CINEMAX BUY

							CINEMAX
1QFY2010 Result Update

BUY
Price Target Price Investment Period Rs49 Rs59 12 Months

Performance Highlights
Multiplex-Producer strike impacts Top-line, dips 18% yoy: For 1QFY2010, Cinemax reported a decline in its Top-line of 17.7% yoy to Rs23.5cr (Rs28.6cr), on a consolidated basis, largely impacted by a 63-day strike (covering almost the entire quarter) between Multiplex-Producers, whereby most movie releases were stalled. Moreover, the second season of the IPL and the Elections also impacted footfalls during the quarter. Hence, footfalls for the quarter fell by 20% yoy to 1.46mn (1.83mn), leading to a drop in occupancy levels by almost 800bp to 18% (26%). Further, an 8% dip in Average Ticket Prices (ATPs) to Rs114 (Rs124), due to a weak content pipeline, added to the woes of the company. Margins collapse, contract by 1,346bp: On the Operating front, consolidated Operating Margins completely collapsed, contracting sharply by 1,346bp to 2.3% (15.7%). While most costs remained flat in absolute terms (despite property additions), a weak revenue base magnified the impact on Margins (as % of Sales), leading to the sharp contraction. Besides, a 133bp reduction in Film distributor share (due to no major releases), most other costs jumped, with the highest contraction witnessed in Power & Fuel costs and Other expenditure by 327bp and 431bp, respectively. Hence, EBITDA for the quarter barely managed to stay in the green, declining a massive 88% yoy to Rs0.5cr (Rs4.5cr). However, the company has renegotiated rentals on several properties by almost 20-25%, which should aid Margins in the ensuing quarters. Bottom-line slumps, registers a loss: Consolidated Earnings for the company dipped into the negative territory, registering a loss of Rs5.8cr (Profit of Rs3.6cr) on a recurring basis, impacted by a weak Top-line and sharp Margin contraction. Moreover, a 66% drop in Other Income to Rs1.3cr (Rs3.8cr), a 38% jump in Interest costs and a 76% rise in Depreciation charges further impacted the Bottom-line. However, on a reported basis, the losses were curtailed to Rs0.6cr owing to two exceptional items: 1) Tax reversal of Rs9.5cr for two years on account of Entertainment tax getting classified as non-taxable for the purpose of Income tax, and 2) Impairment loss of Rs4.3cr on certain fixed assets due to the forced closure of a Multiplex theatre and a Food court during the current quarter. Key Financials (Consolidated)

Stock Info
Sector Market Cap (Rs cr) Beta 52 WK High / Low Avg Daily Volume Face Value (Rs) BSE Sensex Nifty BSE Code NSE Code Reuters Code Bloomberg Code Shareholding Pattern (%) Promoters MF/Banks/Indian FIs FII/ NRIs/ OCBs Indian Public 67.1 13.2 4.3 15.4 Media 136 0.9 103/24 11,030 10
15,379 4,569

532807 CINEMAX CIMA.BO CNMX@IN

Abs. Sensex (%) Cinemax (%)

3m 35.8 4.6

1yr 4.1 (46.1)

3yr 9.8 (68.0)

Y/E March (Rs cr) Net Sales % chg Adj. Net Profit % chg OPM (%) EPS (Rs) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2008 101.6 8.3 13.7 19.7 25.4 4.9 10.0 0.9 9.3 7.6 2.1 8.7

FY2009 144.6 42.3 11.1 (19.5) 21.4 3.9 12.4 0.9 7.2 4.5 1.5 7.6

FY2010E 178.5 23.4 7.8 (29.3) 20.8 4.5 11.0 0.8 4.8 5.6 1.3 6.9

FY2011E 232.0 30.0 15.0 92.1 22.3 5.4 9.1 0.8 8.7 8.3 1.0 4.9

Note: # Since listing on Feb 14, 2007

Anand Shah
Tel: 022 – 4040 3800 Ext: 334 e-mail: anand.shah@angeltrade.com

July 25, 2009

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Media

Key Highlights for the Quarter
Exhibit 1: Exhibition Capacity
Propts Under Operation Screens Under Operation Seats Under Operation
Source: Company, Angel Research

1QFY2010 23 70 19,317

1QFY2009 20 59 16,048

Addition 3 11 3,269

4QFY2009 25 74 20,305

Addition (2) (4) (988)

Exhibition Capacity: During the quarter, Cinemax did not add any new properties and closed down its property at Faridabad (E F 3 Mall, 3 screens with 730 seats). Moreover, the company also closed some seats at existing properties, adjusted for which the seating capacity on qoq terms fell by 988 seats. However, on 3rd July 2009, Cinemax launched a four screen Multiplex at Red Carpet, Ahmedabad, with 987 seats, including 180 recliner seats. With addition of this Multiplex, Cinemax now operates 24 properties, 74 screens and 20,317 seats (including IMAX’s one screen and 450 seats at Mani Square Mall, Kolkata which operates under Management fee model). Exhibit 2: Operational Parameters
Footfalls (Mn) Occupancy (%) Average Ticket Price, ATP (Rs) F&B Spend Per Head, SPH (Rs)
Source: Company, Angel Research

1QFY2010 1.46 18 114 31

1QFY2009 1.83 26 124 29

% chg (20.1) (8.1) 6.9

Multiplex – Producer’s Strike Ends
The stand-off between Multiplexes and Producers/Distributors over the revenue-share agreement, which lasted around 63-days and resulted in estimated losses of Rs250-300cr for the film industry, finally came to an end on 5th June, with multiplex owners succumbing to the Producer’s demands. After the last major release 8x10 Tasveer on 3rd April anda long dull quarter due to the IPL and the Elections, it was business as usual for Multiplexes from 12th June with the first big release – Vashu Bhagnani’s Kal Kisne Dekha. The Agreement Terms

•

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Revenue-Sharing – It was decided the multiplex owners would give 50% to producers in the first week, 42.5% in the second week, 37.5% in the third week and 30% in the fourth week for all movies. For all blockbuster movies that manage to collect around Rs17.5cr, it would be 52%, 45%, 38% and 30% respectively. If the film grosses less than Rs9cr, multiplex owners will get an increase of 2.5% share in revenues. Distribution – Multiplexes have agreed that the release plan in theatres would be decided by the distributors, for films that are released above 500 screens. In case of below 500 screens, distributors will supply prints to the extent of 5% to the national chain of multiplexes. The print and freight costs will, however, be absorbed by the multiplexes.

