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Bollywood Fuels PVR Growth as Sales to Rise 30%

Bollywood Fuels PVR Growth as Sales to Rise 30%
Movie exhibitors are expected to benefit from the recovery of the Indian film industry last year from a two-year slowdown. Photographer: Brent Lewin/Bloomberg

PVR Ltd., an Indian cinema hall chain that bought a local rival last month, predicts an annual 30 percent jump in sales over the next few years as it expands in a country that has the world’s most prolific movie industry.

The company, based in Gurgaon near New Delhi, plans to add 37 screens by March 31 and 50 more in the financial year starting April 1, Sanjeev Kumar Bijli, joint managing director, said in an interview. PVR, which also distributes films and owns bowling alleys, will focus on its movie exhibition business as the acquisition of Cinemax India Ltd. will catapult the theater operator to the nation’s No. 1 spot, he said.

Bijli is counting on higher ticket and food and beverage sales at his chain to outperform the industry’s pace of growth in revenue as the entertainment business bucks a slowdown in Asia’s third-biggest economy. India’s movie exhibition business is forecast to rise 57 percent to 108 billion rupees ($1.96 billion) by 2016 from last year, expanding at an annual pace of 9.4 percent, the Federation of Indian Chambers of Commerce and Industry and KPMG said in a report this year.

“India is a very large country, there are loads of places where you don’t have good quality cinemas,” Bijli said in New Delhi on Dec. 19. “Going to movies is a very strong entertainment option for everyone in India, so we’re looking at the entire country” to expand, he said.

Denting Profit

Shares of PVR have more than doubled this year, compared with a 25 percent gain in the benchmark BSE India Sensitive Index. PVR fell 2 percent to 285.60 rupees in Mumbai as of 10:09 a.m., while Cinemax declined 0.2 percent to 192.15 rupees.

The expansion may come at the cost of PVR’s profit while growth in sales may take some time, said Archana Shivane, an analyst at K.R. Choksey Shares & Securities Pvt. in Mumbai.

PVR said on Nov. 29 that its wholly owned subsidiary Cine Hospitality Ltd. will spend 3.95 billion rupees to acquire 69.27 percent of Cinemax from its founders in a deal funded by fresh issue of shares and loans. An open offer will be made next month to the public shareholders of Cinemax to buy as much as 26 percent additional stake for 1.48 billion rupees, according to a stock exchange filing.

“We are expecting growth in topline, but surely it will take some time,” said Shivane. “But the debt will come before that; interest costs will rise. The extra premium given to Cinemax’s founders will dent their net profit margins.”

Strong Earnings

The purchase is being funded by PVR through preferential issue of 10.63 million shares at 245 rupees apiece to its founders, existing shareholder L Capital Asia LLC and a new investor Multiples Alternate Asset Management. The remaining funds will be raised by borrowing from banks, Bijli said. L Capital is a private equity fund sponsored by luxury-goods company LVMH Moet Hennessy Louis Vuitton SA.

Profitability of Cinemax gives Bijli the confidence that PVR will be able to service borrowings made for the acquisition.

“It has reported a very strong earnings before interest, depreciation, tax and amortization in the first two quarters so that sustainability of the business will ensure we are able to repay the debt as soon as we can,” said Bijli. “There is a lot of confidence by both the private equity and the lending banks that this is a good acquisition.”

PVR has 213 screens with a seating capacity of 50,655 and Cinemax has 138 screens with a capacity of 33,535 seats, it said last month. The acquisition will increase PVR’s presence to 85 locations in 35 cities, including Mumbai, home to Bollywood. The company plans to open halls in 25 new cities in the next three years.

Industry Recovery

Net income at PVR, inclusive of units, tripled to 254.11 million rupees in the year ended March 31 and sales increased 11 percent to 5.09 billion rupees. Cinemax, which listed in October, posted profit of 158.1 million rupees on sales of 1.16 billion rupees in the three months ended Sept. 30, according to a stock exchange filing.

Cinemax may post sales of 5 billion rupees in the year ending March 31, while PVR is expected to increase revenue to 7 billion rupees, Bijli said.

Movie exhibitors are expected to benefit from the recovery of the Indian film industry last year from a two-year slowdown. A rise in average ticket prices because of growing multiplex culture, increasing content that attracts audience, “star-power” and digitization that has facilitated countrywide release of movies has helped in the turnaround, according to the Ficci-KPMG report.

‘Muted’ Outlook

Domestic movie exhibition accounted for 74 percent of the 92.9 billion rupees of revenue generated by the Indian movie industry in 2011, Ficci-KPMG estimated. Revenue generation includes from overseas exhibition, home videos, cable rights. Despite the “muted” outlook for the economy, projections of private consumption remain strong and are a positive sign for the entertainment industry, Ficci-KPMG said in the report.

As many as 1,255 feature films were produced in India in 2011, according to a report by the Central Board of Film Certification. That included 206 by the Hindi-language movie industry better known as Bollywood, five of which grossed more than 1 billion rupees at the box office.

PVR plans to expand into smaller towns such as Pathankot, in northern state of Punjab, and Panipat, in northern state of Haryana as rising incomes prompt people in cities and smaller towns to demand a better experience in Western style halls selling popcorn, coffee and cola drinks.

‘Value for Money’

Slowing economic growth this year won’t hurt ticket sales at his halls as a movie is less expensive than a holiday or a dinner with the family at a restaurant, Bijli said.

India’s economy is set to expand as little as 5.7 percent in the financial year ending March 31, the least in a decade, after an average growth of 7.75 percent in the previous 10 years that lifted incomes.

India’s consumer spending is likely to almost quadruple by 2020 to $3.6 trillion, the Boston Consulting Group said in a February report. The expenditure is set to climb from $991 billion in 2010, according to the report. Sale of food and beverages at PVR’s chain increased 44 percent to 928.5 million rupees in the year ended March 31, according to the company’s annual report.

“People actually feel they are getting value for money for three hours,” said Bijli. “Getting to escape from whatever issues and problems they are facing.”

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