A Project Report on Impact of Multiplex on Indian Exihibition Industry

A PROJECT REPORT ON

Impact of Multiplex Submitted for Prof. Reena Kakkar Retail Marketing (25/09/2008) Submitted by

VISHNU PARASHAR

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THE CURRENT INDUSTRY SCENARIO

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FILM EXHIBITION BUSINESS IN INDIA TREMENDOUS SCOPE MULTIPLEX

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KEY PLAYERS IN MULTIPLEX

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GROWTH DRIVERS

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INCREASE PRODUCTION OF HINDI MOVIES

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HOLLYWOOD STUDIOS EYE BOLLYWOOD

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HOLLYWOOD LOOKING TO INDIA FOR POSTPRODUCTION WORK REAL ESTATE SUPPLY

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MULTIPLEX BUZZ!!

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INCREASING CORPORATIZATION OF BOLLYWOOD

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COST AND REVENUE ANALYSIS

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RISK AND CONCERNS

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WAY FORWARD

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THE CURRENT INDUSTRY SCENARIO India's craze for films has not been fully exploited by the "Film Exhibition" industry due to the lack of screen density in the country coupled with the poor quality of screens. "Multiplex Cinemas" offer an alternative to tap this potential by providing a quality experience to the viewer as well as economies to the multiplex operator. "Films" has been one of the integral components of the Indian entertainment industry contributing nearly 27% of the total revenues of the entertainment industry. Besides, films also contribute to other components of the entertainment industry like music, television and live entertainment. The Indian film industry is one of the most complex and fragmented national film industries in the world comprising of a number of regional film industries like Hindi, Tamil, Telugu, Kannada and others. The Hindi film industry is the most popular among them. Though India produces the largest number of films in the world (Approximately 1000 per year), it accounts for only 1% of the global film industry revenues. In spite of being over 90 years old, the Indian film industry was accorded the status of industry only in 2000. Over the years, the Indian film industry has been highly unorganized as film financing was dependant on private and individual financing at extremely high interest rates. Only recently, the industry has got access to organized finance. With vertical integration taking place between producers, distributors, exhibitors, broadcasters and music company’s corporatization is now taking shape in the Indian film industry. We believe, that corporatization, will bring about transparency, accountability and consolidation which will help to improve the overall profitability of the Indian film industry as well as reduce piracy and leakages which presently account for 14% of the Indian film industry's revenues.

FILM EXHIBITION BUSINESS IN INDIATREMENDOUS SCOPE Film exhibition forms the most important component of the Indian film industry. According to the - KPMG report domestic theatrical revenues contributes 57% of the total Rs59bn film industry revenues and are expected to grow at 17%. Overall, the Indian film industry is expected to grow at 16% CAGR it is expected to reach Rs143bn in 2010. The main pockets for film exhibition in India are Delhi, Mumbai and South India. Due to various regional

language film industries in the South, it has become an important film exhibition pocket. Hyderabad and Bangalore are 2 southern cities where occupancies are exceptionally high at around 70%-80%.

MULTIPLEX India currently has 11500 existing screens, 95% are standalone, single screens. These single screen cinemas are poorly maintained as the owners find it difficult to upgrade and renovate their facilities, due to unavailability of organized finance. The deteriorating quality of these cinemas dissuaded viewers and they started using alternative viewing options. Over the last few years, multiplexes have emerged as a trend in urban India. "Multiplexes" are essentially cinemas with 3 or more screens. They provide a quality viewing experience and are generally located around shopping malls to increase footfalls in these malls. Each screen in a multiplex has small seating capacities in the range of 150-300 seats as compared to single screen cinemas which have capacities in the range of 800-1,200 seats. With around 11500 active screens, India is under screened. China, which produces far lesser films than India has 65,000 screens while the US has 36,000. India’s screen density stands low at 12 screens per million populations. There is a need of at least 20,000 screens as against the current 11500. This gives multiplex operators enough room to grow as the traditional single-screen theatres do not have the financial wherewithal nor do they enjoy tax incentives.

KEY PLAYERS IN MULTIPLEX 1. PVR CINEMAS: •

Strong operational performance- PVR is one of the leading multiplex operators with very strong performance on operational parameters. The company has been able to establish itself as one of the premier entertainment destinations, which has resulted in the highest occupancies, footfalls and spend per head as compared to all of the other multiplex operators.

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Aggressive expansion plans- PVR intends to open ~100 screens in the coming two years. We are assuming a 50% discount to these plans for our estimates, in order to rule out mall delays. Among the new screens, 20-30 will be high end PVR Premiere screens with ticket prices in the range ofRs150-Rs750. It has already opened 17 out of the total 30 screens that we expect for FY09E, thus providing more certainty to our estimates.

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Foray into co-production- PVR has, through PVR Pictures, entered into film co-production, after its first movie met with beginner’s luck. It has 4 movies lined up for FY09E and intends to ramp it up to 8-10 movies in FY10E. We expect the movie business to operate at 13% EBITDA margin and contribute 11% to the total revenues by FY20E.

