Stock Review: INOX Leisure

 

The merger of Fame India will improve Inox Leisure's presence and pricing power. It may also boost its earnings in future

 

INOX Leisure is the subsidiary of Gujarat Flurochemicals. Over a span of around eight years, the company has expanded its reach in 25 cities with 38 operational properties and 144 screens. Besides exhibition, the company has also diversified into other businesses, such as power, distribution, and to a small extent production. Recently, the company had acquired Calcutta Cinema thereby gaining access to nine multiplexes in West Bengal and Assam. In the coming quarters, the company is focusing on expanding in location such as Jodhpur, Ahmedabad, Bhopal, Mangalore, Coimbatore, Kanpur, Hubli, and Bhubaneswar.

INVESTMENT RATIONALE:

Multiplex industry, by its very nature, is capital intensive. Even if a film doesn't release or fails, exhibition companies have to bear a constant maintenance costs, such as food and beverages, staff and other utility bills' expenditure. Besides this, there is a cost of acquiring screens. It is estimated that for one screen, an exhibition company has to shell out around 1.5 crore. This is the reason many sector experts foresee that consolidation is the only way for the industry to prosper with a better pricing power at affordable costs. Merger or acquisition ensures immediate increased presence and better pricing power. Inox Leisure's recent acquisition of Fame India is a step in this direction. Inox Leisure holds over a 50% stake in Fame India. Fame India has 25 operational properties having 95 screens and 26,487 seats in 12 cities. The combined entity would have a presence in 37 cities with around 240 screens. This would make Inox Leisure second in ranking to Big Cinemas in terms of number of screens.

   At the end of FY10, Fame India's film distribution business had revenue of 18 crore, higher than around 2 crore of Inox Leisure. This acquisition will strengthen Inox Leisure's distribution network. Fame India compensates for locations in which Inox Leisure is not present. Another strategic advantage is Fame India's location. Though Inox Leisure has a strong presence in western, eastern and southern India, it has limited presence in the North. Hence, this acquisition serves good for Inox Leisure both on exhibition and distribution fronts increasing its prospects of better earnings.

FINANCIALS:

In the September 2010 quarter, the company's net sales rose by 32% to 88 crore year-on-year. The company's net profit fell 37% on a y-o-y basis to 3.3 crore due to high interest, employee and other expenses. Its interest costs increased from around 1 crore in the September 2009 quarter to 3.5 crore in the September 2010 quarter. In the past two fiscals, the company's debt has increased to 184 crore in FY10 from 44 crore in the previous year. Besides the acquisition of Fame India, a chunk of this debt has gone into the expansion of screens and acquisition of CCPL multiplexes (both amounting to investment of around 60 crore) in West Bengal.

VALUATION:

At the current market price of 60, Inox is available at a price-earnings multiple of 11. This is much lower than its peers such as PVR, Cinemax India, which are trading at a P/E of 22 and 15 times, respectively. A strong visibility of earnings due to the acquisition of Fame India makes Inox's stock an attractive investment.