PVR is stuck in a long interval, but it is hopeful of a happy ending

Size doesn’t always matter. That’s what Chinese tycoon Wang Jianlin is finding out — eight years after buying the majority stake in AMC Entertainment for $2.6 billion, in what was the biggest acquisition of an American company by a Chinese one. The Dalian Wanda group founder had big plans and AMC became the largest screen owner in the world. But all its heft meant zilch as it continued to bleed. In CY19, it reported a loss of $149 million and debt of $4.9 billion. Add a pandemic to that carnage. Today, there are rumours of the chain facing bankruptcy and Jianlin’s 50% stake is valued at $261 million — less than one-tenth of its original price.

AMC’s Indian counterpart finds itself in the same boat, even if not on that large a scale. The biggest theatre chain in India, PVR, is one-tenth the size of AMC in terms of screens and revenue (Rs.34.52 billion), but the pain it is experiencing is similar to that of the Chinese behemoth. Since pulling the shutters down across the country on March 11, the multiplex chain has not made a single penny in revenue. As a result, the stock hit a 52-week low of Rs.711 in May after having hit an all-time high of Rs.2,100 in February. Since then, it has recovered to Rs.1,070 on news that multiplexes can reopen and operate at 50% capacity.

But, here comes the real twist.

Fading lure of the silver screen

While the no-show is drying up coffers, what is agonising for exhibitors is to watch new movies finding their way direct to home. In the US, AMC after taking a decision to ban Universal Pictures from its theatres patched up with the Comcast-owned film studio, allowing it to air new movies at home just after 17 days instead of the earlier 90 days. What is giving exhibitors the jitters is that the studios get to keep a higher share of sales from digital releases unlike from ticket sales. Back home, a similar drama is playing out with Bollywood and regional movies being aired on streaming platforms.

It started with movies such as Bamfaad, Ateet and Nawazuddin Siddiqui’s Ghoomketu finding their way on to the small screens. Not many raised a stink, but when Amazon Prime Video announced that the much-anticipated film starring two of the biggest stars Amitabh Bachchan and Ayushmann Khurrana was to release on its platform, multiplex owners could take no more. Movies, including the big-ticket ones such as Shakuntala Devi and Dil Bechara, found their way home instead of being screened at the likes of PVR and Inox. 

“Over the past months, we have introduced new movies and shows as part of our #BeCalmBeEntertained initiative. In addition to this, we have also acquired blockbuster films across languages with diverse topics. This includes a mix of free and premium content,” Aparna Acharekar, programming head, Zee5 India, one of the smaller OTT players among biggies such as Netflix, Disney+Hotstar and Prime Video was quoted as saying, when the lockdown was at its peak.

The next set of films to be released online-first was Gunjan Saxena: The Kargil Girl and Laxmmi Bomb, which is due to premier on Disney+Hotstar in November. This, of course, broke a few hearts. Strong reactions came from multiplex players, especially Inox, which even sounded sententious with talk of retribution and fair-weather friends. In a statement, it said: “Inox will be constrained to examine its options, and reserves all rights, including taking retributive measures, in dealing with such fair-weather friends.” Meanwhile, Mohan Umrotkar, CEO, Carnival Cinemas, opined, “If films made for theatres release directly on streaming platforms, it may hamper the overall growth of the ecosystem.”

Their reaction may be justified given that they face a very insecure future. But according to a FICCI-EY report, the trend of digital-first releases had kickstarted much before the pandemic. Around 50 low-budget films were released directly on streaming platforms in 2019, states the report. More importantly, digital rights have been gaining ground with revenue rising from Rs.13.5 billion in 2018 to Rs.19 billion in 2019. Usually, Bollywood maintains an eight-week window between theatrical and digital releases. But, with the lockdown entering its eighth month, many producers are getting antsy. After all, they cannot be closed for business when the entire country is glued to some screen. For instance, Gulabo Sitabo’s director Shoojit Sircar stated he chose “not to sit with the film since it was ready”. By selling the rights of the Rs.400 million-450 million film for Rs.600 million-650 million, the producers made decent profit. Moreover, the producers can also make more money through satellite rights going forward.

PVR seemed to understand the producers’ plight. In its Q4FY20 earnings call, Kamal Gianchandani, chief of strategy, PVR, stated, “A lot of producers end up funding their own production — with their own money or with the money borrowed at expensive interest rate. So, there are different reasons why producers have taken these calls.” However, he doesn’t expect the trend to continue. “Our sense is that these streaming platforms would be paying a premium of about 15% to 20% for the cost of production simply because it is extremely difficult to calculate the expected box office,” he added. 

