PVR INOX Limited (PVRINOX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the update call pertaining to INOX-PVR merger announcement hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjesh Jain from ICICI Securities. Thank you, and over to you, sir.

Thanks, Arvind. Good evening, everyone. Thank you for joining on for INOX Leisure conference call to update announced merger of INOX Leisure Limited and PVR Limited. We have INOX Leisure's Management; Mr. Siddharth Jain, Director; Mr. Alok Tandon, CEO; Mr. Kailash Gupta, CFO, I would like to invite Mr. Siddharth Jain to initiate with his opening remarks, post which we will have a Q&A session. Over to you, Siddharth Jain.

So first of all, thank you, Sanjay, and thank you, ICICI, for organizing the call. Very good afternoon, good evening to everyone, the entire analyst community. Most of you know that I usually don't participate in these calls, but certainly today is an extremely historic day for all of us for the industry, for our company, and I thought it's important that I address all of you and get your questions as well and answer your questions. So I'd just like to begin by saying that we have, as INOX Leisure, we've just completed 20 years of opening our first cinema, which started in Puna back in 2002, and it's been 2 decades, quite a journey. We have 675 screens, almost 8,000 employees. And funny enough, this month of March will most probably be a historic month for us, not only in terms of this deal, but also in terms of footfalls and revenues. I think it's a culmination of many things coming together. It has always been our stated desire to be a leading player in this field and, more importantly, to bring our absolute -- the best quality movie watching experience to our consumers. The difficulty we've faced in the past 2 years of not being able to spend money either in upgrading our existing screens or in continuing our CapEx growth is one of the main reasons that has driven us to this decision. I think it's similar for PVR as well. The combined strength of the balance sheet will enable us to raise money in any form required to continue this growth cycle. As we've seen from the results of the movies in the month of February and March that the consumers are absolutely dying to go back to the theatrical experience. Everybody is tired of sitting at home and excited to go out with their families and friends and enjoy good quality cinema on the big screen. This merger is -- the proposed merger between our 2 companies is -- there's a share exchange ratio of 10 shares of -- for every 10 shares of INOX, we will be given 3 shares of PVR. So all of you have read the press release. I don't want to repeat all the information in it. It's pretty self-explanatory. There are obviously going to be tremendous synergies going forward, not only on revenue, cost, OpEx, CapEx, growth, but above all, I think, is our desire to really double this company from where we are today. India is certainly a very large market for us, but nothing is going to stop us from expanding globally as well. And if we're able to satisfy all our Indian customers, we certainly will consider going international as well. So I mean, it's a pretty simple merger, not very complicated in terms of the share exchange ratio. And maybe I'll just hand it over now back to you guys for Q&A. So Sanjay, over to you.

[Operator Instructions] First question is from the line of Abneesh from Edelweiss.

Congrats to the management on this deal. My first question is, this deal obviously will take 6 to 9 months in terms of approval. And there is a slight concern whether CCI could raise some questions at a later stage. I do understand you don't need to preapply. So till then, in terms of expansion plan, how aggressive will you be in terms of signing new properties? Whatever is in pipeline, in terms of fit-out. I understand those anyway will happen. But in terms of signing new properties, will you remain quite aggressive?

Thank you, Abneesh, for your good wishes. As always, you've been a very keen supporter of the multiplex industry, and we deeply appreciate that. Coming to your question on the CCI, as rightly pointed out by you, that we've been advised by our counsel that it doesn't require a notification to the CCI. But regardless, being publicly-listed companies, we have to comply with all the regulatory matters. So whatever it may be, whether it's NCR, we have to go through the NCLT and all those other procedures, which all of you are aware about. And if CCI has any questions, we'll be more than happy to answer them. When it comes to the expansion that as a publicly-listed company, both of us, we must continue operating exactly the way we would prior to the merger during the interim period, and we will continue to be extremely aggressive in our expansion plans the way we have been in the past. It is our charter. It is our mission to increase our size, and that's where we're going to keep going, Abneesh.

Sure. My second and last question is, obviously, there's a gap when we compare the 2 players in terms of ad revenue per screen, convenience fee, SPH. So once you come together, day after all the approval, how easy will it be to reach those gaps in terms of ad revenue per screen, convenience fee, SPH. Does it happen almost fully covered by bringing entities under same management? Or it depends largely on the location because advertising revenue is based on the demographic, right, the footfalls which happen. So how much of that bridge can happen because of the merged entity?

