PVR INOX Limited (PVRINOX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Earnings Conference Call of PVR Limited, 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.

Yes. Hi. Thanks, Srisuja. Good morning, friends, and welcome to PVR Limited's Q2 and H1 FY '21 Earnings Call. From the management side, we have with us Mr. Ajay Bijli, Promoter, Founder, Chairman and MD; 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; and Mr. Nitin Sood, CFO, PVR Limited. I'll hand it over to Mr. Ajay for his initial remarks, and then we can open the floor for Q&A session. Ajay, over to you, please.

Thank you very much. Good morning, everyone. I would like to welcome you all to the earnings call to discuss the results of Q2 financial year 2020/'21. As you are aware, the cinema industry continued to remain shut throughout Q2 FY '21, and our results reflect the same. PVR had almost 0 revenues during the quarter from the core movie exhibition business with almost 100% revenue decline. The company reported losses in Q2, driven by the continuing fixed costs. Consolidated revenues for quarter ended September 30, 2020, were INR 111 crores as compared to INR 979 crores during the corresponding period of last year. Consolidated EBITDA loss for the quarter was INR 14 crores as against a positive EBITDA of INR 324 crores in the same period last year. Consolidated loss after tax for the quarter was INR 184 crores as compared to the profit of INR 48 crores during the corresponding period last year. After adjusting for impact of Ind AS 116, leases, revenue, EBITDA and PAT of the company would have been INR 44 crores and minus INR 81 crores and INR 116 crores, respectively. The company continued with its strategy of aggressively controlling costs as well as augment liquidity. With these efforts, PVR was able to reduce its fixed costs by over 70% in Q2 as compared to Q2 FY '20, excluding rent and CAM. Monthly fixed costs excluding rent and CAM dropped to INR 24 crores in the quarter as against INR 86 crores in Q2 F '20 -- FY '20. PVR is in active engagement with all our developers and partners for discussions on rent and CAM, and so far, settlements have been reached for almost 60% of cinemas offering complete rent waver for lockdown period and significant discounts on rent post reopening. Discussions with balance developers are in progress and is expected to close once cinemas are allowed to reopen in the states -- in those states. PVR has shored up its liquidity using a judicious mix of debt and equity. As on October 31, the company has over INR 550 crores of liquidity available, which is sufficient to sustain its operations and meet all our obligations. Ministry of Home Affairs has, in its Unlock 5.0 guidelines, allowed cinemas to reopen from October 15th onwards with 50% capacity. So far, 16 states and UTs, where PVR has presence, have permitted cinemas to restart operations. Out of a total of 831 screens of the company, 575-plus have received permission to reopen. We are eagerly awaiting now for the reopening of other states, specifically, Maharashtra and Telangana, so that business can gradually get back to normal. We are taking all possible precautions so that both our customers and employees feel safe while visiting their favorite PVR cinema. PVR is welcoming back its patrons with several celebrity promotions and offers, opportunity for private screenings, film festivals and a fresh new menu to make movie watching experience totally delightful. Many of our patrons have responded positively, and we're fully prepared to give them the same immersive movie-viewing experience the way we had done before. We are hopeful that once the new content is released, the business will gradually recover. We are thankful to all our stakeholders, including developers, producers, investors, bankers and, most importantly, employees, who have stood with us during these unprecedented times. Thank you very much, and I'd now leave the floor for any Q&A.

[Operator Instructions] The first question is from the line of Abhishek Bhandari from Macquarie.

I just had one question. On Slide #13, where you've spoken about rent waivers for the lockdown period and significant reduction going after that, so could you just give us some ballpark number what kind of rent reduction you expect over the next few months and new years? And is the reduction only applicable for FY '21 or beyond?

Yes. So I'll answer that question. See, currently, all our rent negotiations are focusing on the current financial year until the time we expect the business to bounce back. We are not doing any long-term rent negotiations currently. We are only focusing on the current financial year. As we said, in 60% of our cinemas, where we've got permissions to open, most of the cinemas we reached settlements. We've got a complete waiver of rent during the lockdown period and rental reductions. Rental reductions are in different forms, so it's difficult to quantify a number. In a lot of our cinemas, we've got a pure revenue share until the end of this financial year. In some cases, we've got discounts on the minimum guaranteed rental. So what that blended discount number will look like is difficult to predict, but our estimate is it will be in excess of 50% discount over the [indiscernible] rentals. It will be slightly higher than that in this quarter. It could be slightly lower in the last quarter. But I think we'll be in a better position to answer that question specifically once all our negotiations close for rest of the properties.

