The stock of Inox Leisure has gained 32 per cent since the start of the year, trending sharply upwards in the past two months. A strong show by the multiplex owner in the June 2015 quarter has buoyed the stock further. You can hope for another good performance in the September quarter, thanks to big hits, such as Baahubali and Bajrangi Bhaijaan .

After the recent surge, at ₹230, the stock discounts its trailing 12-month earnings by 51 times, higher than its five-year average valuation of 48 times. While the stock is not cheap, shareholders can remain invested as it offers potential for further upside.

One, with many movies, some with a top star-cast slated for release this year, the company’s prospects look good. Two, Inox, the second-largest multiplex chain in the country, has plans of expanding further during the fiscal.

Also, given that its fortunes fluctuate with the success of movies released in a year, Inox is making efforts to improve its non-box office revenue, such as advertisements. This should provide some buffer during years of disappointing performance of movies.

Good movie pipeline

A pan-India multiplex, Inox operates 97 properties with 377 screens and over 99,000 seats spread across the country. Last year’s acquisition of Satyam Cineplexes has helped it strengthen its position in the North, particularly the Delhi region.

Inox grew its revenue at 17 per cent (year-on-year) in 2014-15. It derives 66 per cent of its revenue from box office collections and 19 per cent from food and beverages. Both these income streams are a function of the crowds that are drawn to movie theatres, which in turn depends on the success of the movies being screened.

The release of many star-studded films, such as Phantom, Prem Ratan Dhan Payo, Dilwale and Mission: Impossible-Rogue Nation is expected to increase footfalls and occupancy levels at theatres as also the average ticket prices. This should boost revenue this fiscal. The current quarter has already begun on a good note with blockbuster releases, such as Baahubali .

Moreover, Inox plans to expand further to 110 properties with 429 screens and 1.1 lakh seats by the end of this fiscal. The company intends to fund this expansion through a mix of debt and equity (65:35). With a consolidated debt-to-equity ratio of 0.3 times as on March 2015, it is comfortably placed.

Dependence on content

Driven by successful movie releases, Inox reported 50 per cent growth in revenue to ₹349 crore in the June 2015 quarter compared with the same period a year ago. Profit, both at the operating and net levels, improved. Operating profit more than doubled to ₹67 crore while net profit grew five-fold to ₹25 crore. The same was reflected in key operational parameters too.

Footfalls grew 46 per cent to 14.5 million and occupancy levels rose to 33 per cent from 26 per cent in the same period last fiscal. That said, current quarter results include the benefit of Satyam Cineplexes’ acquisition and so are not comparable with the year-ago period.

On the other hand, in 2014-15, a lacklustre show at the box office combined with cost pressures resulted in a less-than-satisfactory performance.

Revenue rose 17 per cent (lower than in earlier years) and operating profit remained almost unchanged.

Hurt by higher fixed costs due to the company’s expansion initiatives, net profit fell 46 per cent to ₹20 crore. The performance in the current fiscal should be much better.

Hedging risk

While the chunk of its revenue is contingent on movie performances which are unpredictable, Inox is focusing on increasing its share of non-box office revenue — advertising and other operating income. This should provide some hedge from the risk of movies doing badly.

While advertising revenue still accounts for only 8 per cent of consolidated revenues, this is up from 4 per cent two years ago.

Likewise, other operating income, which includes virtual print fee on digital projection systems and online ticket service charges, has grown its share in revenue from 4 per cent to 7 per cent. Also, unlike collections from movie screenings which are shared with distributors, advertisement and other operating income accrue fully to the company.

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