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Leading Multiplex operator: PVR is one of the leading multiplex chains in India with 101 screens under operation in 14 cities at present. PVR has been successful in building a lifestyle entertainment brand because of its focus on customer service and quality of experience. Because of the strong brand and presence at prime locations, PVR has found a very encouraging

response from the customers. It attracted 18 million patrons with occupancy ratio of 41% in FY08, both the highest numbers among all the multiplex players. Today, it contributes ~10% plus to the total domestic box office collections in the country, showing a clear dominance. •

PVR Premiere to increase ATPs: The Company has recently started a chain of luxury cinemas branded as PVR Premiere which will be present only in the metros and other affluent cities. These screens provide a very high quality digital cinema viewing experience in luxurious setting. Average ticket price for these screens is in the range of Rs150-Rs750, as compared to the normal ticket price of Rs70-Rs250. From 2 screens at present, PVR Premiere will reach 30 screens by FY10E which will help increase the overall ticket revenues.

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JV with Major Cineplex to strengthen presence: PVR has formed a 51:49 JV with Major Cineplex, the largest exhibition player in Thailand, to further strengthen its presence in the lifestyle entertainment space. The entity, branded as PVR Blu-O Entertainment, will open bowling alleys, karaoke centers, ice skating rinks and gaming zones across the country. We believe that this venture is a well thought out move and complements well PVR's positioning as a leading out of home entertainment provider. With a strong and experienced JV partner like Major Cineplex, execution will be fast paced. However, due to a recent start, we are not factoring in any of the traction from this initiative as of now.

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Entertainment tax burden to decline: PVR started its operations from those territories where entertainment tax exemption was not available, e.g. Delhi NCR region. At present, it pays E-tax on 16 out of a total of 22 properties. E-tax as % of gross ticket revenues is amount the highest for the company at 24% in FY07.We expect E-tax % to come down to 18% in FY09E and 17% in FY10E due to more screen additions in areas where E-tax exemption is available like Punjab, West Bengal and Mumbai. Recently, Delhi government has lowered the entertainment tax rate to 20% from the earlier 30% levels. This will help PVR the most as it operates 46 screens in that region.

2. INOX LEISURE •

Consistent performer- Inox has shown impressive operational performance, delivering a 65%CAGR in topline in the past 5 years with the highest EBITDA margins in the multiplex space. The company has shown remarkable pace of expansion in the last 3-4 years with commendable speed and quality of execution

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Expansion in tier I and tier II cities to be value accretiveInox has more than 50% of its screening the tier I and II cities, which has rewarded the company very well in the past. It plans to add ~100screens in the coming 2 years, 70% of which will come up in select tier I and II cities. We believe that the move will create value for the company as these locations are comparable to metros at the EBITDA level.

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Impressive capacity ramp-up over the last 4 yrs: Inox Leisure (Inox) was set up as part of a diversification strategy by its parent company, Gujarat Flurochemicals. The company opened its first multiplex in Pune in 2002. Since then, the company has come a long way as one of the leading premier multiplex chain operators with a strong brand recall. Starting from just 4 screens in 2002, Inox has ramped up its presence to 84 screens in 24 locations at present. While registering a strong capacity growth in the past 4 years, the company has also been very successful in building a strong entertainment brand for its cinemas. Operating in an industry marked by execution delays, both the speed and the quality of expansion are commendable considering that the promoters didn't have prior exposure to the exhibition industry.

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Top 25 cites - compelling growth stories Crisil Research has identified 25 cities where consumption potential is high due to the strong economic growth and increasing urbanization. Taking organized retail market size as a proxy for future growth potential, they have identified 25 locations that have the potential to become high consumption centers in the next 3-4 years. This combined with the past experience of the company shows that there is a lot of room for leisure consumption at these centers and hence the move into these cities will be value accretive.

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E-Tax exemptions: Inox operates 24 properties but pays entertainment tax only on 7 of them. 13 properties are fully entertainment tax exempt and 4 are availing exemption partially. This has resulted in an E-tax payment of 10% as a proportion of gross ticket revenues during FY07. It has risen to 14% in FY08as it opened two non E-Tax exempt properties and 2 of its properties became eligible to pay E-Tax.

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Move to create value for the company: We believe that the expansion in these locations is a well thought out move and will create value for the company. While it's true that the average ticket prices in these locations are lower than those in the metros, it gets compensated with far lower rentals and staff expenses on the cost side. Moreover, it gives the company

access to prime locations in these cities which provide assured footfall growth has the company has seen in the past.

3. FAME INDIA •

Fame India (Fame) is one of the smaller multiplex operators among the listed Indian exhibitors, with a current slate of 16 properties and 61 screens under operation. Boasting of a predominantly urban presence, especially in Western India, Fame has been disproportionately focused on Tier-I cities. With 8 of its currently operational 16 properties located in Mumbai, Fame is looking to aggressively add to its existing screen count and establish a pan-Indian presence.

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Heavy skew of properties towards Tier-I locations: 8 of the company's currently operational16 properties are situated in Mumbai, with three more lined up before Mar'09. This translates into Mumbai accounting for a whopping 42% of the company's proposed seat count (by Mar'09). In fact, the two Western states of Maharashtra and Gujarat are likely to account for 75% of the company’s seat count by Mar'09. This skew towards Tier-I cities is likely to translate into marginally improving ATPs in the nearterm on a full-year basis from FY09 onwards. Fame currently commands an ATP of~Rs97, a discount of 21% and 24% to that of Inox and PVR respectively.

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Scale to bring in margin expansion triggers: Fame is among the smallest exhibitors in the multiplex space currently. As of FY08, Fame commands fairly low EBITDA margins essentially because of a low scale of operations. Given the high degree of operating leverage (characteristic of the business), we believe that EBITDA margins would improve once the company is able to expand its screen and seat count.