So certainly, ad revenue is something that can happen the soonest. As you have -- just to be -- sometimes in stock prices, you have rerating of companies at P/E ratios. I feel that the merged entity, not just INOX, the merged entity with potentially 200 million footfalls at some point in time, a merged entity at 200 million, we will have rerating of the ad demand for our entire chain. And I certainly think that's the lowest hanging fruit. And we have -- both our teams combined will be able to successfully do that. When it comes to SPH, as mentioned by you, that's more location-based. I don't think it's to do with chain based. That certainly is location based. And lastly, on convenience fee, once again, that is a little more location based. There is no difference in the per head SPH. It's only on the number of people who book online tickets. So maybe we are both in certain geographies where in Tier 1 cities, more people book online tickets and in Tier 3 cities, less people book online tickets. I hope that answers your question, Abneesh.

Yes, sir. That was very helpful. And I had just 1 last small follow up. So that's more of a personal question and to the promoter family of INOX. So Siddharth, you have been extremely passionate on this business. You were extremely aggressive versus INOX's past in terms of expansion, in terms of scaling up your premium brands, et cetera. So now we see you in the nonexecutive role. So I wanted to understand from INOX promoter family on a day-to-day basis or in terms of strategic inputs, how aggressive or how active will you be and the family will be when the merged entity happen?

So Abneesh, as you are aware, we're even currently in INOX Leisure, I am a Non-Executive Director; and Alok Tandon is the CEO. And he, along with his 8,000 strong workforce has been -- done a stellar job over the past 2 decades in bringing the company where it has. My father and I have always provided strategic advice, guidance at Board level. And sometimes even more minutely on the direction in which the company should go. And as you very rightly pointed out that over the past 5 to 7 years that we have gotten more aggressive and that's been a decision at the board level. The execution has always happened at the management team level. Going forward, even with the merged entity, it will be the same. Ajay and I share an extremely good rapport. We are great friends, and we have a tremendous respect for each other's brands. Now we both, in the past, would compete with each other, try and outdo each other only with 1 end goal of satisfying the customer. And I think that will continue to happen, and he has -- always had many partners in the past. And he's always used a very consultative collaborative approach, and it's going to continue in the same manner, Abneesh.

The next question is from the line of Arun Prasath from Spark Capital.

My question is towards Siddharth. Siddharth, how this merger idea got originated? Did you approach PVR or they approached you? Or is it something which was there in your mind during the last 2 years of the disruption caused during the COVID?

Arun, thank you for your question. This has been -- we have been in the same industry for 15-plus years, and we've been talking on and off. But it actually got precipitated during the COVID period, wherein we were almost on day-to-day matters on industry issues. And [Foreign Language], it would keep coming out when all our cinemas were shut that what is the future of this business going to be? How are we going to survive? What's going to happen? And that's what kind of precipitated it. But then as cinema started opening up and our Q3 was great, our November, December so were theirs. We just thought, okay, we are back to normal, and our balance sheets look good. Cash flows are back again, and we will continue. And from there, the kind of discussion moved into, so what's next? What's the future? These OTT players are really large. They've got a big checkbook. Films are being made with larger and larger budgets now. And we realize that we -- unless we grow and offer a platform so large to the content creator, which kind of attracts them more to theatrical just by sheer scale, that's what's going to drive more content owners to come to the theaters. So we said that in order to do that, we really need to combine our balance sheets, and that's the way this kind of originated, Arun.

Okay. Okay. Clear. So is there anything in the agreement you have with the PVR promoters stating the what it can do and what it cannot do regarding the operations or the company or your strategic positions? You said you will be in a non-executive position. But how would you address if there is something that you are not comfortable with doing? Is there any way for you to control it? Even as -- I understand there are 2 sides of the presentation. But beyond that, how would you do that?

So Arun, we have -- as we are being the single largest shareholders, we do have some rights under our shareholders' agreement, which only are purely at a strategic level. Apart from that, if I were to ever see anything which I felt was out of place, I wouldn't hesitate at all to call the management and give them my suggestions. And at the end of the day, we've entrusted the business on Ajay and his ability to grow this business and run the company, and I have full faith in him. And I'm sure he'll always take constructive criticism, if any, at all.

Okay. Okay. That's clear. Just to continue with the question from the previous participant. It was very clear that both INOX and PVR came out with the COVID disruption, relatively unhit, INOX was more because your balance sheet remained debt free. And INOX had a better experience of operating at cities where probably the bulk of the coming opportunities are also coming. So basically, from the perspective of an outsider, INOX was in the driver's seat. I understand the merger synergies and consolidation parts and all. But again, isn't it giving up the control of the organization you had -- you have been running for last 20 years? Is it worth for the synergies that you are building? Is the synergy so large?

