PVR INOX Limited (PVRINOX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the PVR Limited Q1 FY '21 Earnings Conference Call hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ankur Periwal from Axis Capital Limited. Thank you, and over to you, sir.

Thank you, Steve. Good morning, friends, and welcome to PVR Limited Q1 FY '21 Post Results Earnings Call. As usual, the call will be initiated with a brief management discussion on the quarterly performance, followed by an interactive Q&A session. The management team will be represented by Mr. Ajay Bijli, Promoter, Founder, Chairman and Managing Director; Mr. Sanjeev Kumar, Promoter, Co-Founder and joint MD; Mr. Gautam Dutta, CEO PVR Limited; Mr. Kamal Gianchandani, Chief of Business Planning and Strategy, and CEO, PVR Pictures; Mr. Pramod Arora, Chief Growth and Development Officer, PVR Limited; Mr. Nitin Sood, CFO, PVR Limited; and Mr. Rahul Gautam, SVP and Head of Corporate Finance. So I'll hand it over to Mr. Ajay first for his initial remarks, and then we can open the floor for Q&A. Ajay, please?

Yes, thanks. Thanks very much. Good morning, everyone. I'd like to welcome you all to the earnings call of [Technical Difficulty] results of 2021. As you're aware, the cinema industry has been shut since mid-March, even before the official lockdown due to COVID-19. And therefore, our results reflect the fact that we were shut throughout, and we had 0 revenues during this period. So Nitin will speak more about the results. But just the headlines are this only after adjusting for Ind-AS 116 for leases, our revenue was down to INR 12 crores, our EBITDA down to minus INR 116 crores, and our PAT was down to INR 141 crores. Due to these -- due to COVID, a lot of measures were taken by the company, short term and long term. There were temporary pay cuts, there were workforce reductions and various third-party contracts had to be suspended, and we aggressively controlled our fixed cost to almost 78% reduction. We also -- so basically, our run rate has come down to INR 32 crores in the first quarter per month of fixed costs as opposed to INR 150-odd crores compared to last year's Q1. We continue to manage our liquidity. On the positive side, we were very happy that we were able to successfully complete our rights issue for INR 300 crores. Issue was subscribed 2.24x, which is the highest oversubscription of any rights issue in the last 15 years. This really reflects the confidence that shareholders have got in the company as well as in the industry. We have about INR 550-odd crores liquidity available now, including the undrawn banking lines of INR 150 crores, which is sufficient to sustain our operations and meet all our obligations. Another positive news is that cinemas across the globe have started reopening, and the initial box-office response is very promising. A lot of movies are lined up in the entire Indian film industry and international film industry still have got lot of movies lined up for the exhibition sector, and we're looking forward to that. We've obviously revised our SOPs to make sure that consumer confidence is up when they come, and we're totally committed to providing the best and the safest movie watching experience to our customers. And we're just looking forward for the cinemas to open now. Thanks very much for joining once again, and I'll leave -- go back to Axis to conclude.

Ankur, we can start with the Q&A.

[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.

Yes. You have done commendable cost control in very tough macro environment. My first question is on the wages. So you have cut the manpower number, and you have also taken the salary cut 25% to 50%. So once the operations come back, would you need to again rehire more people or it will be mostly on variable/ temporary basis? And second, if you see Domino's in the broader same retail space has shifted permanently, at least in the medium-term towards a variable cost structure. So once you open up, is there a possibility that you can also shift to variable cost cuts given next 6 months, the uncertainties are quite high on the revenue side?

Nitin, would you like to answer this?

Yes. So to answer your second question first, we are already sort of on the variable cost structure very heavily. In the sense, most of our frontline staff are on the off-role format, and so is our housekeeping and security. And that's one of the reasons why we were able to sort of suspend a few contracts. But having said that, we very strongly believe that we are a people's driven organization. We have gone down to a level which we believe will be sustainable over the next 90 to 100 days of operations when we open. So we do not intend hiring any more people. We are training our staff very rigorously on new aspects of hospitality and multitasking so that we could sort of drive our business in a more efficient manner with the current staffing levels. So to answer your first question, we do not intend hiring anymore people for the first 3, 3.5 months, see how business sort of ramp up, and then we will take the calls further.