4. ADLABS FILMS •

Integrated Play on the Media & Entertainment Sector: Adlabs is the only player at present that has presence in all of the three major segments in movies i.e. production, distribution and exhibition. The integrated model adopted by Adlabs gives it a competitive edge over others in terms of capturing value at each level of the value chain. However, it also exposes the company to more risks as risks of one segment are prone to disturb the other segments.

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Exhibition Segment - The largest player: Adlabs has 170 screens at 65 properties under operation at present, making it by far the largest player in the exhibition space. It has a two pronged strategy of expansion - opening multiplexes at the prime locations in the metros and other cities and expanding through renovating existing single screen theatres in the tier II and III cities which has helped the company add more than 100 screens in the last two years.

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Expansion through acquisitions: Since ADAG group has picked up the majority stake in the company, it has shown even more aggression in its expansion plans by acquiring Rave Cinemas, chain of multiplexes in India and Lotus Five star, an exhibition player in Malaysia. Both of these acquisitions have given Adlabs a head start in its expansion plans as compared to other players

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Future Plans: Adlabs has forayed into production and distribution of film and TV content since 2005. It plans to release 6-7 movies per year with varying genres and budge. On the T.V. content side, it has produced 8 shows adding up to 214 hours of programming in FY08. In the next year, it plans to launch 15 shows on commission basis.

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Film Processing - Leader controlling 70% of market share Adlabs started as an ad films processing facility. The company has made fast strides in this business and today controls 70% of the film processing market in the Western part of the country. It has set up film processing facilities in Chennai and Kolkata to tap growing regional markets there. The company has been awarded Kodak Image care Program Negative Processing Accreditation recently. This establishes the film processing division among some of the highly equipped units globally, thus opening doors for business from other countries. The film processing division is a high margin business contributing 70% to the total EBIT in 9MFY08. With the growing fold of the company in film entertainment business, this division is expected to benefit in the coming years.

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Film Production & Distribution: Adlabs entered the production business in 2005; the company recently released its first home production Johnny Gaddaar. Adlabs has signed long term contracts with key Bollywood talent like Vipul Shah, RGV, Harry Baweja, Akshay Kumar, and Ashok Amritraj. It plans to release 6-7 movies per year with varying genres and budge. On the distribution front, it is present in Mumbai, Maharashtra, Gujarat, Delhi, UP, Punjab, Bengal, Tamil Nadu, Hyderabad and My sore territories. These states contribute around 80% to the domestic box office collection. Some of the movies distributed by the company include Guru, Black Friday, Bheja Fry Spider-Man 3, Vivah and Harry Baweja Love Story 2050.It has set up strong overseas distribution network through its US and UK subsidiaries.

In addition to this, the company has mandate to distribute all films produced by Reliance Entertainment Big Motion Pictures. •

T.V. Content Production: Adlabs acquired a 51% stake in Synergy Communications, which is a well known content production house for television, associated with famous game shows like Kaun Banega Crorepati, Mastermind and Jhalak Dikhhla Jaa.The division produces only commissioned programmers and has produced 8 shows adding up to 214hours of programming in FY08. In the next year, it plans to launch 15 shows including Dus Ka Dum,Aap Ki Kachehri, Bindass Champ, Kya Aap Panchvi Pass Se Tez Hai, Angrezi Mein Kehte Hain.

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Adlabs has shown the most aggression in its expansion plans so far, mainly because of access to the deep pockets of ADAG group. It has entered into an agreement with Rave Entertainment to acquire the right to conduct cinema exhibition business at the 23 screens that the group is developing in NCR, Uttar Pradesh, Punjab and Haryana. This gives the company access to 6 properties, 4 of which are tax exempt. Recently, the company has acquired majority skate in Malaysia-based Lotus Five Star Cinemas and will be operating a 51 screen cinema chain in across Malaysia. The chain will be catering to the Indian, Bangladeshi and Pakistani population in the country by playing Hindi and Tamil films along with Hollywood, Chinese and Malay movies.

5. CINEMAX •

Cinemax India (Cinemax) is one of the smallest multiplex exhibitors within the listed space with 56screens across 19 properties, a majority of them concentrated in the Mumbai territory. The company has a predominant presence in the Western region and is the largest exhibitor in the Mumbai territory with a 35% share of the multiplex screens in Mumbai. Cinemax is now focused on expanding its presence across the rest of India and is seeking to aggressively add capacity across other regions

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Aggressive capacity addition plans: The management at Cinemax has guided for adding 41screens during FY09E followed by 72 screens during FY10E. The company employs two criteria for selection of properties: a payback period of less than 4 years and a target RoE of 18-20%.

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Tapping ancillary revenue streams: Cinemax has been actively seeking means to tap ancillary revenue streams by foraying into the branded food court business and the gaming business. In an effort to reduce its over-dependence on ticket sales (that currently contributes 70% of the operating revenues), the company is focused on adding other ancillary revenue streams to bolster the spender head from current levels. Cinemax is targeting F&B contribution within overall revenues to increase by about 300bps from current levels of 14%.

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Leased operating model to help improve margins: Among the 19 properties that Cinema currently operates (as of Jun'08), 8 are owned while the other 11 are operated on the leased model. With more properties being added on the leased model, the proportion of owned properties within the overall mix would reduce. This shift is likely to push the rentals up by about 600bps (from 8% of the topline), which is likely to be offset by an equivalent decline in overheads such as personnel costs and administrative expenses.

