Cinemax ru4 qfy2010-270510

1

4QFY2010 Result Update I Media

May 27, 2010

Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539

Investment Period 12 months

Stock Info

Sector Media

Market Cap (Rs cr) 139

Beta 0.9

52 WK High / Low 81/39

Avg. Daily Volume 26,245

Face Value (Rs) 10

BSE Sensex 16,666

Nifty 5,003

Reuters Code CIMA.BO

Bloomberg Code CNMX@IN

Shareholding Pattern (%)

Promoters 68.4

MF/Banks/Indian FIs 9.2

FII/NRIs/OCBs 7.4

Indian Public 15.0

Abs. (%) 3m 1yr 3yr

Sensex 1.4 18.1 16.2

Cinemax (23.9) (19.1) (65.6)

Cinemax India posted modest revenue growth in 4QFY10, aided by seat additions (added 5,230 seats yoy), a big-budget movie pipeline and spillover collections from 3 Idiots. Bottom-line grew 353% yoy despite margin contraction, largely aided by negative tax provisioning. At the end of 4QFY2010, the company had 90 screens and 24,539 seats under operation. After the results, we have tweaked our FY2011E and FY2012E estimates downwards. We maintain a Buy on the stock. Modest top-line, OPM disappoints; Negative tax drives earnings: Cinemax declared modest top-line growth of 34.1% yoy to Rs44.8cr (Rs33.4cr), aided by seat additions and a big-budget movie pipeline. However, high film distribution expense (up 526bp yoy) and rent expense (up 655bp yoy) resulted in the company posting a decline of 138bp yoy in its operating margins. Bottom-line, however, grew 353.1% yoy to Rs4.4cr on a recurring basis, despite margin contraction, aided largely by negative tax amount (due to consideration of E-tax exemption amount as capital receipt) and a 6.8% yoy decrease in depreciation charges. Outlook and Valuation: Post 4QFY2010 results, we have marginally revised our estimates downwards to factor in 1) lower revenue traction to account for higher volatility in the movie pipeline and 2) high direct costs (increased film distributor’s expense and F&B expense) and rentals. During, FY2010-12E, we expect Cinemax to register a 25% compound annual growth rate (CAGR) in top-line, primarily aided by seat additions. We expect the screen count to increase from 90 screens to 109 screens in FY2011E and 130 screens in FY2012E. However, in terms of earnings, we expect Cinemax to register flat growth during the period, on a recurring basis, despite margin expansion (on low base, we expect operating margin of 20-21% in FY2011E-12E), as we model in a 25% tax rate going forward. Nonetheless, the recurrence of negative tax provisioning carries upside risks to our estimates. We maintain our Buy recommendation with a revised Target Price of Rs85 (Rs106) based on 11x FY2012E EPS of Rs7.7 (downgrading our P/E rating from 13x to 11x to factor in uncertainty over earnings growth particularly due to tax provisioning). Key Financials (Consolidated) Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E

Net Sales 144.6 168.1 213.9 264.2

% chg 42.3 16.3 27.2 23.6

Net Profit (Adj) 11.1 21.3 15.9 21.7

% chg (19.6) 92.5 (25.2) 36.3

OPM (%) 21.4 16.6 19.6 20.9

EPS (Rs) 3.9 6.1 5.7 7.7

P/E (x) 14.2 9.2 9.8 7.2

P/BV (x) 1.0 0.9 0.9 0.8

RoE (%) 7.2 12.8 9.0 11.2

RoCE (%) 5.0 3.9 7.4 9.5

EV/Sales (x) 1.6 1.3 1.1 1.0

EV/EBITDA (x) 8.2 9.1 6.3 5.2 Source: Company, Angel Research

Cinemax India Performance Highlights

BUY CMP Rs56 Target Price Rs85

Anand Shah Tel: 022 – 4040 3800 Ext: 334

E-mail: [email protected]

Chitrangda Kapur Tel: 022 – 4040 3800 Ext: 323

E-mail: [email protected]

May 27, 2010 2

Cinemax India I 4QFY2010 Result Update

Exhibit 1: Quarterly Performance Update (Consolidated) Y/E March (Rs cr) 4QFY10 4QFY09 % chg FY10 FY09 % chg

Net Sales 44.8 33.4 34.1 168.1 144.6 16.3

Film Distribution Share 11.4 6.8 69.0 44.5 32.1 39.0

(% of sales) 25.5 20.3

26.5 22.2

Consumption of F&B 2.3 1.8 26.6 9.4 7.6 23.0

(% of sales) 5.2 5.5

5.6 5.3

Staff cost 3.5 3.1 15.0 13.3 13.7 (3.0)

