The real picture

India’s multiplex industry could finally be waking up to profits and a new lease of life

When PVR Cinemas signed up with the Prestige Forum mall in Bangalore in 2000 for an 11-screen, 2,000-seat multiplex — the first ever in India — most people in the business agreed that it was a terrible idea. “We got a lot of flak from the industry. Everyone thought it was going to be a disaster. They asked us where we were going to get so much content from,” recounts Pramod Arora, president and CEO, PVR Cinemas. “But we were sure it would work. For one, people spoke nearly four or five languages in Bangalore. Even otherwise, in a country where movies are religion, we were certain if we got the execution right, we couldn’t go wrong.” 

The company was able to prove its naysayers wrong in FY04, when it generated the highest seat utilisation the operators had till then, recording 2.6 millions admissions in the complex.

Thirteen years later, PVR is the most profitable player in the business today. In sharp contrast, Reliance Mediaworks has been struggling with huge losses (₹903 crore in FY12) and Inox Leisure was also in the red (₹1.51 crore) as interest and one-time service tax on lease rentals of previous years ate into its profitability in FY12.

That’s odd in a country where stars are treated with an almost God-like reverence, and over 3 billion movie tickets are sold every year. In fact, there was a time when it seemed little could go wrong with the multiplex industry. Between 2005 and 2008, existing and new players lined up exuberant expansion targets thanks to a five-year tax holiday, in turn propelling lease rentals upwards. “Rentals reached ₹100-125 per sq ft per month — more than 2.5 times what the business could sustain,” says Arora. That did nothing to quell the heady optimism surrounding the industry, and a report in 2006 by AT Kearney projected a four-fold jump to 2,000 screens by 2009-10. Even the stock markets came to love the multiplex story, with five players raising ₹637 crore during this phase. 

Cut to 2013 and with around 1,200 multiplex screens, the industry is nowhere close to that figure. The economic downturn was to blame for the reversal of fortunes — occupancy levels fell as people cut back on spending, fewer movies were being made and multiplex companies with considerable debt were bleeding. Some like Fame Cinemas had to sell off and many single screen cinemas went out of business.  

The Right Moves

The industry emerged wiser from the slowdown but it remains highly fragmented. Consolidation was inevitable. In November 2012 PVR took a 69.27% stake in Cinemax for ₹395 crore, catapulting it as India’s largest multiplex operator, ahead of Inox-Fame and Big Cinemas (see: Box office king). With the open offer completed where it mopped an additional 23% for ₹136 crore, PVR now owns 93% of Cinemax with the help of private equity investors. Private equity investors Multiples Alternate Asset Management and L capital invested ₹235 crore to part fund the acquisition. “We have been having discussions with Cinemax for around two years. While for some, the strategy has been to take over distressed assets and turn it around, we wanted to acquire a profitable asset and improve on it through economies of scale,” says Arora.

At one time, Inox was reportedly gunning for the Essel Group-owned Fun Cinemas, which has 80 screens. CEO Alok Tandon declined to comment on that, but says, “We have always used acquisitions as our growth strategy. We were the first to make an acquisition when we picked up Kolkata’s 89 Cinemas in 2006.” The chain’s headline-grabbing acquisition of Fame Cinemas in February 2010 came after a bitter tussle with Reliance Mediaworks. Further consolidation is inevitable, according to Fame Cinemas founder Shravan Shroff. “It will happen sooner than later. The multiplex industry will be similar to the telecom industry where only two or three strong players will dominate the market. The going will get tougher for the smaller players,” he says. 

The film exhibition industry in India is heavily fragmented with single screen theatres dominating the 12,000 plus screens across the country. What’s startling, though, is that with merely 10% of the total screens, multiplexes control two-thirds of box-office revenues.

Consolidation could give them even greater power and that has film producers worried. “It is true that multiplexes have brought in a greater level of transparency to the entertainment business.However, a development such as PVR acquiring Cinemax results in a monopolistic situation. Producers here are often arm-twisted,” points out Mukesh Bhatt, chairman, Vishesh Films. 

Producers and exhibitors each split revenues by half during the first week of a film’s release. By the fourth week, the producer gets a 30% share. That could change soon. “There will be pressure on renegotiating those rates,” says Shroff. “It may not happen immediately but once the dust settles on consolidation, it will. They will start with smaller films and after some time for the larger ones, as well,” he adds.  

Show And Tell

The growing heft of multiplex operators could give them a stronger bargaining plank with mall developers too. But much of that hinges on the progress of mall development across the country. “About 80% success in our business depends on picking the right location and the right developer,” points out PVR’s Arora. 

In 2012, the industry lost out on 150 additional screens as the malls that were to house them weren’t completed on time. “Any delay in the construction of shopping malls will dent our ability to grow,” says Milan Saini, CEO, Cinepolis. The world’s fourth-largest and Mexico’s largest multiplex chain entered India in 2008 and now runs 49 screens across nine properties. 

There is one silver lining, though — lease rentals have dropped to reasonable levels. “Post the slump in 2008-09, there is an element of realism in terms of rental expectations. People are realising that theatres and hypermarkets are really what drive footfalls into the malls,” says Ashok Ganapathy, CEO, Big Cinemas. In the next one year, PVR, along with Cinemax, plans to add about 130 screens, while Cinepolis could add another 60-100 screens in 2013. Inox Leisure plans to add 75-100 screens to take its total to 375 screens by 2014. For Big Cinemas, whose parent company Reliance Mediaworks is weighed under heavy losses, there will be fewer additions this year. 

Much of these plans hinges on movies that can draw audiences in. A string of smaller-budget films catering to the multiplex audience — Vicky Donor and Kahaani, among others — have helped create this demand. Digitisation has ensured that more Hollywood movies are now dubbed in regional languages, and developments in 3D technology have enhanced the movie viewing experience.

All this comes at a time when, ironically, the shelf life of a movie has shrunk tremendously. “You now see revenues peaking in the first weekend because the next one has another set of attractions coming in. Producers are making their money much faster and moving on to other revenue streams like DTH,” echoes Uday Singh, managing director, Motion Pictures Distributors Association. He points to Kamal Haasan’s unsuccessful attempt to release his film Vishwaroopam on direct-to-home a day earlier than its stated theatre release, as a case in point. 

The other real threat for the industry continues to be piracy. According to a report by Ernst & Young, the Indian film industry loses nearly $1 billion in revenue due to piracy. “It is something we would like to control because it clearly continues to impact our growth,” says Inox’s Tandon. While he admits digitisation has helped, Tandon pegs revenue loss due to piracy at a staggering 40%. 

Entertainment tax on ticket sales varies between 30% and 60% depending on the state the theatre is located in. In Andhra Pradesh and Tamil Nadu, ticket prices are capped as well. That puts margins from ticket sales under pressure. Growing non-ticket revenues, chiefly from food and beverages and advertising — where margins are around 60% — therefore becomes critical for profitability to improve. While non-ticket revenues for the industry have doubled since 2008 to 30%, there is enough room to grow further as these are in the 50-60% range in overseas markets. Multiplexes are addressing this opportunity by charging a fee for movie trailers screened at prime slots during weekends, tying up with brands for promotions, charging for displays inside the theatre that were otherwise free, and innovating on food and beverages offerings.  

At ₹2-2.5 crore per screen, setting up multiplexes is a capital-intensive business that’s really not for everyone. Shroff says consolidation will gather steam over the next couple of years as smaller players such as Fun, DT, Wave and SPI join forces with larger multiplex chains. Hopefully, the industry’s new avatar will be a profitable one.