So Arun, the giving up of control is from both sides, right? It's of both companies. And that's the kind of leap of faith, which we are trying to explain to the world at large here that when 2 promoter-driven groups come together, first of all, this hasn't really happened very often. But we are so excited about this simply because we have a shared vision. And our shared vision is to offer the finest moviegoing experience in the world to our Indian audience, which is the largest moviegoing audience in the world. And when you have that simple shared vision, everything else really doesn't matter. We have seen him run his company for the past 2 decades, and he has seen us do it. And we both share a tremendous respect for each other, and we trust each other, and that's the motivational factor behind this.

And you were increasing, you means your family was increasing the stake in the INOX before this, especially after all the demerger process happened with the other rest of the INOX Group. So you would continue to increase the stake in the combined entity also? Would you be interested in that? Or we would have...

Yes, we would be.

The next question is from the line of Harit Kapoor from Investec.

Congratulations. I just had a couple of questions. The first thing was PVR has also looked at other alternative streams in terms of distribution a few years back, their average production. They have a small popcorn investment, et cetera. I just wanted to get your sense on how you see some of these additional alternatives apart from the basic business? And whether you believe that maybe incrementally because your largest focus will probably be fastest screen expansion, whereas some of these other investments could kind of take a little bit of a backseat in the combined entity. Maybe it's a bit too forward, but just wanted your thoughts on that.

Harit, thank you for your question and great question. I think the power of -- the sum of the parts sometimes is greater than one. And especially when their distribution business and popcorn business and whatever else has a larger platform to kind of play with, and we're very excited with those businesses. I think they are extremely accretive to the business, and we look forward to supporting them and expanding it across our network as well jointly. So certainly, the other businesses is a big positive for us, Harit.

And obviously, you did kind of allude to your longer-term commitment saying that you would eventually also look -- you would want to take up the stake. But I just want -- I just had 1 question on you both have run these businesses share of fairly immaculately in terms of the last [ 22 ] years. One or 2 things that you believe that PVR does is really well in terms of best practices or any of that sort or know that you admire from them, which you believe can get further enhanced in the combined business.

So I certainly feel that the F&B offering is great. The look and feel of many of the cinemas, some of the marketing programs that are excellent. And even the way they go ahead and select properties. When they find a good property, the price doesn't matter, they go after it. So I think there are tremendous best practices on both sides that will be shared. And I think we are so complementary in nature because we're in the business and we know each other. That's what makes us even more exciting.

The next question is from the line of Aditya Gupta from Tara Capital Partners.

First, on the shareholding, again, I think you mentioned you would want to increase your stake. Is there an agreement in place between the 2 promoters where if one wants to sell out, the other one gets the right of offer on the block first?

Well, those terms are nothing of that sort, but both promoters are free to increase their stake just as the way you would be allowed in any acquisition.

Okay. Got it. Second, I think you mentioned something on international expansion also. So any more color on that? I mean what kind of milestones to look at?

Right now, our focus first is on -- we have almost 2,000 screens in our pipeline combined which would require -- our stated goal is in the next 7 years, we want to double our sites. It's going to require at least INR 4,000 crores of CapEx over the next 7 years. So we really want to reach out and improve the offering to our Indian consumer first before stepping out with any kind of large CapEx plan.

Got it. And last bit on the synergies that you said would be significant. So how should one think about retaining those synergies in the P&L versus investing them for growth, maybe smaller towns, increasing affordability, adding more premium, keep affordable price? So what is the view on retention of margins?

Synergy and CapEx, I would say, are 2 different things. CapEx has its own identity. Synergy would lead to potentially more affordable -- we would -- we want to attract the consumer and make it as affordable as possible, Aditya. That is absolutely our stated goal, and we will do everything in our power to achieve that.

So it's growth over margin spend, right?

Absolutely. We don't want to be seen as somebody -- there's no profit hearing happening here. We want to expand the pie. That's the aim.

No, I mean profit earnings -- but there will be some automatic synergies that will happen in the -- because of the size of the new entity that goes through. And that you are willing to invest to grow the business faster and take it deeper versus...

Yes, yes, absolutely.

The next question is from the line of Naval Seth from Emkay Global.

I have 2 questions. First is on food menu. So just wanted a clarification that is food menu similar in terms of non-veg, veg, or both the entities serve that? I mean, PVR and INOX? If not, then will that be the case for the merge co as well?