Ajay Bijli, CMD, PVR is not reading too much into the trend. “This is an exceptional period where we are shut. Once the business comes back to normal, I doubt it will continue. It just doesn’t make any economic sense for people to go out and sell to OTT directly and bypass the theatrical window,” he told analysts during the call. Karan Taurani, who tracks PVR at Elara Capital, feels larger films, which are made with a budget of more than Rs.1 billion, cannot be put on OTT directly. “Recovery from domestic and overseas cinema is huge, which OTT alone cannot offset,” says Taurani.

PVR, which screens close to 1,000 movies a year, reported loss of Rs.750 million in Q4FY20, which includes perishable inventory write-off of Rs.18 million. That is against profit of Rs.470 million in Q4FY19, when it had acquired TN-based SPI Cinemas. And FY21 looks to be headed for a washout with the pandemic showing no signs of slowing down. It did turn out that way with Q1FY21 revenue falling 99% to Rs.127 million, of which Rs.14 million came from F&B revenue, Rs.30 million from digital revenue and other operating income of Rs.83 million. Even with the gradual reopening, it will have to operate at half its capacity. With screens across 176 rented properties in 71 cities, PVR is stuck in a really long interval, one where it can’t even sell its expensive popcorn or cold drink to make a quick buck.

Counting the cost

As it deals with the drastic fall in revenue, the company is spending Rs.1.42 billion/month,which includes rent and common area maintenance charge (CAM) of Rs.650 million (See: Behind the scenes). Thus, the multiplex association has appealed to landlords to waive off rent and CAM for the lockdown period. Since leases are a major fixed cost for PVR, it has already invoked the force majeure clause in its agreements with mall developers. 

“We have always been a good paymaster and tenant throughout, so let’s see what happens. We are not pushing the envelope too much just now and I am sure we will find an amicable solution,” points out Bijli. Ambit Capital’s Ritesh Gupta is optimistic that they will agree to a favourable concession. “PVR should be able to renegotiate rentals with the property owners for full/partial waiver of rent and temporarily move to revenue-sharing model, which would reduce the drag on profit and cash flow,” he stated in his report.

The company has already taken care of the other big expense — employee cost. “It was heart-warming to see my senior management voluntarily opt for 50% cut in their remuneration until cinemas reopen. However, at the cinema level, we did not cut salaries since they anyway make just above minimum pay. But, rest of our controllable expenditure has been brought down by two-third,” explains Bijli, adding that increments, too, have been deferred while suspending house-keeping and security arrangements.

It had already opted for principal and interest rate moratorium till August on its net debt of Rs.9.71 billion. It holds cash of Rs.2.27 billion and to augment resources further, has raised Rs.3 billion through a rights issue. “We are taking steps to ensure that we have enough liquidity to take care of fixed costs as we tide through these uncertain times,” says Bijli. Due to these steps, Taurani believes PVR can breathe easy. “With the current debt level and liquidity, they will be able to run operations for the next four to six months,” he points out.

Not only did PVR have to rein in current expenses, it also had to postpone future plans — of opening additional 100 screens. CFO Nitin Sood mentions that the capex plan would be revisited. “Around 30 screens are 85% complete. Our priority will be to finish those since the bulk of the work is already done.” Though more screens are in various stage of construction, PVR is not pushing for a quick closure. “We will not focus on new handover. Realty developers are delaying that anyway given their liquidity constraints,” adds Sood.

Meanwhile, PVR is chalking out a plan to make some money off its F&B offering, which contributed 30% of its revenue pre-Covid or Rs.9.5 billion in FY20. This will include takeaway and online sales of a bouquet of PVR’s food products. Its gourmet popcorn brand 4700BC in which the company bought 70% stake in 2015, is sold online through portals such as Amazon, Snapdeal and Paytm. Available in zip-lock bags and tins, it is priced between Rs.65 and Rs.800 for different sizes. Since FY16, its turnover has increased nearly 8x, from Rs.24 million to Rs.190 million in FY19, while loss narrowed from Rs.6.4 million to Rs.3.8 million.

The management remains confident that these plans will help them tide over the crisis. Bijli says that there is no back-to-the-drawing board situation and there is no point in changing what has worked well for the chain. “I have 45 screens positioned in a certain manner and can’t overnight change their positioning and I think in a year’s time, the vaccine will be out. So, the only thing we need to make sure is that costs are under control,” says Bijli.

