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PVR-INOX merger: Will it be a happy ending? ​

The merger is focused on creating scale to improve efficiencies and enhance productivity to fight increasing competition within the movie exhibition industry and from streaming platforms as well on long-term survival.

March 28, 2022 / 05:44 PM IST
Average ticket prices for both PVR and INOX dropped in the financial year 2021 to Rs 180 and Rs 170 from Rs 204 and Rs 200 respectively in the previous year.

Average ticket prices for both PVR and INOX dropped in the financial year 2021 to Rs 180 and Rs 170 from Rs 204 and Rs 200 respectively in the previous year.

 
 
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After the two-year COVID-19 interval, the movie exhibition business has seen a twist in the tale with the merger of two top multiplex operators, PVR Ltd and INOX Leisure Ltd.  The question still being asked is whether it will be a happy ending

The key metric to look at in the union is profitability, given the significant revenue hit suffered by both PVR and INOX while the pandemic raged. On this score, analysts say there’s no cause of concern: profitability will go up because of three reasons.

The merger will be positive for the earnings before interest, tax, depreciation and amortisation (EBITDA) of the combined entity, said analyst Karan Taurani, senior vice-president of Elara Capital Ltd.

EBITDA, a measure of a company’s financial performance, should go up by Rs 150-200 crore, Taurani reckoned.

"One is reason is that the advertising and convenience fee will go up as it will move up for INOX. Second, there will be some lower rental cost, especially for renewals and new contracts, due to better bargaining power but for the existing ones, it will remain the same. And third, there could be a cut in terms of overheads and employee expenses," he added.

How the partners measure up  

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Taurani explained that INOX's ad revenue per screen had been at a 33 percent discount to that of PVR as of financial year 2020. The merger will lead to better yields on advertising, he said. Even in terms of convenience fees, INOX is 50 percent lower than PVR on a per screen basis and this will also be revised up.

INOX, which is at a 5 percent discount compared to PVR in terms of the average ticket price (ATP), is expected to be on par with its merger partner.

Will this mean the cost of watching movies will go up for film fans?

Ticket prices may go up in North and West India, said Nitin Menon, co-founder of NV Capital, a credit fund for the media and entertainment sector. In South India, any rise in ticket prices will confront resistance because the prices are capped in the region, he said.

PVR and INOX are unlikely to raise ticket prices steeply because of concerns about affecting footfalls in their theatres in a country where moviegoers are sensitive to price increases, Taurani said.

Prices may increase nominally in step with inflation, he said. "A second growth driver (for ticket prices) will be the luxury offerings that are the driver of ticket prices and that will remain," Taurani added.

ATP for both PVR and INOX dropped in financial year 2021 to Rs 180 and Rs 170 from Rs 204 and Rs 200 respectively in the previous year.

Creating scale, fighting the competition 

The merger of PVR and INOX Leisure is focused on creating scale to improve efficiencies and enhance productivity to fight increasing competition within the movie exhibition industry and from streaming platforms as well on long-term survival of the multiplex operators, said Likhita Chepa, senior research analyst at CapitalVia Global Research.

The combination of PVR and INOX will create an entity that can push the envelope in terms of all three metrics --- average ticket price, spending per head and advertising, said Menon.

The two companies together will be pushing screen accretion as well.

"There is still organic growth left because we are still at around 9,000 screens and we are an industry that produces excess of 1,500 movies (a year). Also, the regional has become the new national. See, RRR collections. There are six-eight regional stars who have become national stars and when that scale happens you need more screens," Menon added referring to the latest theatrical release of Telugu director SS Rajamouli.

PVR and INOX were adding 60-80 screens annually in the pre-COVID era.

They will be adding 200 screens under the PVR-INOX brand. The merged entity has a total of 1,546 screens and a pipeline of 1,500-2,000 more.

Resistance to dominance  

In terms of box office revenue, the combined entity's share of Hindi and English content is 42 percent. Hindi and English films have a 65 percent share of overall box office revenue.

Overall, the merged entity's box office share is 34 percent and this includes regional content, which contributes 35 percent of overall takings. In regional content, single-screen cinemas have a higher share of box office revenue.

With a merged entity commanding such a dominant portion of box office revenue, it may confront opposition from sections of the film trade and fraternity fearing a potential hike in the distributor’s share, Taurani said.

Menon said that it is important to see how the film production space will respond to the merger.  "If the distributor’s share is 50:50 in the first week, they (PVR-INOX) are in the position to increase that (exhibitor;s share)," he said.

Taurani said some kind of assurance by the exhibitors that the distributor’s share will not increase will bode well for the film trade.

Cinema consolidation   

On the market share increase in the exhibition space, Taurani noted that while PVR is stronger in the North, West and South, INOX has more screens in the East. The combined entity has a 50 percent share in the multiplex industry and a 16-18 percent share in the overall exhibition sector.

"They (PVR-INOX) can become larger because there is opportunity to consolidate further. There are multiple smaller chains which have had liquidity issues due to COVID-19. Second driver for market share growth will be screen additions. They will be adding screens at a fast pace as compared to other chains,” added Taurani.

When it comes to other top exhibitors, Menon said Cinepolis will have to think about how to recalibrate its strategy.

"Carnival Cinemas is looking at B & C centres so, they will continue concentrating on those markets. Cinepolis was also be looking at going to B & C centres,” he said.

A centres refer to cities and towns with a primarily urban audience, B to those with a semi-urban audience and C to those with a rural viewership.

“Now, they have to see how they can position themselves. They will have to acquire something complimentary to their scheme of things. If they are dominant in A&B centres then they can't go down. They will look at smaller chains, but those that fit into their brand," Menon added.



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Maryam Farooqui
first published: Mar 28, 2022 05:44 pm
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