One question on the outlook of the business. So globally, 70 countries, the cinema seems to have opened up. So what are the learnings from there? How do you get initial footfalls given India has the maximum COVID cases now on daily basis? And second, in India also, if you see, there are lot of learnings because malls have opened up, restaurants have opened up, in some places, pubs and bars have also opened up. So from there, are you getting some learnings and imbibing that also in your initial strategy in the first 4 weeks or first 8 weeks. Anything you will inculcate there?

Yes. If I can answer this.

Yes, please.

Abneesh, basically, the cinema first-hand experience of going out and watching movies is an incomplete experience till such time brand-new movies don't come. So I think all over the world, cinemas have opened more than 80-odd countries now. Initially, they were showing old films, catalogs films. Then now, all of a sudden, Tenet, Mulan all have opened, and the response has been absolutely amazing. Also, the countries which have a very good local film industry. For example, South Korea, China, who are not dependent only on Hollywood films, so India falls into that category because 90% of box-office in India comes from Indian films. So we are very basically privileged and have an advantage over other countries, which are only dependent on Hollywood, [Technical Difficulty] well. So lot of South Korean movies have done very well. Chinese movies have done very well. So I think we would take a leaf out of that. I think the response in India is going to be along those countries. And as far as COVID cases are concerned, everybody knows they are going high, and it's here to stay till such time a permanent vaccine or solution comes out. But all other activities have opened. So if all other activities have opened, then I think cinema doesn't prove to be any threat simply because there are multiple case studies now done by epidemiologists and virologists and doctors, which we have shared with the Ministry of Home Affairs as well now, where actually people are sitting in a dark room, most of the time, out of a 2.5-hour experience and looking at the screen, wearing a mask and not talking. So other activities, bars, restaurants, you still communicate, you don't go to a restaurant to sit quietly, you communicate. So the aerosol transfer in cinemas is the least. So in the pecking order, lot of countries have opened first cinemas, and then they've opened bars and restaurants. It's only in our country there's a perception just now that, okay, this is something where super spreading can happen. But scientifically, it's been proved that people do not communicate. They are quietly sitting, looking -- not even looking at each other, they're looking at the screen. And therefore -- and people realize that. So the moment people have started going out, even in European countries and South Korea and all that, they've realized that this is not a space where they should feel constricted or they should feel that something may happen to them. So we are just waiting for the cinemas to open, brand-new movies to come, and I think everything will be fine after that.

And I would like to add to what Ajay said, our own experience in Sri Lanka, where we've opened as well now, it's been more than a month, has been positive. So Mulan has done very well there. So when cinemas do open up and a new content and a new film comes and gets released, Mulan got released about a week ago. And people have tried to come back in. So I think the pent-up demand to come and watch a movie at a cinema is huge. And once we open and new films come out, people will start coming out.

That's quite helpful. Just last follow-up. So in Sri Lanka, if you can tell in terms of F&B and advertising, how has been the response? I'm not questioning whether it is back to normal. I think it is -- it will take some time. But how has been the initial qualitative, quantitative feedback on advertising and F&B in Sri Lanka? And in terms of the Indian content, you mentioned, so if you could give us some color on Hindi and regional content next 3 months. So October, November, December, how is it?

Kamal?

Hi. This is Kamal. On -- firstly, your question on Sri Lanka, the F&B -- advertising is a bit early to speak about because it's just been a month since the cinema opened in Sri Lanka. But F&B is, in fact, clocking better than what it was doing pre-COVID because typically, we measure F&B as a percentage of our average ticket price and currently, F&B is hovering at about 60% of the average ticket price, as in the spend per head is at about 60% of the average ticket price at Colombo, which is better than the pre-COVID level. So that's on Sri Lanka, very encouraging numbers on F&B. As far as -- coming back to India, as far as content supply is concerned, we've got some good mix of big, midsize and small films. In terms of big films, Sooryavanshi, 83, films from Yash Raj, and Yash Raj has been extremely supportive to hold back their entire catalog and not just big films, but also their midsize films. In Tamil, we've got Master, which is still holding its release, and they've come out publicly to say that they will wait as long as it takes for cinemas to open. Telugu has had very few films, which have gone straight to OTT, namely one film, which has gone to OTT, which is V. All other films have held back their releases for cinemas to open. Same for Malayalam, same for Kannad. KGF 2, which is a sequel to a very, very strong performing film, very strong franchise, KGF, which has also held back its release. And of course, there's a long slate of films, which are lined up for release in November, December in the foreign language, Hollywood category.

And Sri Lanka ATP was, sir? That is my last question.