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Future expansion plans: On the exhibition front, Cinemax intends to add 41 screens duringFY09E and 72 screens during FY10E. The company has also forayed into the movie distribution space with 'Kismet Konnection', which is scheduled for an all-

India release on 18th Jul'08. Cinema has acquired the distribution rights for the Mumbai and Punjab territories. The company also intends to form a separate SPV for movie production with a total investment outlay of Rs1bn over the next two years. Cinemax plans to raise Rs1bn for this initiative of which Rs700mn will be spent towards production and the rest towards distribution. At its CMP of Rs87, the stock is currently trading at 18x its fully diluted FY08 EPS of Rs4.91. We do not have a rating on the stock •

Property selection criteria: Cinemax applies two criteria for selection and addition of properties to its existing count. Firstly, the company targets an Roe in the range 18-20%. Secondly, Cinema targets a payback period of less than 4 years for selection decisions. The management has guided for the following seat / property matrix over the next 3 years.

GROWTH DRIVERS

At a time when single-screen theatres are dying due to lack of footfalls, people are queuing up at multiplexes that sell tickets at almost 5 times the prices prevailing in single-screen theatres. This fact provides ample testimony to the increasing prosperity as well as the Indian consumers’ willingness to pay for superior-quality entertainment. Given the prevailing demand-supply dynamics, we believe that the sector offers high visibility for steady cash flows.

Supply side - Improving dynamics On the supply side, we look at content suppliers, real estate suppliers and the prevailing regulatory environment in order to judge the visibility of revenues from the sector.

Content supply set to boom Multiplexes are in existence because people want to watch movies in a quality ambience. Hence, as a direct corollary, more footfalls will be generated with more movies being released. In this sense, the multiplex operator can do nothing but depend on the suppliers of content (movie producers and distributors) for a regular and high-quality supply of content to generate higher number of footfalls. Content supply is set to boom in the coming years mainly because of the following factors:

Increasing investment in film production Film production is presently going through a wonderful phase as far as supply of funds is concerned. This space has been attracting a lot of attention because of its inherently strong fundamentals. A number of players with deep pockets have entered this space, which should keep the content pipeline robust over the coming years. In this year so far, an investment pipeline of ~$1.7bn has been announced in this space (investible over the next 2-3 years). Producers are now flush with cash and are no longer overly dependent on informal sources of funding. We believe that this trend will continue in the medium-term and supply of content will not be a problem for multiplexes.

Moreover, ticket sale reporting is far more transparent in multiplexes than in single-screen theatres. This results in higher film revenues for producers, which can be ploughed back into movie production.

Reducing shelf life of movies making multiplex the ideal format for distributors The shelf life of a movie has dramatically reduced from a few months earlier to merely a 1-2 week window now. This has significantly reduced the time window within which producers/distributors can monetize the movie and recover their costs. Multiplexes, with multiple screens, have far more flexibility in scheduling of movies, which enables them to exhibit multiple shows of a single movie simultaneously, thereby helping distributors recover a majority of the anticipated revenues from the film during the first week itself. For instance, 31 shows of the movie 'Race' were shown on a single day by a multiplex operator in Mumbai. Today, multiplexes are contributing 35-40% to the overall domestic box office collections with less than 5% of the total screens under operation. We believe that the format is highly relevant for the distributors and none of them can afford to bypass it and still make money on films.

Hollywood films gaining ground - more content supply Hollywood films are increasingly finding acceptance in India, making India the fifth-largest market of Hollywood films in Asia and the 15th largest market for Hollywood globally. An increasing number of Hollywood films are being released in India in multiple languages with greater number of prints. For instance, Spiderman 3 was released with 600 prints in 4 languages. The film was a blockbuster on the Indian domestic circuit, clocking $4.5mn during the opening weekend. We believe that the number of foreign films released in India is set to grow, especially with large studios such as Reliance Big Entertainment and Yash Raj Films foraying into foreign film distribution. We expect this trend to benefit the multiplex industry in terms of ensuring a steady stream of content.

Real Estate Supply Multiplexes are often regarded as the footfall magnets for malls. The concept of shopping-cum-dining- cum-entertainment outing is gaining popularity among the urban populace, where multiplexes in malls become the most relevant destination choice. Almost all upcoming malls have a multiplex operator as an anchor tenant. Hence, we believe that the supply of real estate will not be an issue for the sector, even though the pace might be slow due to development delays. India is presently witnessing a retail revolution with many big players foraying into organized retail and many mall development plans being announced in order to cater to their expansion plans. The pace of mall development will surely ensure availability of quality real estate for multiplex operators.

Encouraging regulatory environment All entities linked to the entertainment space are required to pay entertainment tax, which is a state subject. Entertainment tax in the past was as high as 100% of the ticket revenues in some states, which made exhibition projects unviable in many cases. However, many state governments appreciate and understand the need to rationalize E-tax levels and have provided for either entertainment-tax exemptions for multiplex operators or reduction of e-tax to more affordable levels.

 Demand Side - Strong pull Demand side environment has never been better for the whole media & entertainment industry in general and multiplex sector in particular. A lot of demographic changes coupled with sector fundamentals are expected to fuel demand side of the story for the sector.

Prosperity to drive discretionary spend India is a highly favorable country for consumer industries with all the key indicators pointing towards higher consumer spends in the coming years. It has seen its per capita income doubling in the last 6 years, it has more than 60% of its people under the age of 60, urbanization and exposure to western lifestyle is rising, all leading towards increasing consumerism in the coming decade. In the buoyant times; people tend to spend more on the leisure based consumption. For the multiplex sector, the target group is in the age group of 15-60 years of age, which visits the theaters more often than others.