(% of sales) 7.9 9.2

7.9 9.5

Property Rent 9.3 4.8 95.8 23.8 16.1 47.6

(% of sales) 20.8 14.2

14.2 11.2

Repairs & Maintenance 3.0 2.6 15.1 9.8 8.4 16.0

(% of sales) 6.6 7.7

5.8 5.8

Power & Fuel 3.3 3.9 (15.3) 13.5 12.2 10.4

(% of sales) 7.3 11.5

8.0 8.5

Other expenditure 7.9 7.0 12.0 25.8 23.5 9.9

(% of sales) 17.5 21.0

15.4 16.3

Total Expenditure 40.7 29.9 36.2 140.1 113.7 23.3

Operating Profit 4.1 3.5 16.7 28.0 30.9 (9.6)

OPM (%) 9.2 10.6

16.6 21.4

Interest 2.1 1.7 19.9 7.7 6.3 22.5

Depreciation 4.8 5.2 (6.8) 17.5 18.9 (7.5)

Other Income 4.0 3.5 14.2 8.0 9.4 (15.6)

PBT (excl Ext. Items) 1.3 0.2

10.7 15.2 (29.3)

Ext Income/(Expenses) - -

(4.3) -

PBT (incl Ext. Items) 1.3 0.2 523.8 6.4 15.2 (57.6)

(% of Sales) 2.9 0.6

3.8 10.5

Prov. for Taxation (3.1) (0.8)

(10.5) 4.1 (355.8)

(% of PBT) - -

- 27.2

Recurring PAT 4.4 1.0 353.1 21.3 11.1 92.5

PATM (%) 9.9 2.9

12.7 7.6

Reported PAT 4.4 1.0 353.1 17.0 11.1 53.6

Equity shares (cr) 2.8 2.8

2.8 2.8

EPS (Rs) 1.6 0.4

6.1 3.9

Source: Company, Angel Research Spillover effect of 3 Idiots and improved occupancy aid top-line growth

Cinemax registered modest top-line growth of 34.1% yoy to Rs44.8cr (Rs33.4cr), aided by seat additions (added 5,230 seats yoy); a big-budget movie pipeline, including Veer, Ishqiya, My Name is Khan and Karthik Calling Karthik; and spillover collections from 3 Idiots (released in the last week of December 2009). For the full year, the company reported an improved occupancy level, up 100bp yoy to 26% (25%) and footfalls to 10.8mn (8.5mn), despite weak 1QFY2010 (considering the strike from April 10, 2009 to June 12, 2009). However, average ticket price (ATP) for the company remained flat yoy to Rs128. Higher rent and film distributor’s expenses drag OPM, erodes 138bp yoy

On the operating front, consolidated operating margins for the company eroded by 138bp yoy to 9.2% (10.6%), as film distribution expense increased 526bp yoy (on account of a new revenue-sharing model between film distributors and producers) and rent expense increased by 655bp yoy (on account of new property additions and ~Rs1.5cr provisioning for service tax). However, all other expenses, including staff cost (down 130bp yoy), repair and maintenance (down 109bp), power and fuel cost (down 426bp yoy), other expenses (down 346bp yoy) and F&B expenses (down 31bp yoy), declined due to strong focus on cost curtailment.

May 27, 2010 3


Low base and negative tax provisioning aid bottom-line growth In terms of earnings, Cinemax registered whopping growth of 353.1% yoy to Rs4.4cr (Rs1cr) on a recurring basis, despite margin contraction. The company registered a 19.9% yoy increase in interest expense to Rs2.1cr (Rs1.7cr). However, a 14.2% yoy increase in other income to Rs4cr (Rs3.5cr), 6.8% yoy decrease in depreciation charges to Rs4.8cr (Rs5.2cr) and negative tax provisioning of Rs3.1cr (due to consideration of the E-tax exemption amount as capital receipt and, consequently, reversal of tax provisions made in the earlier years), aided bottom-line growth. For FY2010, the company reported bottom-line growth of 92.5% yoy on a recurring basis to Rs21.3cr (Rs11.1cr) largely on account of negative tax provisioning (due to consideration of E-tax exemption amount as capital receipt). However, on a reported basis, growth stood at 53.6% yoy to Rs17cr due to a one-time impairment loss of Rs4.3cr on account of forced closure of a multiplex theatre and a food court during the year. Key Highlights for the Quarter Exhibit 2: Exhibition Capacity 4QFY10 4QFY09 Addition 3QFY10 Addition Propts Under Operation 28 25 3 28 - Screens Under Operation 90 74 16 88 2 Seats Under Operation 24,539 20,305 4,234 23,869 670

Source: Company, Angel Research Exhibition Capacity: In 4QFY2010, the company added two new screens in its Ghatkopar property (Odeon mall), Mumbai. At the end of the quarter, Cinemax had 90 screens and 24,539 seats under operation. In FY2011, the company has opened a four-screen multiplex in Cochin taking its total property count to 29. Exhibit 3: Operational Parameters (Rs cr) 4QFY10 4QFY09 % chg FY2010 FY2009 % chg Footfalls (mn) 2.8 2.0 43.6 10.8 8.5 27.0 Occupancy (%) 26 25 100bp 26 25 100bp ATP (Rs) 128 128 - 128 128 - SPH (Rs) 31 30 3.3 31 30 3.3