Sri Lanka -- ATP in Sri Lankan rupees is at about LKR 750 at present, which is comparable to what we were doing pre-COVID.

The next question is from the line of Jaykumar Doshi from Kotak Institutional Equities.

Yes. And good liquidity and cost management…

Mr. Doshi, can you speak closer to the handset, please? Your voice is not audible.

Yes. And good liquidity and cost management, team. Now I've got 3 questions. The first one is rent negotiations have been underway since about 4 to 6 months. Could you please provide some color based on your discussions with developers? Or rather, what would be your base case at this juncture for the 3 phases, if I may, Phase I when malls were locked down; Phase II, which is the current phase where malls are operational, but cinemas are not allowed to operate; and Phase III, which is eventually when cinemas operate. What would be your base case? What should we build? And second is, you have fully provided for CAM. Does it mean that you are prepared to pay CAM during the lockdown period as well? So this is the first question, and I'll come back with other questions, please.

Okay. My name is Pramod. I'll respond to this query. So we have been in touch with all our developer partners. And in the first bucket that you had suggested when the malls were closed, all the developers have agreed of not -- waiving of the rent. For the second bucket, when the malls are operational and the cinemas are not, till such time the cinemas are not operational, the developers would be -- waive -- would waive off the rent component. When it comes to CAM, while we have provided for, the developers would only be charging CAM to the extent of their actual outgo, which will be about 10% during the time the cinemas were closed -- or during the time, the malls were closed. Once the malls opened and cinemas have not opened, this number may shift to about 30% to 35%. That is how we are looking at it. Does that answer?

That's very clear. And second question is, could you please comment on sustainable cost savings. So if -- as per my understanding, your monthly fixed costs were ballpark in the range of INR 150 crores, if I assume electricity as well as employee costs as fixed costs? Or to put it the other way, your monthly employee expense was INR 36 crores, which has probably come down to INR 12 crores, INR 13 crores in August. Now this will again go up to a certain level once cinemas operate. But if you were to move back to 30% plus, 32%, 33% occupancy, would you go back all the way to INR 36 crores in case of employee cost? Or you think you will be able to operate at about INR 30-odd crores? So at an overall level, should we expect 100 to 200 basis point expansion in margins as compared to pre-COVID levels once you get back to similar occupancy is the question.

So I'll answer that, Jay, for you. So the management has taken several measures. Some of the measures that we've taken are temporary in nature consequent to shutdown of cinemas, and some of the measures are long-term and permanent in nature. Like you rightly said, some of the costs will go back once cinema is open. But in some of the costs like employee costs, specifically, we think the costs will be at least 15% to 20% lower on the long-term basis given what we've managed to achieve. And we definitely intend to operate with much lower headcount levels in the long term, given some long-term restructuring that we've managed to achieve in the overall scheme of things. Also some of the other expenses and overheads will come down. At least in the next 6 months post opening, those expenses will at least be 20% lower, 20% to 25% lower than our traditional run rate. Some of the other costs, et cetera, electricity and so on will also, at least in the next 12, 18 months, will be lower given the fact that several state governments have announced relief for the industry, general industry, post opening, some cases, minimum load charges have been waived out, Maharashtra has reduced the electricity tariffs by almost 8% for the next 4 to 5 years. Similarly, lot of states have taken these measures. So cost structures are definitely going to be lower. And till the time business generally bounces back to normal, all mall operators and retailers will try and keep their costs lower. So you will see lot of permanent cost reduction. It's very difficult to put a number. But clearly, I think between 15% to 20%, especially in 2 heads, which is employee cost and other expenses, we think we'll have long-term cost savings.

That's again very clear. It's helpful, Nitin. My final question is on screen additions. Now in the presentation, you have indicated that 30 screens are 70% to 95% complete, and another 28 screens are under fit-outs. So what would be -- for these 2 buckets, what is the CapEx that you need to incur to sort of commission the screen?

Pramod, would you like to answer? I think Pramod is answering. Pramod, you want to go ahead?

No, no. I think, Gautam, either of you or Nitin as per whatever we have provided for in the books, right, that will be better.

Sure. Let me take it. So Jay, for the 30-odd screens that we are talking about, we need to spend in total including what is currently outstanding for the work already completed about INR 40-odd crores. And for the balance, 28 screens, our CapEx outlay will be in the range of INR 75-odd crores.