Where will you watch them? India is an entertainment hungry nation, and the major sources of entertainment are cricket and Bollywood. More than 3.3bn tickets are sold in India annually, this makes us the most cinema going population in the world. Even then, there are only ~11,000 screens operational in the country. Secondly, 95% of these are single screen theatres many of which have poor quality ambience. Most of the single screen theatres are run by single proprietor, often without proper operational management skills. Moreover, because of the poor quality of prints supplied to the single screen theatres in the rural areas, footfalls have been coming down. On top of it, these screens are not eligible for entertainment tax exemptions. These factors have eroded the viability of these screens resulting in poor infrastructure spend which further reduces footfalls.

People willing to pay for quality With the entry of multiplexes, which provide better quality movie watching experience at a higher price compared to single screen theaters, more and

more middle income group people are coming back to the theatres thus unlocking a latent demand. This is a classic case of leisure consumption winning over value proposition in India. As content supply booms, more and more people will turn to multiplexes because of the rising willingness of people to pay for such services.

Enough space for more multiplexes We believe that there is enough space for more multiplex projects given the quantum of demand and lack of supply in the sector. Our preliminary analysis suggests that at national level and considering only the urban population demand in the age group of 15-60 years, 662 multiplexes with 3 screens per property i.e. ~2000 screens can operate at 35% capacity. All of the multiplex players combined are operating only ~500 screens at present, hence, we believe that even though there might be a case for overbuild in some pockets, overall there is enough scope for further screen supply.

PRODUCTION OF HINDI MOVIES

The Indian film industry, with over 3 billion admissions per annum, is the largest in the world, in terms of number of films produced per year. This industry, which was worth US$ 2.12 billion in 2006, is estimated to grow at a CAGR of 16 per cent to US$ 4.42 billion by 2011. The opening of the film industry to foreign investment coupled with the granting of industry status to this segment has had a favorable impact, leading to many global production units entering the country. For example, Walt Disney has partnered with Yash Raj Films to make animated movies, the Warner Group is funding the Sippys' film projects, Viacom has joint-ventured with the TV 18 group to form Viacom-18, and Sony Pictures Entertainment has co-produced Saawariya with SLB Films (Sanjay Leela Bansali FIlms). Simultaneously, advancements in technology along with a rise in consumer income and change in consumption patterns has led a massive shift in all spheres of the film industry -- production, exhibition, distribution and marketing. One perceptible change has been the rapid growth of multiplexes, which meets consumer demand for quality entertainment and has also helped boost production of niche films targeted at niche audiences.

MULTIPLEXES FEEDING INDIA’S MOVIE MANIA Indian and Hollywood films, although a ticket now costs about $3 (Rs121). Moreover, many are located in big malls, adding the attraction of shopping to a day out at the movies. Earlier, it was like one film in one hall, you don’t get tickets you go home said Dipti Varma, a young executive with a business forum. Now you have a choice of films under one roof. Such has been the runaway success of this cinema viewing experience that today, even though multiplexes make up just 2% of India’s nearly 11500 screens, they account for more than half the box office revenue of Hollywood releases in the country and more than a third for Bollywood. That success, however, has not been limited to the glitzy cinema halls. Industry analysts say that multiplexes, with their smaller halls, have also redefined filmmaking by creating a niche for experimental cinema among urban, educated audiences. Multiplexes, where ticket prices are five times that at a single-screen cinema, ensure a faster return on investment for producers and, because of quick turnarounds, have become instrumental in raising the output of films, he said. “The idea now is to recover investments within the first weekend,” said

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Independent film-makers like Madhur Bhandarkar agree, saying multiplexes have proved to be a blessing as many recent hits would never have been made if it were not for them. “Exhibitors would never run my films in a 1,000-seater hall,” said Bhandarkar, a leading director known for his unconventional films. For businessmen who kept their faith in movie halls and invested in multiplexes, it has been a gamble that paid off. They have thrived on the back of tax incentives over the last five years, and are now looking to expand, according to industry group Ficci. Aiming to widen their base in search of greater profits, they are now moving to smaller cities and towns, where operating costs are lower, allowing for greater flexibility in ticket pricing. “Multiplexes will first reap the more lucrative markets— reap the low hanging fruit first—and then move on to the smaller markets,” said Deepak Asher, director of multiplex operator Inox. “It is just a question of time before multiplexes hit the B and C towns big time.” While PVR Ltd, the pioneer, has about 70 screens, Inox has about 50. Adlabs Films Ltd, which branched out from film processing to multiplexes, plans to have about 80 screens by 2007-08. The multiplex industry is expected to grow more than 44% to $220 million by next year, according to a recent report by brokerage B&K Securities. The overall Indian film industry, now worth about $2 billion, is expected to grow to $4.3 billion by 2011, Ficci says. While more and more single-screen cinemas are converting to multiplexes in cities, they still remain the entertainment mainstay for millions in small towns and villages. They are also popular with the urban poor because of their cheaper tickets. Analysts say high ticket prices have also meant that average occupancy levels in multiplexes have hovered at around 40%. They say that as multiplexes mushroom and begin cutting into each others’ territories, occupancy levels could plummet to 30%. “This could mean the multiplex boom is a bubble that will burst unless ticket prices are brought down,”

HOLLYWOOD STUDIOS EYE BOLLYWOOD This year's much awaited Bollywood film Saawariya, with a mega budget of over Rs 50 crore (Rs 500 million), will be the first movie to be produced by a Hollywood studio. Co-production of Bollywood movies is on the rise, with more Hollywood production houses -- Paramount Films and Warner Brothers -- eyeing the space. And this trend is catching up.

