The Hindu Business Line : Pyramid Saimira Theatre: Invest at cut-off

PSTL's model focuses on gaining critical mass in territories so that it will be too large for distributors to ignore. This could help it secure strong content.

MR V. NATARAJAN (right), Chairman, Pyramid Saimira Theatre Ltd with Mr P. S. Saminathan, Managing Director. — Paul Noronha

Pyramid Saimira Theatre's (PSTL) proposal to upgrade and digitalise theatres across the country makes the stock an interesting exposure in the film exhibition space. At the upper end of the price band, the offer values the company at 29 times its annualised FY-07 earnings, on a fully expanded equity base. The valuation is at a discount to peers such as PVR and Inox Leisure, and it is likely to improve as the company adds more theatres to its fold. However, challenges in execution, relative lack of experience of promoters in the theatre business and an untested concept make it suitable for investors with a high-risk appetite and those looking to diversify their portfolio with an offbeat stock.

PSTL was engaged in the production of films. It discontinued that business to concentrate on its "mega digital theatre chain" project, which it launched in November 2005. With 148 screens under its fold, PSTL has built a strong presence in the Southin a short period.

It has achieved this by entering into lease agreements with traditional stand-alone theatres that have been suffering the onslaught of multiplex chains. The company is focusing on the Tier-II cities , where films are typically released several weeks after their launch in top rung cities. By that time, the quality of the print deteriorates, resulting in a poor viewing experience. Moreover, pirated copies hit the market before the originals make it to the theatres and eat into the revenues. Stand-alone theatres in these towns tend to suffer from low occupancy rates as well as low admission prices.

Going digital

PSTL hopes to overcome these problems by setting up digital theatres. Essentially, this does away with the celluloid film, which costs about Rs 60,000-70,000 to print. Because of the stiff costs involved, production houses order 300-400 prints that are played in theatres in A category cities alone; the real requirement is about 12,000 as there are as many screens in the country. However, a digital print is not as expensive. Through satellite as many as 12 films can be launched simultaneously across different theatre locations, even as print costs are contained.

The upfront cost of setting up a digital theatre is steep and this has prevented traditional theatres from upgrading. However, with these theatres finding it difficult to compete with the modern organised multiplexes, they appear amenable to agreements with outfits such as PSTL, where the latter takes over operation of the theatre, refurbishes them and converts them into digital theatres. PSTL pays theatre owners a rent, and retain the box-office collections.

PSTL hopes to lease out 120 theatres in A category towns and 235 theatres in B and C ones by March 2007. It hopes to increase utilisation levels and admission rates with latest film releases, strong content and better theatre experience. The model, however, will remain low cost, with its average ticket priced at around Rs 30, against Rs 80-90 charged by most multiplexes.

Technological tie-ups

But PSTL will save on capex through its tie-ups with other players with experience in the digital cinema space. It has tied up with Valuable Media (which runs its digital initiative under the name UFO Moviez) for the installation of comprehensive digital cinema systems in 1,000 theatres. These services will be provided on a "pay-per-view" basis.

It has also tied up with the Chennai-based Prasad Labs for the conversion of films to high definition format; with Real Image for sound systems; with Tatanet for bandwidth and has arranged with Delta Electronics, Taiwan, to import projectors. The tie-ups lend confidence.

Territorial dominance

The other interesting aspect of the PSTL business model is establishing dominance in a distribution territory. While there are players operating at the national level, the distributor continues to exert greater negotiating power. The recently-released mega-starrer Dhoom-2, for instance, saw distributors asking for a higher share of revenues. Large multiplexes such as PVR Cinemas failed to reach an agreement on the terms of revenue sharing and did not screen the movie; this resulted in lost revenue potential.

PSTL's model focuses on gaining critical mass in territories so that they will be too large for distributors to ignore. This could help it secure strong content, which will attract audiences.

Risks

While the business model appears to be well conceived, the following risks will have to be considered.

One, because it operates on a low-cost format and seeks territorial dominance, the success of its venture rests almost completely on execution. PSTL hopes to have 2,000 screens in its fold by 2010. That is the number of theatres that should be willing to hand over their operations to the company. Theatre owners may prefer to sell their properties to real estate developers, rather than lease them out.

Two, in the immediate term, the focus will be on gaining scale. Upgradations and digitalisation will happen once PSTL has about 400-500 theatres under its fold. Profit growth could be moderate until revenues from the new initiatives kick in.

Three, its fortunes remain vulnerable to the success of films at the box office, just as for multiplexes. It will have to ensure capacity utilisation at 25-30 per cent for it to break even.

The risks are more because PSTL assumes all the risks of the business as it takes over from theatre owners.

Finally, the success of the technology at such a scale is yet to be proven.

Offer details: About 85 lakh shares are on offer. The price band is Rs 88-100. At the upper end, the offer will raise Rs 85 crore.

About Rs 35 crore of the proceeds will go towards upgradation of theatres, Rs 25 crore towards digitisation and the balance towards rental/security deposits and working capital. The offer opens on December 11 and closes December 18. The lead manager is Keynote Corporate Services.

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