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S. Vaidya Nathan

SHAREHOLDERS can retain their exposures in Adlabs Films as there appears to be scope for gains over a one-to-two year period. Business Line had recommended a buy in September last year when the stock traded at about Rs 60.

Expansion of margins in its core business of film processing is likely to drive earnings growth over the next few quarters. Adlabs would post earnings growth of about 20 per cent in FY 04.

Revenue growth has also shown a rising trend during the first three quarters of FY 04 in contrast to the trends in FY 03.

If this continues over the next few quarters, earnings could get a leg up at the higher level of operating profit margins that Adlabs now enjoys in film processing business; it has a market share in excess of 85 per cent in the processing business in Hindi films and is expanding its presence in regional language films.

Given its dominant position, it is well-placed to command a price of its choice. This limits the downside risk to profitability in this business.

If the process of installing digital screening systems in theatres across towns and bigger villages scales up, it could emerge as a driver of revenues and profits.

Adlabs is involved through joint ventures to push the shift to digital screening systems; the process is, however, still in a fledgling state and it may take two-three years for higher level of penetration of this concept.

The declining profitability of its multiplexes and I-MAX theatre business is a cause for concern. This trend may continue with competition in the multiplexes space likely to intensify, with several business groups planning to step up their presence.

This business now accounts for about one-third of Adlabs' revenues. Its share in revenues may rise with the planned addition of three multiplexes; Adlabs is, however, likely to depend on the film processing business to drive earnings growth.

The company's foray into production of film is yet to make a difference. Gangaajal has been the only success story so far. It has quite a few films, including `1857 The Rising', under production.

This business may impart volatility to the earnings stream, as box-office preferences can be fickle. By entering into financing arrangements with other players, Adlabs has reduced the risks associated with its foray into films.

The risks associated with an investment in the stock of Adlabs is, however, lower compared to pure film plays such as Mukta Arts, as its film processing business is likely to remain a source of strength to the earnings stream and also provide healthy cash flows.

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