Picture abhi baaki hai

While the company is putting its best foot forward, some analysts are adopting a cautious stance. Taurani says it is better to err on the side of caution and believes the stock will rerate in a phased manner, once clarity emerges. Meanwhile, Crisil has assigned negative outlook to the multiplex’s long-term bank facilities and non-convertible debentures, citing ‘lower-than-expected ramp-up in occupancies, resulting in continued higher cash losses would remain a key factor’.

PVR, which has 182,000 seats across 176 cinemas in 71 cities (See: Choose your seat), and a loyal customer base of 110 million, believes this would result in 20-25% reduction in seating capacity for PVR. Its average occupancy in FY20 was 35% — 26-27% during weekdays and 50-52% during weekends. Sood points out that the company will need at least 20% occupancy to break even and meet its fixed cost. “As we are now allowed to sell 50% of our capacity, our break-even should be around 18-20%,” explains Sood. 

Devang Sampat, CEO, Cinepolis India believes, initially the occupancy will be on the lower side. “This is because of two reasons – the first, because of the social distancing norms that have been implemented in cinemas. The software will no longer allow two groups to sit together and will automatically leave one seat empty between them. Secondly, our experience globally has been that there is a ramp up period of about four weeks for fresh content to start coming in.”

Even though cinema chains lost the release of Laxmmi Bomb to a streaming platform, Bijli is keeping his fingers crossed for the situation to improve by Diwali. “At this point, we can only hazard some scenarios, but there is a backlog of movies that are set to be released. Although I cannot draw parallels, when there was a 47-day movie strike in 2009, the occupancy went up dramatically once it was over and a lot of releases were bunched,” says Bijli.

After a blockbuster year in terms of box-office collections for the industry, many were looking forward to an encore. In 2019, the highest number of films (17) entered the coveted Rs.1 billion club and six movies made it to the Rs.2 billion club. Bijli believes a few movies awaiting theatrical release repose same level of confidence — big-ticket films such as Sooryavanshi, sports drama 83 and Radhe. “We might see some release dates being shuffled as the producers will be keen to avoid clashes at the BO,” says Sood. Not just that, there are close to 27 Hindi movies in the pipeline that are due for release till March 2021 and 15 Hollywood movies by December. “First 6-8 weeks will be tricky. Till major markets don’t open, new releases won’t happen, but I think we have to bite the bullet,” adds Sood.

Sampat of Cinepolis, too, feels fresh content is extremely important. “We have seen with the movie Alive in South Korea (fastest one million ticket sales mark in 2020) and also in Spain, fresh content has brought in the audience. In India, we have about 80 titles ready for release, which will provide a great start once we reopen,” he explains, even though he adds that the number of shows per day will be lower than pre-Covid because of stringent safety measures to be followed before and after the shows, and during intervals. 

But, what about the impact of job losses and salary cuts, which are hurting discretionary spends? Bijli is not worried. “The average ticket price at PVR is still Rs.200, as opposed to the assumption that all our cinemas charge premium fees, like in metros. People would want to spend on entertainment and going for a movie continues to remain inexpensive,” he asserts. Bijli’s optimism also comes from the support of his investors — Warburg Pincus (around 13%) and Multiples Private Equity (around 10%), Hillhouse Capital Management (1.53%) and Kuwait Investment Authority (1.31%). However, Sood sounded a bit cautious during the concall when he said, “The average ticket pricing may end up looking higher than what we have been operating at. I think we will wait and watch and move along with how the situation evolves.”

Despite the uncertainty, Taurani of Elara is bullish and has a ‘accumulate’ rating with a target price of Rs.1,520. “Once cinemas reopen, we expect fixed cost burden to converge to Rs.1.16 billion/month run-rate for the balance months of FY21, assuming lower rent and cost cutting initiatives,” he explains. In Q1FY21, PVR reported cash burn of Rs.324 million/month. “We also expect the burn rate to increase to Rs.598 million for the remainder of the current fiscal,” adds Taurani.

While analysts are keeping their fingers crossed, Bijli is taking it easy by making the most of the free time by catching up on his riyaaz in the morning and evenings, and spending time with his family. Striking a philosophical note, the 47-year-old says: “Though the world BC (before corona) and AC (after corona) will be very different, I am not so myopic to think just about PVR. The problem before humanity is much bigger than what I am facing in the business. But this too shall pass.”

But do PVR’s investors share the same sentiment?