We believe that the agreement terms are more in favour of Producers/Disributors rather than Multiplex owners, who will now have to shelve out a higher revenue share, thereby impacting their Margins. Moreover, due to a string of big releases getting delayed owing to the strike, we believe that the hurry to release new films is going to lead to a ‘bunching effect’, whereby two-three big ticket movies will clash every now and then. Moreover, these bottlenecks are also likely to lead to lower shelf lives for movies, leading to lower revenue shares for Multiplex owners under the new terms. Nonetheless, we believe the worst is over for Multiplexes and with a host of big Bollywood releases lined up, almost till the end of the year, and strong support from Hollywood blockbusters, Multiplexes are all set to stage a comeback. However, quality of content will continue to remain the key revenue driver for Multiplexes. 2

July 25, 2009

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Outlook and Valuation
We have marginally tweaked our Top-line estimates for FY2010E to factor in a longer-than-expected continuation of the tiff between the Exhibitors-Producers. During the FY2009-11E, we expect Cinemax to register a 27% CAGR in Top-line, mainly driven by an addition in the seating capacity, as we expect ATP to remain flat, due to the economic slowdown and expansion in Tier-II and Tier-III cities. We expect the screen count to increase from the current 74 screens (including IMAX screen) to 93 screens in FY2010E and 119 screens in FY2011E. We have revised our Earnings estimates downwards by 24% and 14% for FY2010E and FY2011E, respectively, to factor in a higher revenue share for distributors and a weak 1QFY2010 in terms of operating performance. Nonetheless, we expect Margins to expand 90bp (decline 60bp in FY02010E due to a weak 1QFY2010), during FY2009-11E, on account of operating leverage, driving a 29% CAGR in EBITDA. In terms of Earnings, however, we expect the Net Profit (recurring) to register a CAGR of 17% during FY2009-11E (a dip by 29% yoy in FY2010E), partially impacted by higher interest costs (we have modeled in higher debt to fund future expansion plans). We believe that the worst is over for Multiplex sector in terms of an exceptionally weak quarter. We are positively surprised with the revenue traction exhibited by Cinemax during the quarter, in spite of it being a dull quarter. While execution risks, in terms of property roll-outs and a heavy dependence on content (beyond their control), remain a cause of concern, the improving liquidity situation, the strong movie line-up and an up-tick in economic activity are key positives for Multiplex owners. At Rs49, Cinemax is trading at 9.1x FY2011E revised EPS of Rs5.4. We recommend a Buy on the stock with a Target Price of Rs59. Exhibit 3: 1QFY2010 Performance Update (Consolidated)
Y/E March (Rs cr) Net Sales Film Distributor Share (% of Sales) Consumption of F&B (% of Sales) Staff costs (% of Sales) Rent (% of Sales) Repairs & Maint (% of sales) Power & fuel (% of sales) Other expenditure (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income PBT (excl. Ext Items) Ext Income/(Expense) PBT (incl. Ext Items) Provision for Taxation Recurring PAT PATM Reported PAT EPS (Rs) 1QFY2010 23.5 5.2 22.2 1.6 6.8 3.1 13.1 3.5 14.8 1.8 7.5 3.0 12.5 4.9 20.8 23.0 0.5 2.3 1.7 4.8 1.3 (4.7) 5.2 0.5 1.1 (5.8) (24.7) (0.6) (0.2) 1QFY2009 28.6 6.7 23.5 1.6 5.7 3.4 11.7 3.5 12.1 1.6 5.6 2.7 9.3 4.7 16.5 24.1 4.5 15.7 1.2 2.7 3.8 4.3 4.3 0.7 3.6 12.7 3.6 1.3 % chg (17.7) (22.4) (1.8) (7.8) 1.2 10.7 11.3 3.8 (4.6) (88.2) 39.3 76.2 (66.0) FY2009 144.6 32.1 22.2 7.6 5.3 13.7 9.5 16.1 11.2 8.4 5.8 12.2 8.5 23.5 16.3 113.7 30.9 21.4 6.3 18.9 9.4 15.2 15.2 4.1 11.1 7.6 11.1 3.9 FY2008 101.6 23.2 22.8 4.7 4.6 8.9 8.7 9.6 9.4 4.9 4.8 8.3 8.2 16.3 16.1 75.8 25.8 25.4 3.5 6.9 4.7 20.1 20.1 6.4 13.7 13.5 13.7 4.9 % chg 42.3 38.2 63.0 54.5 69.0 72.2 47.2 44.0 49.9 19.9 81.8 174.8 102.6 (24.6) (24.6) (35.5) (19.5) (19.5)

(87.9) (259.3) (115.9)

Source: Company, Angel Research

July 25, 2009

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CINEMAX
Media

Research Team: Tel: 4040 3800

E-mail: research@angeltrade.com

Website: www.angeltrade.com

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July 25, 2009

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