PVR INOX Limited (PVRINOX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the PVR INOX Limited Q4 FY '23 Results 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. Thank you, and over to you, sir.

Thank you, Aman, and good afternoon, friends. Welcome to PVR INOX Limited Q4 and FY '23 Post-Results Earnings Conference call. The call, as usual, will be initiated with a brief management discussion on the earnings performance, followed by an interactive Q&A session. Management team will be represented by Mr. Ajay Bijli, Managing Director, PVR INOX Limited; Mr. Nitin Sood, Group CFO, PVR INOX Limited; Mr. Alok Tandon, Co-CEO, Central West and East; and Mr. Gautam Dutta, Co-CEO, North and South, apart from the other senior management team. I'll hand it over to Mr. Bijli for his initial comments, post which we'll open the forum for Q&A. Over to you, sir.

Thanks a lot. Good afternoon, everyone. I'd like to welcome you all to the first earnings call of PVR INOX to discuss the original results for the quarter and 12 months ended March 31, 2023. As the appointed date for PVR INOX merger was 1st January 2023, Q4 FY '23 results for the company are reported on a merged basis of PVR and INOX and not comparable with Q4 of FY '22 reported results. Similarly, FY '23 full year reported results are based on 9 months numbers of PVR and fourth quarter numbers of PVR and INOX combined. Therefore, FY '23 reported results are also not comparable with FY '22 reported results. I hope you've had the opportunity to review our presentation and results which was uploaded last evening on our company's website as well as the stock exchange's website. The following numbers are after adjusting for the impact of IndAS 116 relating to lease accounting. For the quarter ended March 31, 2023, total revenue was INR 1,165 crores, EBITDA was INR 27 crores and PAT loss was INR 286 crores. This is after onetime exceptional write-offs of some cinema assets to the tune of INR 21 crores and merger-related expenses of INR 5.5 crores in total amounting to INR 26 crores. In addition to the above, company has taken a onetime accounting write-off on account of restatement of deferred tax assets amounting to INR 134 crores on account of transition to the new tax regime effective FY '23. For the 12-month period ended March 31, 2023, total revenue was INR 3,819 crores. EBITDA was INR 389 crores and PAT loss was INR 243 crores. However, if you want to look at pro forma financials of both PVR and Inox for full 12 months for the period of 1st April '22 to 31st March '23, then combined revenues for the year were INR 5,311 crores, and EBITDA was INR 609 crores. PVR INOX welcomed 30.5 million guests across the cinemas in Q4 FY '23 and 140 million guests during the full financial year 2022 and 2023. Although Q4 started off on a high note with a blockbuster success of Pathaan in January and the sustained strong performance of Avatar: Way of Water, which was released in December '22. But Feb '23 and March '23 admissions were dismal due to lackluster performance from other Hindi films. While movies like Tu Jhoothi Main Makkaar and Bholaa from Bollywood garnered average box office collections, Selfie and Shehzada failed to make any impact. From Hollywood, John Wick: Chapter 4, Ant-Man and the Wasp: Quantumania, Shazam 2 and Creed III delivered decent performances at the box office. Regional films, however, continued their strong performance with movies like Varisu in Tamil, Waltair Veerayya and Thunivu in Telugu and Ved in Marathi, all registering impressive box office collections. FY '23 has been a period of strong recovery for us despite the marked underperformance and volatility of Hindi movies and significantly low releases from Hollywood last year. Revenue from exhibition business witnessed strong growth driven by exceptional performance of regional cinema, an increase in ticket prices and a substantial increase in consumption, spending of F&B by our patrons. While there has been a decent amount of volatility at box office over the last few months, we are quite positive, and this will settle down over the next 2, 3 quarters. As we look ahead to FY '24, we're optimistic about the robust content lineup across all languages. Over the next few months, we have several big Bollywood movies lined up for release like Maidaan, Adipurush, and Satyaprem Ki Katha in June; Rocky Aur Rani Ki Prem Kahani starring Ranveer Singh and Alia Bhatt in July; Dream Girl 2 starring Ayushmann Khurrana and Animal starring Ranbir Kapoor in August; Jawan starring Shah Rukh Khan and Yodha starring Sidharth Malhotra in September; Tiger 3 starring Salman Khan in November, etc. From Hollywood, we have Fast X in May; Transformers: Rise of the Beasts, The Flash and Indiana Jones and the Dial of Destiny in June; Mission: Impossible - Dead Reckoning Part One and Oppenheimer in July amongst others. From the regional genre, we have Carry On Jatta in June, Maaveeran in July, Jailer starring Rajinikanth and Bhola Shankar starring Chiranjeevi in August. Viduthalai Part 2 starring Vijay Sethupathi and Salaar starring Prabhas in September '23 amongst others. On the screen openings, PVR INOX added 79 screens in Q4 FY '23, taking the total tally of the new screen additions in FY '23 to 168 scheme for combined PVR INOX circuit. In FY '24, the company intents to open another 150 to 175 screens. Of these screens, 9 screens have opened til date, 15 are awaiting license for commercial openings and 152 screens are currently under various stages of fit-out. The company has a strategy also -- has also realigned all upcoming handovers of new sites fit-outs to next calendar year until the time there is strong recovery in the box office. We've also taken a decision to shut down about 50 screens over the next 6 months across the country. Most of these screens have been underperforming, loss-making screens, which are housed in malls which have to come to the end of their life cycle with little hope of revival. The decision to shut down these underperforming screens is in line with the company's strategy to focus on profitable growth and improve unit level economics. Our screen portfolio, including the 38 management screens, stands 1,689 teams across 361 cinemas in 115 cities in India and Sri Lanka. Now I'd like to open the platform for any Q&A. Thank you very much.

