The Hindu Business Line : Inox Leisure: Invest at cut-off

AN INVESTMENT can be considered in the initial public offering of Inox Leisure. A multiplex operator which has gained scale in a short span of time, Inox appears well set to capitalise on the demand for better outdoor entertainment options. The price band values the offer at about 30-36 times its annualised FY-06 per share earnings, on an expanded equity base.

On the back of aggressive expansion plans, the ramp up in revenues and earnings is likely to be significant, justifying this valuation.

The valuation is also at a significant discount to that of the recently listed PVR Cinemas. PVR is the largest operator and Inox a close second.

While its rapid pace of expansion is in tandem with that of other players, the superior operating margins and a foray into cities that have, until now, been untapped, are factors that could provide it an edge over competition.

As the multiplex business is at a fledgling stage, it is early days to determine the best investment option in this space.

Investors who wish to participate in the growth of this sector may want to hold more than one stock. Inox, PVR and Shringar are likely to be the three serious contenders in the multiplex space over the next three years.

Risks to recommendation

Revenues of the business are closely linked to the number of successful films launched during the year, over which the film exhibitors have no control.

There could be delays in execution, as mall space may not free up on time. The possibility of over-crowding in certain pockets in Mumbai, Bangalore and Hyderabad and phasing out of entertainment tax exemptions are other risks to our recommendation.

On an expansion spree

Inox Leisure is a relatively recent entrant in the film exhibition sector. Promoted by Gujarat Fluorochemicals, it began operations in May 2002. In just three years, it has emerged the second largest player in the business with revenues at about Rs 60 crore. In this period, it has also gained prominence as a host to the International Film Festival in Goa and Pune.

With 32 screens spread across seven cities, Inox now aims to have a wider footprint across India. Like other multiplex operators, it is also on an expansion spree, with plans to add 64 screens by FY-08 with the help of the offer proceeds. Going by their stated expansion plans, PVR and Inox are likely to retain the top two slots in the industry.

Inox has signed properties at most of its proposed locations. It also has an arrangement with Pantaloon Retail, whereby it has preferential access to real-estate developments of the latter. This would be in addition to the properties that they have already signed, offering scope for further ramp up in space.

Zooming in on offbeat locations

While PVR and Shringar Cinemas tend to have a dominant presence in Delhi and Mumbai respectively, Inox does not appear to have a geographical bias. Instead, the ability to avail of exemptions from entertainment tax, which could shave off as much as 30-40 per cent from gross ticket sales, partly dictates its choice of locations.

Almost all properties enjoy entertainment tax exemptions, as a result of which the tax accounts for only about five per cent of ticket sales, against 20 per cent in the case of PVR.

This also explains Inox's relatively high operating margin of more than 35 per cent. The benefit of the exemption extends, in most cases, to five years and Inox may not be able to sustain this advantage over other players in the long term.

The strategy, however, appears to help it zoom in on offbeat locations. Even as tier-II cities are beginning to figure in the maps of other multiplex operators as well, Inox has homed in on cities such as Jaipur, Darjeeling, Kharagpur, Jodhpur and Raipur.

These tourist spots and industrial towns have room for at least one multiplex and have been untapped thus far.

Tackling the competition

While Inox may not be able to generate high spends in these locations, it would be able to provide the same returns on investment as it would in key metros and avoid taking the competition head-on.

It also gives it a wider national presence compared to its peers which are consolidating their presence region-wise.

In cities such as Bangalore, Hyderabad and Mumbai, however, competition is likely to be stiff.

While the high propensity to spend in these cities is unlikely to affect ticket prices, an ability to showcase the best films on a regular basis would help in drawing footfalls.

As Inox grows in scale, it is likely to gain clout with the distributors. Already, Inox claims to enjoy the lowest distributor payout in the industry. It is also looking at venturing into the distribution business itself, in a manner similar to PVR.

Offer details: 1.65 crore shares are on offer, of which 45 lakh shares are an offer for sale by the promoters, Gujarat Fluorochemicals. Two lakh shares would be reserved for employees. The promoter's stake, post-offer, would be 66 per cent. The price band is Rs 100-120.

The offer would raise between Rs 120 to Rs 144 crore and its proceeds would fund the expansion plans.

The offer closes on February 2, 2006. The lead manager is Enam Financial Consultants.