So Naval, currently, what we've decided is both entities will continue to operate just -- I'm sorry, both -- wherever there is the INOX brand, wherever there's a PVR brand, initially, we'll continue to operate exactly in the same manner. The new screens will all be merged and they'll be branded together and the food and beverage service will be as the managing director decides, whatever it may be, absolutely fine. If you look at the margins of INOX product -- I'm sorry, of INOX Leisure, the margins that we have, EBITDA margins, even by serving vegetarian food, a very healthy indeed. So I don't think really a choice of veg or non-veg has a huge impact at all on either profitability or in spend per diet. Because in Tier 1, Tier 2, Tier 3 towns, wherever we are knock-for-knock in comparison, depending on the spending propensity of the customer, they actually spend the same amount of money in either cinema.

Understood. Understood. And second question is on CCI. Although you -- as a merge co, you need not require to go to CCI because of the clause what they have, which is less than INR 1,000 crores revenues. But is that clause basically -- or does that clause has a provision that it is applicable for normal circumstances and not on the foreclosure kind of a impact on the business also, something of that sort?

Naval, not that I'm aware of. The lawyers haven't told me anything of that sort. I haven't read it line by line. But no, if it was, they would have told me. I don't think it's there.

The next question is from the line of Aasim Bharde from DAM Capital Advisors.

So firstly, are there screens in your pipeline currently which may overlap those of a PVR's pipeline? And would you reconsider the ones where CapEx has not started in that case?

So Aasim, whenever we would sign up a new pipeline, and I'm sure it would be on their side as well is very rare that I would sign up something new if I was across the road from a PVR and vice versa. So I mean it just so happens that, I mean, sure, out of the 2,000 screens, maybe there are 50 screens that may be competing with each other. But a majority of them would not compete with each other. Even more owners won't put it up across the road from each other because they know there's really no point doing that. And the -- we haven't looked at it that deeply yet to see whether there are any places which we may not go ahead. But we haven't dug that deep into it.

Okay, sure, sure. And on the 2,000-odd screen pipeline or rather the 200-odd screen additions that are planned for next year for the combined entity, would this be increasingly on an asset-light model? Or would this still be your own CapEx and asset-light model expansion might be over and above it?

No, this would be on our own balance sheet. The INR 2.5 crores is screen kind of CapEx.

Okay, okay. And just 1 question on the shareholding at the promoter level. So GSL would become a shareholder of the combined entity. Any plans of restructuring this and moving it away from GSL?

No, not yet.

The next question is from the line of Hansal Thacker from Lalkar Securities.

Congratulations on a historical event. It's truly heartening to know that we are on a firm footing again with some solid box office collections after a rather unfortunate period. But sir, I was just surprised to notice that like the previous participant was saying that GFL was excluded from the current scheme of arrangement. So should we continue to expect a merger of GFL with the operating underlying? Or I mean, you had indicated that in the September 2020 con call.

No. GFL is a completely separate entity and it's not part of this merger at all. And it -- GFL is going to be the single largest shareholder of this entity. There is no plan to merge it into this at this stage.

Because, I mean, if that would happen, then eventually, at some point, it will become extremely tax inefficient, right?

Yes. Although this call is for the shareholders of INOX Leisure.

No, no, I understand. But I mean, given that it's such a large event, I mean, all stakeholders would kind of be equally curious to know, I would think.

But I don't see anybody asking this from a GFL perspective, because I don't think this is a GFL investor call.

Fair enough. I mean, at some point, I hope the management gives some clarity on this, sir.

The next question is from the line of Jayesh Gandhi from Harshad H.Gandhi Securities. The line for the current participant has got disconnected. We will move on to the next question from the line of Nikhil from Galaxy International. The current participant has left the question queue. We'll take the next question from the line of Sanjesh Jain from ICICI Securities.

A few from my side. First, we have already tied up for 2,000 screen, both PVR plus INOX plus we have an ambition to go deeper into the smaller cities. First, I wanted to understand, does this 2,000 screen which we have signed up amply cover the ambition of going deeper into the regional market? Or we are talking of incremental more sign-up happening over a period of time beyond this 2,000 screen, which will be more focused on Tier 3 and Tier 4 kind of cities? That's number one. Number two, in terms of economic model, are we seeing a different model both entities put together, which is more suited for the smaller and regional market? Or the portfolio which the combined entity have enough space to accommodate or has enough economical model to sustain even in the smaller cities?