Source: Company, Angel Research

May 27, 2010 4


Outlook and Valuation Post 4QFY2010 results, we have marginally revised our estimates downwards to factor in 1) lower revenue traction to account for higher volatility in the movie pipeline and 2) high direct costs (increased film distributor’s expense and F&B expense) and rentals. Exhibit 4: Revision in Estimates Old Estimate New Estimate % chg (Rs cr) FY2011E FY2012E FY2011E FY2012E FY2011E FY2012E Revenue 224 276 214 264 (4.4) (4.3) OPM (%) 21.9 22.5 19.6 20.9 (233bp) (164bp) EPS 6.0 8.2 5.7 7.7 (5.3) (5.5) Source: Company, Angel Research During FY2010-12E, we expect Cinemax to register a 25% CAGR in top-line, primarily aided by seat additions, as we factor in only 2-4% improvements in ATP and F&B spends. We expect the screen count to increase from the 90 screens in FY2010 (including IMAX screen) to 109 screens in FY2011E and 130 screens in FY2012E. However, in terms of earnings, we expect Cinemax to register flat growth during the period, on a recurring basis, despite margin expansion (on low base, we expect operating margins of 20-21% in FY2011E-12E), as we model in a 25% tax rate going forward. Management has guided for a negative tax rate, in line with FY2010, as it would continue to create higher deferred tax due to the treatment of E-tax exemption amount as capital receipt. However, on a conservative basis, we have modeled in a 25% tax rate for FY2011E-12E leading to our muted earnings growth estimates. Nonetheless, the recurrence of negative tax provisioning carries upside risks to our estimates. We believe from here on, while heavy dependence on content (beyond the company’s control) remains a cause of concern, improving the liquidity situation, a strong movie line-up and increased economic activity are key positives for the sector. At the CMP of Rs56, the stock is trading at attractive valuations of 7.2x FY2012E EPS. We maintain our Buy recommendation on the stock, with a revised Target Price of Rs85 (Rs106) based on 11x FY2012E EPS of Rs7.7 (downgrading our P/E rating from 13x to 11x to factor in uncertainty over earnings growth particularly due to tax provisioning).

May 27, 2010 5


Profit & Loss Statement (Consolidated) Rs crore Y/E March FY2008 FY2009 FY2010 FY2011E FY2012E

Gross sales 102 145 168 214 264

Less: Excise duty - - - - -

Net Sales 102 145 168 214 264

Total operating income 102 145 168 214 264

% chg

42.3 16.3 27.2 23.6

Total Expenditure 76 114 140 172 209 Direct Cost 28 41 54 70 87 SG&A Expenses 12 16 19 22 26 Staff Costs 9 14 13 15 18 Other Expenses 27 43 54 64 78

EBITDA 26 31 28 42 55

% chg

19.8 (9.5) 49.6 31.7

(% of Net Sales) 25.4 21.4 16.6 19.6 20.9

Depreciation 7 19 17 20 23

EBIT 19 12 11 22 32

% chg

(36.3) (12.8) 112.2 44.3

(% of Net Sales) 18.6 8.3 6.3 10.4 12.2

Interest & other Charges 3 6 8 9 11

Other Income 5 9 8 7 8

(% of PBT) 23.1 62.1 74.1 34.7 26.4

Share of Associates - - - - -

Recurring PBT 20 15 11 20 29

% chg

(24.6) (29.3) 85.4 45.4

Extr. Exp./(Inc.) - - 4 - -

PBT (reported) 20 15 6 20 29

Tax 6 4 (11) 4 7

(% of PBT) 32 27 (98) 20 25

PAT (reported) 14 11 17 16 22

Add: Share of associates - - - - -

Less: Minority interest (MI) - - - - -

PAT after MI (reported) 14 11 17 16 22

ADJ. PAT 14 11 21 16 22

% chg

(19.6) 92.5 (25.2) 36.3

(% of Net Sales) 13.5 7.6 12.7 7.4 8.2

Basic EPS (Rs) 4.9 3.9 6.1 5.7 7.7

Fully Diluted EPS (Rs) 4.9 3.9 6.1 5.7 7.7

% chg

(19.6) 53.7 (6.2) 36.3

May 27, 2010 6


Balance Sheet (Consolidated) Rs crore Y/E March FY2008 FY2009 FY2010E FY2011E FY2012E