[Operator Instructions] The first question is from the line of Abneesh Roy from Nuvama Institutional Equities.

My first question is on the interview, which you just gave. You have said that in FY '24, you'd expect a revenue of around INR 6,000 crores to INR 7,000 crores, which is a marked increase versus FY '23. And now we have seen almost 3, 4 months of lull, February-March was in FY '23, and even April-May, Hindi has been quite challenging. So what are the assumptions you have taken for this? Have you taken a very big revival for Hindi movies from June itself for this number?

April, definitely was not as per our expectation, but May has surprised us with Kerala Story has done well, Guardians of the Galaxy has done well in our circuits. Now we've got Fast and the Furious coming. So May is looking better than what we had anticipated. And even June, we've got some big moves like Adipurush. We've got Flash and Maidaan. So I think on the back of these movies, we are optimistic about at least the last 2 months of this quarter. April, of course, has been slow, but then July picks up again with a lot of big movies coming, especially for our circuit. We've got -- in fact, in June, we've also got Indiana Jones. And in July, we've got the big Mission: Impossible, which releases like an Indian film; Oppenheimer, which is next Christopher Nolan's movie, Rocky Aur Rani, the next Karan Johar movie. So I think it's basically on the confidence of the lineup, which is there. Of course, Jawan has also got shifted to the second quarter now, which is going to be a very big movie. Animal of Ranbir Kapoor is in the second quarter. So the numbers that I spoke about in the morning is based on the movie lineup because that is what gives us the confidence and, of course, also the rollout of the screens that we are doing. We have some very iconic destination cinemas opening up this year as well. And so it's on the back of that rollout.

Sure. My second question is a bit linked to the first one. So you are rightfully focusing on the profitable growth. Now I see that earlier your vision was to see an expansion of 200 screens on an annual basis, which has been now changed slightly to 150 to 175. But we also expect a recovery. So when I see your expectation of recovery and say cutting down on the number of expansion, I wanted to understand 2 things here. One, the cities that you are vacating, for example, some of the smaller cities like Bharuch, et cetera, you plan to exit, what would be the plan for entering that? And second, you're downsizing your expansion plan when you expect a recovery. So if recovery happens, then what will be the recalibration in terms of the faster expansion. What is your initial plan of, say, 200 screens?

You know net-net, it is still 150 and 175 because we are closing down like we've already announced about 50-odd screens we've closed down. We are closing in the next 6 months because these are -- PVR is 25 years old, INOX is 20 years old. So we have certain properties, which have had their time in the sun and leases have come to an end, the malls have become less attractive than they were earlier, some of them even closed down. So net-net, that's what the number is looking like. And I think profitable growth is the need of the hour just now. And we've just become very strict about our criteria of where we should be spending our capital. And also, the mall -- there are a lot of things in the mall also with the checklist. The mall has to be fully tenanted, it has to have the right number of tenants. Everything has correctly only, then we'll start investing our capital. Even 150 to 175 screens is not a small number to grow profitably well. But I think we have to also be conscious of the fact that we've come, only 14 months have happened since pandemic. And we just need to be more -- we need to be careful about how we grow. Every unit level, the economics must work and only then the numbers will look better. So we have been cautious of how -- where we invest our money and what kind of return we'll be getting.