The next question is from the line of Abneesh Roy from Edelweiss.

So my first question is on Sri Lanka and West Bengal. So we have seen good data in the festive period in Bengal and Assam. So if you could tell us in these markets, in Bengal, Assam and Sri Lanka, after the initial very good data point or in the festive season good data point, how have things panned out? And did you give the 25% off on F&B even in the festive season in Bengal and Assam?

Yes, we did. There were many prize and F&B promotions those were run. For all the old content, we played films between the price tag of about INR 75 to INR 125, but largely in most of the cinemas, under INR 100. And the new content played on the pre-COVID levels in terms of ATP, but SPH was discounted so that we wanted people to come and experience the new order of planning that we had done in the F&B counter.

Kamal, would you like to comment on the specific occupancy?

Yes. Bengal turned out to be a good lab test. Not so much holds true for Assam because Bengali films are moderate in Assam, not a very big ticket in terms of content in Assam. But [indiscernible] Can I continue?

Yes. I think you were interrupted. You're back now.

Okay. So Bengal turned out to be a good lab test. We had about 6 new films, which released around Durga Puja. Two of these films -- most of them were small, but 2 of these films were, I would say, slightly towards the midsize range, and they did quite well. Throughout those 5 or 6 days when the Durga Puja is at its peak, people tend to go out, very similar to the behavior that we tend to see after Diwali for North and West of India and also the rest of India. Those 5 or 6 days were very aggressive in terms of capacity utilization. Most of the shows ran with almost 100%, close to 100% occupancy. And when I say 100% occupancy, I mean, within the 50% capacity that we are permitted to sell. Within that, we were able to clock 100% occupancy. I must also add that these films, as I mentioned before, were mid-sized finds. So none of the regular big-ticket films that we are used to releasing around Durga Puja in Bengali language were not there. Those have been postponed to December or to January. But this lab test turned out to be a big success, and we are expecting some more new Bengali films to release in November, later in December. But clearly, the signals that we've got from the audiences are extremely positive. Lanka at this -- Sri Lanka, at this point in time, is again shut. There is a government directive which came out about 2 weeks back, which suggested that cinemas and malls should remain shut. So at this point, Colombo is not operational.

So 2 follow-ups here. One, you mentioned big-budget Bengali movies will come in December, Jan; and you also mentioned mostly it was going till 50% sell-out capacity. So my question is, are the big budget essentially waiting for that 50% relaxation to be done? And any sense you're getting on when 50% relaxation will be removed in states where already a few weeks opening has happened? So could there be a precursor from, say, other forms of retail where you can pick up, so there -- if the relaxation has happened, maybe multiplex can also get that relaxation, say, after 1 month?

We are extremely keen to pursue this matter and get this relaxation as early as possible. We are constantly in touch with various government officials. But at this point, I think I'll just pause and say that we are making our best efforts, but we'll have to wait and see in terms of time line. We don't see it happening this quarter, and we are hoping that in the fourth quarter, some of the relaxation will come about. You -- the other question that you had with respect to big films waiting for relaxation to go away, no, that's not the sense that we are getting. I think most producers, including South Indian producers, are fairly comfortable with the 50% capacity because we also have to keep in mind that cinemas don't have any backlog content. So in terms of capacity, in terms of shows, screens that we allocate to brand-new films is much more than what we are used to normally. So answer to your question is that most producers are comfortable with the 50% capacity.

Right. My second question is on the employee front. Almost 45% cut in number of employees. So are you now -- when sales are opening, are you now shifting to variable employee base? So is that a way forward and there could be cost savings even when screens open? And could you discuss some more costs which have come in the non-Bengal market? How you have managed to cut costs there because screens are with 50% occupancy. So how you're managing costs in those states?

So you're right, we've cut down on manpower drastically in the sense, if you include housekeeping and security, we were close to about 14,000 employees. And currently, we've opened with about 6,500, 6,600 employees. We hope to maintain this level going forward. However, with new cinemas and territories opening, this number will change. But largely from the pre-COVID levels, we will operate the cinema at about 60% employee base. Most of our employees were anyway on [ off-roll ] of variable costs. And so very clearly, till the time business does not return to the pre-COVID levels, we are not ramping up our people's costs.

Right. And last question, on private screenings, anything to share? Any good data points? Second, Delhi, again, COVID cases have hit all-time high. So consumer behavior in Delhi, how is it? I understand it was anyway 2%, 3% because no new movies. But are you worried that again COVID cases are coming back in terms of wave 2 in some of the cities?