The co-production between renowned filmmaker Sanjay Leela Bhansali and motion picture company Sony Pictures marks Sony's foray into the Bollywood production space. "Given the growth potential and scope in the Indian cinema, the market is very important for us. India figures in the top-15 markets for Sony Pictures' business plans," said Uday Singh, managing director, Sony Pictures. Adds Sarabjit Singh, general manager (India operations), Paramount Films, "Coproductions are strategic alliances wherein one makes use of the other's network strength in a particular region." Paramount Films too is believed to be in talks with Subhash Ghai-promoted Mukta Arts for crossover movies. Confirmed an official of Paramount, "The discussions with Mukta Arts are at a nascent stage." Warner Brothers too is following suit. Hollywood studio experts explain that making a Hollywood film is becoming an expensive business with audiences' expectations on the rise. A Hollywood production budget could range anything between $30 million and $120 million, apart from an additional $60 million for marketing and promotional activities. The overseas market for Indian films continues to be growing rapidly. The overseas market for Bollywood movies is currently estimated to be Rs 850 crore (Rs 8.5 billion) and is expected to grow at a compound annual growth rate of 18 per cent (higher than the estimated 16 per cent CAGR of the domestic box office collections), according to the latest PWC’s report. For instance, Mira Nair's much acclaimed movie The Namesake was coproduced by UTV Motion Pictures and FOX Searchlight. If that wasn't enough, UTV Motion Pictures and 20th Century Fox recently announced their strategic tie-up for the co-production of director Manoj Night Shyamalan's forthcoming Hollywood thriller The Happening. The movie has a budget of $ 57 million. UTV and Fox will co-produce and enjoy global revenues equally.

Said UTV's CEO Ronnie Screwvala, "The key to a successful international coproduction is that you have global distribution partner from day one and that partner needs to be a co-producer." UTV has five foreign co-productions up its sleeve with studios such as Sony Columbia, 20th Century Fox and Disney. Co-production alliances are mainly to make use of one another's business network and expertise. "Bollywood movie budgets are shooting up. Collaboration of international and domestic studios provides the essential

money and helps entry into each other's territory, thereby opening newer markets," said film analyst Komal Nahata. Using each other's resources is the major driving factor for co-production. Like in the case of Sony Pictures' tie-up with Sanjay Leela Bhansali, while Sony has the money, Bhansali has an understanding of Indian cinema and audience appeal. The same holds true for UTV and 20th Century Fox. UTV has its own business expansion agenda, Hollywood movies being one of them. Consequently, being a new market for UTV, Hollywood sought partnership with an established player. "It is a de-risk model for new players wanting to enter a new territory for operations. Most of the production houses are now looking at increasing their level of film production, thereby increasing their intellectual property rights value and market capitalisation," said movie financier Sanjay Bhandari. According to the PwC report, the Indian film industry in 2007 is estimated to be Rs 9,680 crore (Rs 96.8 billion) and is expected to grow at a CAGR of 16 per cent to Rs 17,500 crore. With the numbers the Indian filmdom is expected to churn out this year, the entry of Hollywood studios is not surprising. Going forward, Sony Pictures plans to increase its footprints across three verticals, co-production of Bollywood films, production of Indian cinema and movie distribution. Consequently, last month it has named Deborah Schindler as the president of International Motion Picture Production and Gareth Wigan (vice-chairman of Sony's Columbia TriStar Motion Picture Group) to head the new international movie division. The newly created wing will facilitate 'increasing production in India' and other countries. "At the moment, our focus is on Saawariya. The movie will mark the beginning of the state we intend to develop in India. We will look at similar ventures in the near future. However, acquiring distribution rights, coproduction and production are on our agenda," said Uday Singh. Sony Pictures in the past has distributed nearly 20 Hindi movies such as Monsoon Wedding; Bend it like Beckham, among others. Audience base and also the scope of production houses," said film analyst Taran Adarsh.

HOLLYWOOD LOOKING TO INDIA FOR POST-PRODUCTION WORK Impressed with the low-budget and good production quality Bollywood films, Hollywood is eyeing India to outsource its post-production and shooting work. "There is obviously a lot of talent in India. Hollywood is looking back to India to commission a lot of the post-production work and shooting work," Kishore Lulla, Chairman and Chief Executive of Eros International said. "If you look at the quality of Bollywood movies, we can produce those movies at maybe 10 or 20 per cent of the cost that Hollywood can do. If Hollywood is spending 100 million dollars a movie, we make the same kind of movie for 10 to 20 million dollars budget in India," Lulla, who recently won the BDO Stoy Hayward Business of the Year Award at the Eastern Eye Asian business awards function, told the The Daily Telegraph.

REAL ESTATE SUPPLY Multiplexes are often regarded as the footfall magnets for malls. The concept of shopping-cumdining-cum-entertainment outing is gaining popularity among the urban populace, where multiplexes in malls become the most relevant destination choice. Almost all upcoming malls have a multiplex operator as an anchor tenant. Hence, we believe that the supply of real estate will not be an issue for the sector, even though the pace might be slow due to development delays. India is presently witnessing a retail revolution with many big players foraying into organized retail and many mall development plans being announced in order to cater to their expansion plans. The pace of mall development will surely ensure availability of quality real estate for multiplex operators.

