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S. Vaidya Nathan

AN INVESTMENT can be considered at the upper end of the price band in the initial public offering of Shringar Cinemas. Investors would have to buy the stock with a two/three-year perspective as the benefits of the expansion plans may get reflected in revenues only from FY-06, and in earnings from FY-07.

Its film exhibition business would be a source of strength; the presence in film distribution can become a drag on earnings, its stability and resources.

But this business is likely to be overshadowed by the big-ticket expansion that is imminent in the film exhibition business over the next few years. Our recommendation is not linked to the likely price trends on listing.

We expect the stock to attract investors who fancy the retail sector. The trends in performance of its joint venture with Adlabs Films is a encouraging pointer to the prospects for Shringar Cinemas; its multiplex property — Fame Adlabs — has been in operation for three years; it has enjoyed healthy profitability levels on a growing revenue base.

Shringar Cinemas commissioned two multiplex theatres in a phased manner in the last six months of 2004. As they are in the initial months of operation, the earnings card has a splash of red. On a standalone and consolidated basis, the company is likely to post losses for FY-05. With seven new properties to be commissioned in the next 10 months, we can expect an encore in FY-06 too, as revenues may take time to match and march ahead of costs.

Shringar Cinemas has so far been present only in Mumbai where it proposes to commission its third multiplex in the next quarter. It now plans to gradually establish a pan-India presence with properties in Thane, Pune, Surat, Kolkata, Hyderabad and Aurangabad. Its capacity in terms of screens would treble to 42 over the next year.

About 75 per cent of the IPO proceeds would finance four of the seven properties in the pipeline. The company has tied up funds for the other three and made sizeable investment in their implementation.

Multiplexes have become popular with filmgoers, as they provide a superior viewing experience and offer a choice. Tickets are priced higher than at conventional theatres and they also generate sizeable revenues from sale of food and beverage.

A few multiplexes also offer shopping outlets with big banner names; this too has the scope to enhance footfalls. Shringar Cinemas' properties in Mumbai fall under this category.

In Mumbai, the company faces competition from other players. As a concept, multiplexes are in their nascent stage in India, and the existence of a few players has served to popularise the concept and expand the market. In most other places where it plans to set up facilities, it would be an early entrant. This should give the company an edge over the long term.

As the company has built expertise in operating, marketing and pricing services in the multiplexes and has a brand — Fame — that enjoys good recall in Mumbai, it should be able to repeat its success in other centres as well. It would also perhaps be one of the earlier players to create a wide geographic footprint (the company plans to own 150 screens by 2010).

The experience that the promoters have in film distribution and exhibition business should be a source of strength. It could help attract distributors of big-banner commercial films and offbeat movies, which have had considerable success in recent times at the box office, to their theatres in several centres.

We take a positive view of Shringar's exhibition business though a respectable level of earnings may be likely only in FY 07.

The revenue flow from the film exhibition business would also partly depend on the number of movies that turn out to be box office successes. The revenue pattern of Shringar's joint venture indicates that screening a diversified set of films through the year provides an adequate cushion against sharp declines.

If multiplexes become an avenue to screening non-film based content, it could also help diversify risk. Such content could also provide flexibility for commanding a higher price. Its film distribution business is carried out by a fully-owned subsidiary.

Revenues have shown a healthy growth till FY-04. But the higher cost of picking up rights and the sporadic successes at the box-office appears to have affected profitability and led to losses over the past couple of years.

In the nine months ending December 2004, the company appears to have scaled down the distribution business as is evident from a sharp decline in revenues. Earnings stability would depend on how this business fares.

To bankroll its expansion plans, the company has also relied on debt. If revenues from the new properties do scale up within a year or two, the company's ability to service the debt could be affected.

A spurt in the interest cost and depreciation charges on account of the film distribution business and delays in commissioning of properties, are the principal risks to profitability, and, hence, to our recommendation.

Offer details: Shringar Cinemas is offering 81.5 lakh shares through the book-building route in the price band of Rs 47-53. The equity base would be Rs 31.5 crore.

The book running lead managers are Enam Financial and JM Morgan Stanley. The offer document is available on the Web site of Enam (www.enam.com). The offer opens on April 5 and closes on 11.

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