Yes, in a way, but the fact is when you go out and look at what's happening to malls, restaurants and hotels, we are keenly looking at that data and the consumer response there. We believe that consumer is taking enough and more caution. And at least when he enters any such spaces, he knows exactly the protocol that needs to be followed. We believe once the content comes in, like the malls, we will also get enough and more support, and that is something -- this is a new normal. This SOP has kind of driven in, consumers are very clear on what they need to do if they are stepping out of homes. And the malls over the weekend and some other days are fully packed. So the fact is we believe once we get the content, we'll be able to push the consumers to our floors as well.

And private screening?

Private screening, we are close to about 340-odd private screenings pan-India in the circuit. And we believe this is a great idea that came out of this pandemic. And we don't only intend to push it currently. It would be a product now on our charts going forward. And what this has also done is, it takes the focus away from the content, it gets rarely into an area of PVR's exclusive experience, and this is what the consumers have come back and relate to us that it's so wonderful to come and get my friends and family with a small group of 12 to 15 people and get an exclusive screening. So people are also doing screenings of other content other than movies like their wedding tapes and anniversaries, and birthdays are being kind of celebrated. So I believe we've created yet another product, which is here to stay for a long time.

But your screens are much bigger, right? So you charge per-screen basis? There, per-seat basis doesn't make sense.

We are charging per screen, but we are giving an exclusive [indiscernible] even at about a 30% occupancy as against 50% as allowed by the government.

[Operator Instructions] The next question is from the line of Kinjal Desai from Nippon India Mutual Fund.

I wanted to understand now with the new content coming through, if there are any changes in negotiations with producers, both with respect to their share as well as the windowing that we have.

Kamal, can you handle this?

Sure. These are sensitive discussions. We would not like to delve into details, but what I can share with you is that because there is a capacity gap, there could be some minor changes here or there until the capacity cap is there at the cinemas. But on a long-term basis, we don't see any meaningful change with respect to the established norms, commercial terms, windows and the other practices that we have between producers and the exhibitors.

This would include even the window that we have before it goes on to first satellite or OTT?

We don't expect any meaningful change in that. Window is a sacrosanct long-term business model, which has benefited both producers and exhibitors alike. We see absolutely no reason why windows should change. And -- so that's what we have to say.

Sure. And sir, slightly on a long-term basis [indiscernible] that we do have some [indiscernible] content, which is there right now with us probably for the [indiscernible]. So from a longer-term basis, if I was to ask you on an 18-month basis per se, do you see that there can be a challenge in terms of the content, which is getting -- which might still have to start or something in terms of liquidity for the producers. They might not [ want to invest ] much, probably looking to more OTT kind of content rather than going for a very large big theatrical content? So just your thoughts on how do you expect to see beyond the current content [indiscernible].

This is still a very good question, but the way things are shaping up, in fact, during the pandemic, the number of projects, which have been put together, film projects in terms of scripts, which have been okayed by the actors, production plans, which have been put in place by the producers, are very, very strong in terms of numbers. Actors seem to be extremely interested in going out and shooting multiple films. Actors who typically shot 1 or 2 films in 12 to 18 months want to do 3 or 4 films now. So I think this pandemic has given an opportunity to the creative talent to pause, look at the material which is available and really work on creating material in a very in-depth manner and which will probably expedite a lot of shoots once producers have an opportunity to freely go out and start shooting. But in any case, a lot of producers have started shooting. We've been in touch with producers. We've been speaking to a lot of people about the new protocols which have come into practice as a result of COVID. And people -- producers seem to have got their act together. They seemed to have made peace with the new protocols. There are films which are being shot overseas, and there are also films which are being shot in India. So in terms of number of films getting impacted, we don't see that to be a big impact. In terms of cash flow, frankly, at this point, producers have more opportunities to slice and dice their content. So their cash flow, if anything, has, in fact, improved because the streaming platforms have come up and bid very aggressively for content. And as a result of that -- so cash flow is not -- it doesn't seem cash flow would be a big problem, but we'll have to wait and see for a couple of 4 months. We don't see any impact -- the way we're looking at the situation, we don't see any impact of liquidity on -- in terms of scale of films or in terms of quantity of films.

Sure. Just one last -- your thoughts on the way OTTs have been acquiring content. So before, we were hearing that when the pandemic started, there was a lot of aggression and now that seems to have slowed down. They've become a little more choosy about where they are investing. So do you see that there can be some kind of reset in going back to the old way of buying of content for them? Just your thoughts on how you are seeing their content acquisition strategy kind of panning out?