Understood. And earlier, pre-COVID, our expectation was adding 90, 100 screens for the next 3 years. Now if we are able to sort of get to a normalized environment in FY'22, will you still be eyeing the 90, 100 screens? Or you will probably be a little bit conservative in FY '22?

No, no, no. We'll absolutely be going forward with that sort of screen count, which would be range bound to the number that you suggested, provided those sort of opportunities exist in the country in terms of the mall developers coming up with such infrastructure. And our belief is that there would be a similar or a higher level of opportunity in the coming years, especially in the coming 3 years because it will also go in the same direction that there would be malls, which have being left unfinished to the extent of 40%, 50% and so on and so forth. So they'll all get into the market and huddle up and basically provide infrastructure for us to put up screens.

So at this juncture, you're not seeing any permanent cancellation of any mall projects given the environment?

No, not so far. We -- in fact, whatever signings we have done, there has not been a case wherein there has been a cancellation or except for suspension, which is temporary in nature, it seems to be in the -- pretty back on track.

[Operator Instructions] The next question is from the line of [ Yong Zhen ] from Tokio Marine.

Congratulations on the results. Can I just ask 2 questions? So based on all these cost reductions that have been mentioned, I think in the presentation, you said that your fixed cost in second quarter has been further reduced to INR 25 crore and from the questions asked before. What's the breakeven seat capacity now based on this sustainable new cost structure? That's my first question. And second question, is there any discussion about monetizing some of your content through the -- through third-party OTT platforms, given just uncertainty of timing as to when the cinemas can restart. And with all the new cases as well, whether that time line is being pushed back? That's the 2 questions I have.

So I'll answer the first question. I didn't get your second question clearly, but I think it was relating to OTT. So I'll request Kamal to answer. See, given the short-term cost reductions that we've kind of currently achieved, our endeavor is to break -- try to achieve a breakeven between 18% to 20% occupancy levels, which was earlier around 23% to 24% occupancy. With the lower cost, we aim to try to break even at these occupancy levels. Your second question on OTT, Kamal, will you take that question?

Yes. Thanks, Nitin. So as far as the exhibition business, which is our main bread and butter business, we license only theatrical rights from the producers and distributors. We are not the right holders as far as OTT or streaming platforms are concerned. But PVR Group also has -- is also a prolific distributor of foreign language and local language films. And there, specifically for foreign language films, we also have streaming rights. We also have television broadcasting right and those we continue to license. So that's business as usual. That's been business as usual even in COVID.

I see. Okay. So for the traditional films, those rights for the cineplex and the rights for OTT are separate. And you're saying that you're unable to monetize those rights through a third-party OTT platform even if you wanted to. In current period when there's basically 0 demand and with COVID cases rising, it's not clear when the cinemas open. Is that the right way to understand this?

I think the right way to look at it that as exhibitor, PVR Cinemas, has only theatrical rights to exploit. OTT or streaming rights are left with the distributor or with the producer. PVR Cinema doesn't have those rights to exploit.

The next question is from the line of Harshit Toshniwal from PremjiInvest.

Am I audible?

Yes, sir, you are.

Sir, 2 questions. One, carrying forward from a previous question on rent, specifically. So we agree that maybe the rent in the coming quarter might also look very similar to what it was this particular quarter. But going forward, how do you see that this rent cost to movie be flat typically at INR 2,500, INR 3,000 per seat average per month. Are we talking to developers about changing this to a purely variable model. If you can throw some light on how that can look. And second is that what have been the interactions with the regulators on the opening date? So obviously, where are we in the conversation cycle? And how are the expectations at this point of time?

Okay. This is Pramod. I'll answer the first question and the second one would be taken up by Kamal. In terms of the rental, you are talking about the future outlook. Yes, we are in touch with our developer partners to come out with a model, which can be more variable than fixed. But our overall objective would be that we should be able to get through that INR 3,000 per seat per month sort of a rental, getting on from our revenues. If you are able to make those sort of revenues, then we should be able to provide INR 3,000, whether it is in the form of a variable or in the form of purchase. But yes, we are gunning towards getting more variable than fixed.

Thanks, Pramod. This is Kamal. On the second question that you asked, we remain in active engagement with various government ministries. And the government has been extremely supportive. We presented all the information that they have seeked from us. We've shared our SOPs. We've spoken in detail about what's happening in the international market. The decision is for the government to take, and I don't think we'll be able to speak on behalf of the government. But all we can say is that we remain quite confident that end of September, when the government announces Unlock 5, we remain extremely hopeful and also confident that cinemas would be included in the announcement. That said, there is no commitment or construction from the government as yet. So we'll have to wait till the announcement at the end of this month.