PROCEDURE OF SETTING UP A MULTIPLEX The procedure of setting up a multiplex is divided into 3 phases after the multiplex operator has decided the location of the multiplex and entered into the agreement with the mall developer. Development of property In this stage the mall developer develops the property according to the specifications agreed upon by the multiplex operator and the mall developer. The mall developer has to get certain approvals from various authorities. After the mall developer completes development and gets approvals, the property is handed over to the multiplex operator. Fit outs:

After the property has been handed over to the multiplex operator, the interiors are done up by him. This includes civil and architectural work, designing, seating, carpeting, putting up the screens etc. This stage normally takes between 2-6 months depending on the size and scale of the project. Approvals: After fit outs are completed, the multiplex operator has to get various approvals before he can commence operations. On an average this stage takes around 1-3 months depending on the state as he has to get approvals from the fire department, electrical department, health department and various other licenses.

MULTIPLEX BUZZ!! The nation's multiplex industry is all set for an unprecedented boom buoyed by positive regulatory changes and booming consumerism. Multiplexes /megaplexes have been instrumental in contributing 28 percent of the total theatrical sales for the film industry according to a report by Systematix Institutional Research. Industry experts estimate that top six multiplex chains have plans of 300-500 screens each by FY-10. •

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DLF, a leading real estate player in the country, plans to invest US$ 298.12 million for the expansion of its multiplex business. The company has planned to add at least 500 screens in the next four to five years across the country. Entertainment conglomerate Adlabs Cinemas has drawn up a plan to build 12 megaplexes in India where you can not only see movies but also cricket and soccer matches on screen. Multiplex chain PVR Cinemas, which currently has 92 screens, is also planning to add over 150 screens across India, staggered over a period of three years from 2008-2010, with a total investment outlay of around US$ 71.55 million. Cinemax India, the multiplex chain which currently has 55 screens over 17 properties across the country is planning to scale up its presence to 299 screens across about 100 properties by fiscal 2010

AGE WISE DISTRIBUTION OF CINEMA VIEWERS

INCREASING CORPORATIZATION OF BOLLYWOOD Film production historically has been a fragmented segment, dominated by a few family production houses and individual producers. Recently, the segment has begun attracting corporate funding and along with that a corporate style of project management. Better planning and discipline in the production process will bring in higher efficiency, thereby reducing project delays and cost overruns.

Corporatization of Bollywood has actually widened the canvas for movie producers. Movies are being produced on a much larger scale with larger budgets, employing more sophisticated technology.

REDUCING SHELF LIFE OF MOVIES MAKING MULTIPLEX THE IDEAL FORMAT FOR DISTRIBUTORS The shelf life of a movie has dramatically reduced from a few months earlier to merely a 1-2 week window now. This has significantly reduced the time window within which producers/distributors can monetise the movie and recover their costs. Multiplexes, with multiple screens, have far more flexibility in scheduling of movies, which enables them to exhibit multiple shows of a single movie simultaneously, thereby helping distributors recover a majority of the anticipated revenues from the film during the first week itself. For instance, 31 shows of the movie 'Race' were shown on a single day by a multiplex operator in Mumbai. Today, multiplexes are contributing 35-40% to the overall domestic box office collections with less than 5% of the total screens under operation. We believe that the format is highly relevant for the distributors and none of them can afford to bypass it and still make money on films.

% split of ticket revenues across the life of a film Week 1

2

3

4

FY08

53%

25%

10%

12%

FY07

58%

24%

9%

9%

FY06

55%

22%

10%

13%

Source: Fame India Note - Numbers are only for comparable screens

REVENUE BREAKUP The revenue breakup is divided into three distinct parts namely : -

Ticket which generates 69% of the revenue Food and Beverages is leased out to agencies which generate 19% of the revenue. These include various stalls like cold drinks, juices, chocolates and various other snacks. Advertisements as a whole generate 12% of the revenue.

Conduction fees a key part of the revenue breakup generates revenue with activities related to the conduction of a particular show. Companies today are putting in immense effort to try and expand their operations in prime cities like Mumbai.. Companies are also focusing on increasing food and beverage spend by introducing new items and offering attractive packages like food combo's and providing additional facilities like a gaming zone which attracts huge number of kids thereby generating more revenue for the companies.

GROSS REVENUE MADE BY FILMS

Sr No.

Film

Total Gross

1

Ugly Aur Pagli

3,0399443

2

Mission Istaanbul

3,83,56,380

3

Mony Hai Toh Honey Hai

2,06,52,608

4

Kismat Connection

17,34,56,122

5

Jaane Tu Ya Jaane Na

30,81,34,906

6

Sing Is Kinng

46,90,03,356 (Figures in Indian Rupees)

As you can see the chart Sing Is Kinng a mind boggling comedy which has done exceptionally well all across the globe has broken all records to gain the title of the best comedy movie of the year. This movie as the figure shows has generated Rs. 46,90,03,356 gross revenue followed by Jaane Tu Ya jaane na and Kismat Connection as far as gross revenue is concerned.

FRANCHISE MODEL The company operates two multiplexes under the franchise model; PVR SRS in Faridabad (3 screens, 776 seats) and PVR Spice in Noida (8 screens, 1,821

seats). Under this model, the property the company sells its expertise in developing and managing the operations of the multiplex to the mall developer. PVR advises the mall developer on design specifications, business plan and the financial and operational feasibility of the multiplex. PVR manages the operations of the multiplex and uses its brand name to attract patrons. For these services, PVR is entitled to a revenue share from the multiplex. In the case of PVR SRS, PVR charges 5% of the net revenues of the multiplex as management fee. For PVR Spice, the management fee is calculated as 3% of the net revenue and 5% of the net profit of the multiplex. The franchise model is a good strategy for the company in places where they want to take limited risk or in areas where the company wants to take exposure but the mall developer desires to own and operate the multiplex.