Absolutely. I mean we see a reset in that because the -- we've always maintained that this strategy of taking films directly to a streaming platform is not a sustainable strategy, not sustainable for the streaming platform and not even sustainable for the producers. And there has been a recent structural change in a large media company. They have decided to deprioritize acquisition of expensive films for their streaming platform. And clearly, the cracks in that strategy are visible. Clearly, producers -- streaming platforms are questioning the entire viability of releasing an expensive film directly on streaming platform, and producers are questioning the fact that if this is the best way to monetize their content -- a content -- a film on which they have spent 18, 24 months of their life, if this is the best way to monetize. A lot of producers are questioning that. We don't see this direct-to-streaming platform release to sustain, I would say, beyond next 3 to 6 months. Definitely, by the next financial year, there would be a big reset and we would go back to releasing films theatrically and then taking it out on the other platforms. What we do certainly see is that a lot of streaming platforms will continue to produce original content, which is essentially films which will be commissioned by the streaming platforms and which would be initiated by producers, which would be commissioned and funded by the streaming platforms and which will release directly on streaming platforms. So we see a lot of those, but we don't see them coming at the cost of theatrical releases. We see producers expanding their portfolio of producing more films to accommodate this new demand, but we don't see these originals being produced at the cost of theatrical releases.

The next question is from the line of Jinesh Joshi from Prabhudas Lilladher.

Sir, if you can just highlight what is the time line with respect to reopening in Maharashtra, that would be really helpful. And secondly, also, is there any fresh content that is lined up during Diwali time? If you can share a few names on that front.

Maharashtra -- this is the feedback that we've got from the government, while there is no official order that's come out of the government, but we are fairly confident that Maharashtra would be permitted to reopen in November and most likely before Diwali. So that's first part of your question. The second part in terms of films, which are slated for Diwali release, there is one film which has been announced, which is Suraj Pe Mangal Bhari. This is a Hindi film, which is with a very famous popular Punjabi actor, Daljit (sic) [ Diljit ], and there is also Manoj Bajpayee. This is a film which has been announced for Diwali, but we have to see when Maharashtra's permission comes out to reopen cinemas and how ready we are in terms of cinema openings. But at this point, the way things stand, this is a film which is coming on Diwali.

Okay. And sir, secondly, I know that it is slightly early to kind of gauge any kind of trend in this case considering that cinemas have opened on October 15th. But say, for example, 10 people are stepping into our cinemas, how many are actually buying our F&B products? And how does this figure compared to the pre-COVID level? Any ballpark number you would like to share?

Yes. So it's very early days right now, I think, and we are running a lot of discounts and promotions right now, but we are not seeing any significant impact on our F&B spend. In fact, our F&B spend based on very small numbers that we are doing right now is almost 75% of what our pre-COVID level was. And that's largely due to huge discounting and promotions that we are running, but our general feedback is that we are not seeing any reluctance on part of the consumers to hit the candy bar as [ site ] rates have not fallen. And clearly, I think that doesn't seem to be a big concern area right now.

Okay. Sir, one last question. Any specific reason for not renewing the leases on 14 screens that expired during the quarter?

Yes. Most of these leases had come to the expiry of the terms, and they had -- most of these properties had virtually come to the end-of-life cycle for those properties, and we have better locations in the vicinity. So clearly, we did not want to renew these leases because they have -- some of these properties had kind of run their course and were very marginal profits or loss-making. That was the prime reason.

Okay. So basically, this is a one-off case, and this should not be expected in the coming quarters, right?

No. I think at the end of every life cycle of every property, we renew whether it -- we take a view whether it is worth renewing or not. Sometimes better malls and better shopping centers have already opened in the vicinity, and we don't see any long-term viability of those properties, and we proactively take a call and shut down those locations because they are anyway not contributing to the profitability in a significant manner.

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

Two questions, sir. One is, clearly, I think we'll start opening from Q3. And maybe in Q4 if we take a 10% to 15% kind of an occupancy level, just wanted to understand that what is your estimate of cash burn which we might see in the H2 and our liquidity position versus that. And sir, second question is more from a longer-term outlook that I think there was a pipeline in FY '21 for screen additions. Possibly, it will happen in early FY '22. But post FY '21, how do you see the average screen increase run rate? And also -- so if malls -- the outlook on malls is not very bright maybe in the next 3 to 4 years, then in that context how important will it be to look at the screens of competition if they are out for sale?