So on the pending question of, say, your view on the smaller cities like Patna and now the Bharuch kind of cities, is it a dimmer view for smaller cities? Or do you have an expansion plan in the next few quarters to enter again such cities?

No, no. We're getting into every city. Sorry, you can finish your question.

Just one clarification on the gross versus net. So your gross openings are 150 to 175, so net will be 50 screens lower, right? So net will be 100 to 125 in FY '24. Is that right?

Yes. That's correct.

If you could answer the first part.

The question that you asked about, are we not opening in smaller cities. No, that's not correct. We are opening a lot of properties in smaller market. I think our focus is on locations like some of these markets where we've seen better quality shopping centers and malls have come up. We've updated or have better cinemas now in modern day shopping centers. I'll take you an example. Suppose we are shutting down a cinema in Lucknow, we've opened in a brand-new shopping center with Phoenix in Lucknow and PVR is there is in LuLu Mall, Lucknow. Now these are 2 brand-new shopping centers, which have eclipsed the rest of the smaller formats, which exist in that market. And hence, the decision to shut down, say, a property, which has become outdated and is no longer viable to run an operation in that center.

No, I got the Lucknow luLu Mall, that's a brilliant new large mall. My question was to summarize, would you be present in all the cities wherever, say, exit is happening currently in the next 6 months. In terms of those 50 screens, a lot of those are in smaller cities also. So do you have a full plan of reentering such cities or currently some cities you will come at a later stage, not in the near term? That was my question.

See, a lot of these we'll already be present in a better shopping mall or some new shopping mall, for example, would be consider. You took an example of Bharuch. That's a market which hasn't done too well. And we are aware of new shopping malls at least signed up, which will be coming up in the near future. And we would be migrating to better quality shopping centers in most of the cities.

Yes, just bear in -- I'm just looking at where we have Rourkela coming up, Kochi is there, Pune is there. There's so many smaller cities as well. There is no -- wherever there is going to be consumption of movies, PVR wants to be present over there at a different price point. But the opportunity has to be correct. It has to be the right location, right mall. All the ducks have to be in a row, only then. But there's no -- you can't make one sweeping statement that we're not going to be in small cities or we're only going to -- nothing like that. We're going to be in all sorts of cities wherever there is a potential for a PVR INOX to be there. And it's just that these particular properties where we have closed or we are not investing, obviously, that's not meeting our threshold criteria.

Sure. Got it. One quick question. When I see your comparison on Y-o-Y for Q4 versus the pro forma, ATP has grown 3% and SPH has grown 13%. So that sharp increase in SPH, is it mostly because of the inflation which you have seen in food. So that is the main reason? Or is it a mix improvement because of newer and better menu?

Actually, it's 50-50. 50% is clearly attributable to value increase and 50% is on volume. We have introduced many products, better products, and we've also come up with a range where consumers are encouraged to buy products and consume at home, like the kernels or the popcorn or the microwave popcorn. These are all low price items, which are being sold at the cinema. It helps us increase our SPH, at the same point in time does not eat into the consumption pattern of the consumer at the cinema. So that's what we are working on.

[Operator Instructions] The next question is from the line of Atul Mehra from Motilal Oswal Asset Management.

This has been reference to Slide 23, where we have put out pro forma numbers pre-COVID and now. So one of the observations is that while, say, total revenue was more or less similar, profitability has declined quite materially versus pre-COVID, 11.5% margins versus 18% margins. And despite COVID being a time, which has taught most businesses to be -- well, a lot of businesses have invented ways of saving costs. So as we look forward in the next year and like you said about INR 6,000 to INR 7,000 crores of revenue guide expectation, how do we think about profitability? When do we hit the 18% number that we did pre-COVID?