COST BREAKUP The costs are divided into 4 distinct parts, namely :

 Direct Cost which is further divided into various sub parts -

Distributors share-This refers to a stipulated amount which needs to be paid to the distributor for distribution a particular movie to the multiplex.

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Entertainment Tax which is a mandate tax which needs to be paid and is charged to the viewer within the cost of the actual ticket purchased by him.

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Food and beverages cost refers to the cost incurred by the in house brands to producing or making a particular product or item available for the end consumer.

 Personnel Cost refers to the cost incurred right from the sweeper and the security guard right up to the manager of the multiplex.

 Depreciation refers to the ware and tare of a particular machinery over a period of time which can this case refers to the projector and various other assets bought to commence the how.

 Interest refers to the amount which needs to be paid on the borrowed capital by the company.

RISKS AND CONCERNS

 Slowdown in content supply As multiplexes are the consumers of content, they have no control over the supply quality and quantity. Multiplexes thrive on rising footfalls which in turn depend on the better supply of films from producers. Hence, any disruption on the supply side will definitely have a negative impact on the multiplex players' growth.

 Alternative entertainment avenues Movies compete for customer attention with other forms of entertainment viz. DVDs, TV, cricket, festivals etc. An increased acceptability of these avenues will divert footfalls away from multiplexes. However, we believe that there is enough room for all to exist and grow simultaneously. A case in point is US, where almost all forms of entertainment are present and have been well received by the consumers. Even then, footfall growth hasn't halted over there. Moreover, there might be possible synergies among these formats which might benefit multiplexes, e.g. showing of IPL matches on cinema screens.

 Mall development delays Supply of quality real estate has been a problem in the past for multiplex players. Mall delays due to various reasons will hurt expansion plans of the companies. We are building in a 50% delay in mall handovers to the multiplexes in our analysis. Any delay more than this will hurt future growth of multiplexes.

 Uncertainty over entertainment tax Entertainment tax in India is among the highest in the world leading to a much higher occupancy levels required for break even of multiplexes. Even though state governments have announced tax free windows for these players, uncertainty looms over the viability of multiplexes after the window expires. We believe that the levels entertainment tax will come down in the future, otherwise any increase will be passed on to the consumer to a large extent like it is done at present.

 Worsening economic environment The whole footfall growth story depends on rising prosperity in the country leading to higher discretionary consumer spends. If the economic environment starts worsening for a prolonged period, it will affect patronage

levels negatively pulling down topline growths. We are assuming very low CAGRs at the topline levels for all of the players and are quite optimistic that multiplexes will grow as expected.

 Great success of IPL Bollywood regularly competes with cricket as an entertainment category. One such property, the Indian Premier League (IPL) was floated by the BCCI during Q1FY09 and held between Apr'08 and Jun'08. This has been a double whammy for multiplex operators. On the one hand, movie producers were reluctant to release their movies during the quarter, on the other hand, popularity of IPL reduced cinema visits. Since no fresh content was forthcoming, multiplex operators had to churn the old movies a little longer and hence, could not generate footfall growth. Our interaction with the management at various multiplex chains indicates that all operators experienced low occupancy rates during the quarter. Given the fact that the DLF IPL is here to stay as a property, at least in the foreseeable future, we believe that low occupancy levels would characterize the first quarter performance. However, we also believe that going forward, once the novelty factor wears off, and multiplex operators would be able to progressively improve their occupancy levels.

WAY FORWARD Kishore Biyani''s Future Group media arm Future Media has acquired the onscreen media rights for all Inox Leisure multiplexes in India, for the next twoand-a-half years. It also owns the rights to ad spaces within the Future Group retail formats, and provides brands with opportunities to reach their target consumers in the ambience of consumption, be it at malls, airports, or cafeterias. This deal marks its foray into the multiplex space as well. Future Media India Ltd is a part of the Future Group, which owns multiple retail formats such as Pantaloons, Big Bazaar, Food Bazaar, Central and hometown. The company plans to expand its gaming business by opening seven new Giggles gaming zones at some of its future multiplexes at different locations in India. Include pubs and bar. Kishore Biyani-promoted Future Media is set to launch Future TV Lounge next month to capture a slice of the profitable liquor and tobacco advertising that is banned in the general media. Future TV Lounge would be a special vehicle that would put up television screens for advertising in hotel lounge, restaurants, bars and pubs. Mumbai's multiplexes are growing bigger and better and working towards transforming themselves into complete entertainment zones. others are trying to get liquor licenses so that you can wash down your movie experience with the choicest of liquor. And, if your kids are bored with the movie, you can also leave them out in the children's play area or, better still, book a ticket for them in the theatre where the screen is dedicated to kids' films. Reliance Adlabs is one of the firms that is planning a double-digit number of screens in one of its megaplexes The firm is investing Rs 30 crore on what will be India's largest megaplex. It will have 15-16 screens, including an IMAX 3D digital screen, food and beverage lounges, special screens for kids and sports screens. Adlabs is also opening a nine-screen multiplex at Ghatkopar also PVR coming up with 8 screens. Adlabs has also tied up with kingfisher airlines were u travel by airlines and you accumulate points on which you can get a free ticket in adlabs after you have reached a specific number of points.