So I'll actually combine both those questions, Sanjesh, it's kind of connected to each other. Every market needs to be segmented. You always have different pain propensity of people. It's like when you fly Bombay-Delhi, the people who can pay INR 1,000 a ticket or they can pay INR 1 lakh a ticket or INR 10 lakh a ticket, but the end goal is to get from Bombay to Delhi. Very similarly, we might show the same movie but the audience that is watching it is extremely diverse, and they could be anywhere from INR 50 a ticket to INR 5,000 a ticket. Now it is our job to provide the INR 50 a ticket person a great environment to watch the same content in. And similarly, the INR 5,000 a ticket person something commensurate to what they're willing to pay. And when it comes to your question on net Tier 2, 3, 4, 5, just the way we will execute the 2,000 screens that we have, we will continue to add more screens as well, and it will be diverse. It will be across tiers because our aim is to expand, take some movies to all Indians. It's not that we want to take the movie only to certain Indians. We want to take it everywhere, wherever we have potential and there is a market. Similarly, on the economics of the model that you asked about, the economics of the model are driven by the amount we invest in these properties to show that same content. And as we have very successfully shown, we are already present in multi-tier cities, and we are very profitable across them. Pre-pandemic, we were doing almost 19%, 20% EBITDA margins ROC north of that. It just goes to show that regardless of which tier we are in, if management is right and they know how to run the business, and you manage your cost structure correctly, you can achieve profitable business regardless of the tier in which you are.

Fair enough, sir. Just 1 follow up. In this 2,000 screen, are we having a significant presence in the smaller cities and regions? And if you can just share, we are combined have presence in close to 110 cities. Where will we be, say, 3 years down the line or 4 years down the line in terms of city penetration?

Sorry, I don't have the details of their sign-ups and which cities they are in. This is just a number that we are aware of, but I don't have those details. So I can't comment on that, but it's very, very -- it's distributed. Even the 1,000 that we've signed up, it's evenly distributed across the country -- I'm sorry, across tiers. And going forward, we -- currently, we are 109 unique cities combined. I wouldn't be surprised if in the next 3 to 4 years, we may be 120, 130 unique cities, an additional 20 or 30 unique cities.

Fair enough, sir. Just on the second question, a follow up. We did mention that both the promoter have the right to buy more stake from the open market. Any threshold level between the 2 that we have or it is open or it's a free end that anybody can...

No. Not, Sanjesh.

And any change in the Board seat based on the shareholding pattern? Is that also a part of clause?

I'm not aware of the details. The shareholders' agreement is yet to be done.

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

Sir, I just need 1 small clarification. Does the current swap ratio take into account the real estate which we have on our balance sheet? And just in case, if you plan to liquidate it going ahead, will we have a say on that? Or will the combined entity's Board decide something on that matter?

So Jinesh, certainly, the real estate has been taken account into the swap ratio. And in the future, if the merged entity decides to liquidate it for any reason, it will certainly require Board approval.

Sure. And secondly, can you just talk about what kind of middle level organizational changes will we see in the combined entity? Will we -- I mean, the current CEO, CFO, how will they be absorbed in the new entity? What will be the -- define the rules for them. And are we going to see any kind of retrenchment given a lot of duplication of work will be there and some rural reversals can happen. So your thoughts on that?

So first of all, we haven't had time to discuss that in detail, but one thing is for sure, all the employees of both companies will have some role or the other in the merged entity. This is before we -- the merger is complete. We will have alignment on the future management team of the merged entity. And 1 thing people must realize that the scale of this business is so large and the growth potential in new verticals are so large that we're going to have new roles being created as well from the existing set of people.

Sure. One last question from my side. I know that we have not quantified any synergy benefits in terms of numbers. But would just like to know your thoughts, especially on the film higher distribution cost side, given the fact that the combined entity will have about 1,500-odd screens. So do you think that structurally we'll be able to bargain for an improved share going ahead? And that is how it can actually play out? Or I mean your thoughts on that.

So I think we must realize that without the films, there's no cinema. And we've all lived a very good symbiotic life for the past 15 years. And I see no reason to change that going forward. Thank you.

[Operator Instructions] The next question is from the line of Aasim Bharde from DAM Capital Advisers.

Just 1 question. I think you mentioned this earlier, but of the 2,000-odd screen pipeline, how is the spread out in terms of number of cities? And if possible, if number of properties can be shared, that would be helpful.

I'm sorry. Aasim, I don't have that data on me. And I certainly don't have PVR's data. And my data too is not handy with me, something we can share with you later, Aasim.

Ladies and gentlemen, that was the last question for today. On behalf of ICICI Securities Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.

Thank you.