Yes. So I'll answer your first question first, which is really to say how do we expect cash burn over the next 6 months. As we reopen screens, clearly, the amount of expenses will go up, whether it is employee costs, whether it is some of the temporary salary cuts we have taken for people as we were shut or whether it is some bit of rental expense. But we will try and keep our expenses in check as much as possible during the next 6 months. I think cash burn is a function of how soon the occupancy will bounce back. So it's difficult to put an exact number to say how much will the cash burn be. I think that's a difficult number to quantify. We expect Q3 cash burn to go up. We are hoping that given that we are operating at a much lower fixed costs, if more films and content is announced, the focus in Q4 will be to get down to breakeven and reduce the cash burn. So we'll have to see how that plays out. On your second question of growth, et cetera, next year, I think at this point of time, we are, I think, taking the position quarter-on-quarter. Our focus is to complete the properties, which were either fitted out 70%, 80% or they had shut down temporary for renovation, get them up and running. Clearly, we see the industry consolidating even further. Smaller operators will find it even tougher to survive. There will be more opportunities in terms of shopping malls that had got built up and suddenly want to work with larger operators. But I think we will start making capital commitments around that only once we have clarity on the business front, once business bounces back. Needless to say, the pipeline is very, very large that we have signed. And we expect, I think, that pipeline will grow even bigger given the fact that the real estate developers would want to work now increasingly with the large-scale operator. But I think we'll be in a better position to answer this question probably towards end of Q4.

Got it. And maybe just one question. So on the liquidity part, we have INR 350 crores, INR 370 crores in cash right now. How do you see this liquidity standing in the next 5 to 6 months or in the medium term?

Yes. So we have additional credit lines, and as on date, we've shored up our liquidity to about INR 550 crores. Our net debt position remains the same, about INR 1,000 crores of net debt, and our liquidity position now is about INR 550 crores. We have availed additional credit lines.

So this additional credit line is in -- is post 2Q? You're saying...

It is post the end of the quarter, post the end of the quarter.

The next question is from the line of Sarvesh Gupta from Maximal Capital.

Sir, first question is on the rent and CAM side. You mentioned that you have had negotiations with most of them. Is there any more color that you can do on the expected rent in, let's say, quarter 4? What is the expectation post all these negotiations? Will we be on 100% revenue share? And what would be the sort of weighted average number on revenues that you may get to?

No, it's very difficult to put an exact number. As I said, of the deals that we managed to negotiate, a large part of those deals are on revenue share. And similarly, a large part of those deals are discount to rent. So it's difficult to quantify what the exact percentage would be. But I think between now to March, we expect more than 50% discount on the lease rentals. What exactly that number will play out to be, weather it will turn out to be a 60% or a 50% or a 45% is slightly difficult to comprehend or put exact number to, given large part of those deals are on revenue share, and we still have some negotiations which are pending closure. But we expect overall discount from opening until March to be in excess of 50%.

Okay. And for the month of October, so do you have a like-to-like comparison of occupancy compared to, let's say, last October? So I'm talking about the cinemas which...

No, I think, as I said, since the time these opened, it's very, very insignificant occupancies. Our occupancies are in the range of about 4% to 5%, mid-single digits. So the comparison is not relevant because most of our screens are not even fully operational, and we have no content. I think that comparison will only become relevant when everything is open and we have new content to start showing on the screens.

No, no, for the screens which were opened in October, only for those screens, if we have to look at occupancy compared to...

Insignificant numbers. I would say they will be down by about 90%, 95%.

So to be seen in isolation without new content doesn't make sense at all. So that's the issue.

The next question is from the line of Vipul Garg from Kotak.

Hello? Am I audible?

Yes, sir, you are.

Yes. Sir, a couple of questions. First of all, with the opening of cinema halls, what is the employee count increase which we are seeing and the jump in employee expense, say, in the last 14 days? Then secondly, as per the H1 results, there seems to be some CapEx about INR 50-odd crores done in H1. So what exactly it is? And along with the CapEx, what we see is that number of screens have simultaneously fallen from 845 to 831 in this Q2. So if you throw some light on that. And was any rentals paid for these screens shut?

So let me comment on question number two and three first. The CapEx really represents our for capital creditors for CapEx on screens done last year or some of the screens which are in advanced stage of renovation/fit out. So it really represents that. On your third question, which was around shutdown of screens I commented earlier, we've shut down 3 properties with 14 screens, where leases had come to the end of their life cycle. We saw no merit in renewing these leases because these properties had run their life cycle and either had a negative EBITDA or very marginal EBITDA. We didn't see any long-term viability in continuing with these properties. Your first question -- coming back to your first question on employee costs, we've started the operations with about 6,500 people, as we said, which is what the headcount was on September 30th. We don't intend to ramp up this headcount till the time we see occupancies really coming back.