SOURCES OF FUNDS

Equity Share Capital 28 28 28 28 28

Preference Capital 0 0 0 0 0

Reserves& Surplus 120 125 138 149 166

Shareholders Funds 148 153 166 177 194

Minority Interest - - - - -

Total Loans 96 81 96 116 136

Deferred Tax Liability 6 8 8 8 8

Total Liabilities 250 242 270 301 338

APPLICATION OF FUNDS

Gross Block 182 234 268 302 345

Less: Acc. Depreciation 21 40 57 77 100

Net Block 161 194 211 226 245

Capital Work-in-Progress 37 28 32 39 45

Goodwill - - - - -

Investments 29 0 0 0 0

Current Assets 58 73 84 103 127

Cash 8 4 7 5 9

Loans & Advances 44 62 69 87 105

Other 6 7 8 11 13

Current liabilities 34 53 57 68 80

Net Current Assets 24 20 27 36 47

Mis. Exp. not written off - - - - -

Total Assets 250 242 270 301 338

Cash Flow Statement (Consolidated) Rs crore Y/E March FY2008 FY2009 FY2010E FY2011E FY2012E

Profit before tax 20 15 6 20 29

Depreciation 7 19 17 20 23

Change in Working Capital (29) 6 (17) (11) (7)

Interest / Dividend (Net) 1 6 7 9 11

Direct taxes paid 6 4 (11) 4 7

Others (1) (5) 13 (1) (1)

Cash Flow from Operations (9) 37 38 32 48

Inc./ (Dec.) in Fixed Assets (67) (61) (38) (42) (48)

Inc./ (Dec.) in Investments 36 32 - - -

Cash Flow from Investing (31) (29) (38) (42) (48)

Issue of Equity (0) - - - -

Inc./(Dec.) in loans 33 (2) 15 20 20

Dividend Paid (Incl. Tax) 1 5 4 4 5

Interest / Dividend (Net) 1 6 7 9 11

Cash Flow from Financing 31 (12) 4 7 4

Inc./(Dec.) in Cash (9) (4) 3 (2) 4

Opening Cash balances 17 8 4 7 5

Closing Cash balances 8 4 7 5 9

May 27, 2010 7


Key Ratios (Consolidated) Y/E Mar FY2008 FY2009 FY2010E FY2011E FY2012E

Valuation Ratio (x)

P/E (on FDEPS) 11.4 14.2 9.2 9.8 7.2

P/CEPS 7.6 5.2 4.0 4.4 3.5

P/BV 1.1 1.0 0.9 0.9 0.8

Dividend yield (%) 2.7 2.1 2.1 2.7 2.7

EV/Sales 2.4 1.6 1.3 1.1 1.0

EV/EBITDA 14.0 21.0 24.1 11.9 8.9

EV / Total Assets 10.3 8.2 9.1 6.3 5.2

Per Share Data (Rs)

EPS (Basic) 4.9 3.9 6.1 5.7 7.7

EPS (fully diluted) 4.9 3.9 6.1 5.7 7.7

Cash EPS 7.4 10.7 13.8 12.7 15.9

DPS 1.5 1.2 1.2 1.5 1.5

Book Value 52.8 54.6 59.3 63.2 69.2

Dupont Analysis

EBIT margin 18.6 8.3 6.3 10.4 12.2

Tax retention ratio 0.7 0.7 2.0 0.8 0.8

Asset turnover (x) 0.8 0.7 0.7 0.9 0.9

ROIC (Post-tax) 9.6 4.2 8.3 7.1 8.5

Cost of Debt (Post Tax) 0.0 0.1 0.1 0.1 0.1

Leverage (x) 0.1 0.5 0.5 0.6 0.6

Operating ROE 10.9 6.1 12.6 11.2 13.8

Returns (%)

RoCE (Pre-tax) 8.3 4.9 4.1 7.8 10.1

Angel RoIC (Pre-tax) 8.9 5.1 4.0 7.5 9.8

RoE 9.6 7.3 13.3 9.3 11.7

Turnover ratios (x)

Asset Turnover (Gross Block) 0.6 0.6 0.6 0.8 0.9

Inventory / Sales (days) 1 1 1 1 1

Receivables (days) 20 18 16 16 15

Payables (days) 103 93 114 95 92

Solvency ratios (x) 56 40 43 54 58

Net debt to equity

Net debt to EBITDA 0.4 0.5 0.5 0.6 0.7

Interest Coverage (EBIT/Interest) 2.3 2.5 3.2 2.7 2.3

May 27, 2010 8


Research Team Tel: 022- 4040 3800 E-mail: [email protected] Website: www.angeltrade.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this

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Disclosure of Interest Statement Cinemax

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies’ Directors ownership of the stock No

4. Broking relationship with company covered No

Note: We have not considered any Exposure below Rs 1 lakh for Angel and its Group companies.

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946

Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059. Tel : (022) 3952 4568 / 4040 3800

Cinemax ru4 qfy2010-270510

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