Okay. Okay. Got it. And one last question, if I can squeeze in. On the EBITDA, so clearly, we had around INR 100 crores, INR 115 crores of EBITDA loss in Q1. Now I understand, you talked about the cost and the revenue buildup. But should we see that this is the peak EBITDA, which we'll try to manage for the next few quarters. Are we targeting it that way also?

No, so if you look at our presentation and the guidance that we've kind of given, our Q2 fixed costs are likely to be lower than the Q1 fixed cost. So EBITDA loss in Q2, since we are shut, is likely to be lower because of incremental cost reduction measures that we've taken, but hopefully, once we open cinema, things will change, and lot will depend on how our occupancies build up and how some of the post opening costs are reflecting and how much time does it take for us to ramp up. So it's difficult to give an answer. I think first 60 days post opening are likely to be the most stickier one because it will take time for occupancies to ramp up. But I think after that, we should quickly hit the breakeven level and then move on to the positive territory.

The next question is from the line of Swagato Ghosh from Franklin Templeton.

Sir, you mentioned about Tenet. So if we look at the data closely for Tenet, the U.S. Labor Day weekend opening has not been very great. So if a similar situation arises for fresh content in our country, and obviously, in that case, the cash burn might actually increase for us. So what is the plan B in such a situation after reopening?

So if I can answer. This is Ajay. As I mentioned earlier in my opening remarks for the question that was asked to me earlier, that India is not a Hollywood-dependent country at all. I mean, Hollywood makes about 100, 120-odd movies in a year. And India, through our system, about anything between 1,000 to 1,200 films go through the system, and 90% of the box-office collection are from Indian films. Secondly, we're all spread out. If you look at the presentation, you'll see that bulk of our screens, around 200 are in the South. We have equivalent amount of screens in the South, West and North and a little bit in the East. So we have a -- very diversified content gets played in our cinemas. So Tenet, also it opened in fits and starts in America, not everything opened straight away. So I don't think it's a right comparison to compare U.S. to India at all. We have a lot of films coming of South India, lot of movies from the Indian film industry -- Hindi film industry, so I'm not worried if Tenet is something that hasn't done well, but -- Kamal will tell you exactly the numbers, but whatever I read, $200 million it has already done over the -- Kamal, what's the collections of Tenet already?

It's crossed $200 million. And I think you've summed it up really well. Tenet has done exceptionally well in the international markets. In most of the markets outside of U.S., the film has exceeded all expectations. Also the director of the film, Christopher Nolan, is known to make films which are not -- which don't open big, but they tend to have very long run at the box-office. It could be one of those in U.S. and frankly, time will tell whether it's one of those or it continues to underperform. But internationally, the film has done exceedingly well.

Yes. And I don't think that weekend probably is a good benchmark because there were so much warnings that came from doctors and virologists in the U.S. to be extra cautious on the weekend. So I think maybe people may have avoided going at that week -- on that particularly weekend, and there's also other issues faced in the U.S. like fires and all the rest of it. But as Kamal said, these movies do have long legs, and they -- it's very early to sort of like give any judgment on the box-office.

No. No, point well taken, but the second weekend of -- numbers are actually down quite sharply for Tenet. But what I meant is what Tenet is for U.S. markets, maybe Sooryavanshi or 83 is to the Indian market. I did not mean specifically Tenet's performance, what I wanted to understand is the expectation that we have that fresh content will bring people to the theaters, like without any second consideration, if that does not happen. So after reopening, if we come across that situation, can we then again stop and then maybe start again after maybe the whole virus thing has subsided? I just want to understand that bit. That what is our plan B on that front if fresh content does not do the trick as we are expecting?

As I said earlier also…

See, we are in a business where we keep getting new content every Friday. And it's happened in the past as well that some big touted films don't do -- open so well at the box-office, but that doesn't sort of change the business model. Consumers come -- and today you also need to understand that we are no longer in just a business of showing movies. We are in a business of out-of-home entertainment. People like to come and spend time at the cinema. Content is, of course, very, very, very important. However, there are many other aspects to now a movie watching experience. So as long as there is content, big or small, this is a part of our business that some movies will do well and some won't. But that doesn't mean that we'll need to take a step back. We only keep moving and wait for another 7 days for the next big film to come. So that's how we've run this business, and we see no change there at all.