing 0.7 15.8 (50.5) (80.4)

Other Non Current Assets 12.8 3.5 3.5 3.5 Net Change in Cash & Cash Equiv 12.4 (13.1) 10.1 53.2

Net Current Assets -88.8 -88.0 -77.4 -19.7 Opening Balance 13.4 27.1 14.0 24.1

Total Assets 823.7 887.2 962.5 1079.5 Closing Balance 27.1 14.0 24.1 77.3



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