I think if you look at the numbers, it's largely down because of the operating leverage in the business. Like this year has been a tough year for the business. If footfalls are down, it has a direct impact on the profitability of the business. We did about -- PVR INOX combined did 168 million footfalls in FY '19-'20. As compared to that, we've done only 140 million footfall. So that is the reason for the decline in profitability. And this year comparing costs of 3 years ago, so while most of our costs are down, whatever is controllable, rental cost after a 2-year holiday that we got and the tax break that we got from our landlords are back to their original contracts, which is obviously reflected in the profitability. Our hope is that this year will be a strong revival in box office performance of both Hindi films and Hollywood films as well, which have underperformed last year, and admissions and profitability should improve significantly. Difficult to say what the exact number would look like. But like Mr. Bijli spoke at the beginning of the call, we are expecting much better content, starting May-June onwards. And Q2, Q3 are looking quite good on paper based on the content queue we have. And we should do everyday between INR 6,000 to INR 7,000 crores depending up where the box office set is. And we are hoping to get back to pre-COVID level margins of 18% to 20%.

Got it. Got it. And secondly, just in terms of the vagaries of the box office and the content, which you have no control over. So in the medium to long term, obviously, we have other competing media like OTT and so on an so forth. So in the medium to long term, how do we -- like will we always be at the fate of how a producer or director manufactures content? Or is there anything now that we are a much larger entity and big companies coming together? Is there anything we can do on the content side, which is more innovative than which perhaps has never been done before?

Actually, there is no sign or way on being embarrassed -- there's nothing to be embarrassed. The business is about cinemas, and time immemorial has been about movies. And in a country like India where 1,800, 1,900 films get produced and released every year, how can that be a disadvantage. That is an advantage because if one movie doesn't do well, there are other movies that take their place and compensate for that one movie if it doesn't do well. It's just that last year has been very volatile, but we don't see this to continue. So I think depending upon movies is our business, and that is something that we are very confident about that people -- the supply of movies and the quality of the movies connecting with the audience will happen, and it's already happening. And on the other side, on the demand side, consumers will continue to go out and entertain themselves. And they -- the number form of entertainment still out of home is cinema. So I think we're in a market where both the supply side and the demand side is very strong. And the shift in aberration that we've had of post-COVID syndrome of about 12 to 14 months, which is going to correct itself, there's no question about it.

The next question is from the line of Karan Taurani from Elara Capital.

My question is around the profitability aspect again. So if you look at the box office revenue, I don't know if it's correct or wrong, but we tried to compare this to a quarter of Q1 FY '18 had the opening of Bahubali. If you look at the collection numbers of Bahubali, we have more mirror of Pathaan wherein one single week, the film has done well, so in multiple weeks, and the other films have not done well as you've probably got one more film which has done INR 100 crores, which is Tu Jhoothi and at that time we had some light. In terms of the margins, that time around 18.5% EBITDA margin for the merged company, today which has come to almost about 2.3% excluding IndAS. So what is the gap here clearly because if you look at the heavy box office revenue, it's around INR 800 crores for that particular quarter in terms of net box office. So what is this big gap here because the number doesn't seem to be very dismal as far as the Hindi box office is concerned. I know for a fact that advertisement revenue is down very sharply. So that has an impact. But is it to enter that big that your margins can move from making literally 2%?

So Karan, I think if you look at the pro forma number, you are comparing box office revenues of 3 years ago versus now. Part of it is driven by ticket pricing growth, but in some point in the cost front. So we were paying ex rentals 3 years ago. We got rebates in rental and cam costs. Costs have moved up with inflation. So if you look at a lot of our fixed costs, which are external based, they have moved up after a 2-year holiday that we thought have -- the brief that we got from our landlords, as a result of which those are costs are carried. Second big impact area for our business is advertising revenue still significantly below pre-pandemic level. And these two are, I think, the key two items which go directly to the bottom line. So while price realization and SPH growth has kicked in and they have held us to get to the top line number, advertising revenue shortfall and the rent and cam increases across locations over a 3-year period has been the biggest reason why our margins are already...

Right. But then there's also SPH and ATP, we've seen a big delta versus that time. I got the point. I mean, advertisement is a big Gulliver here. Now to the second question. How does one foresee ad revenues because ad revenue was very -- lot of premium pricing happened in the Hindi circuit only as far as advertising is concerned. So what is the kind of acceptance? What is the kind of growth that we are seeing in normally new process as far as ad business is concerned? So tomorrow in the next 6 months of Hindi content remains to be this way in terms of overall performance, I believe small and medium budget films won't come back, do we see ourselves where the regional content is good enough to pull back this ad to pre-COVID levels?

So clearly, this year, we are aiming to get closer to the pre-COVID number. That's the big one, the big target. But having said that, advertising revenues do need some big tent poles films. We saw a spike in advertising revenue whenever a big film releases, even in case of Pathaan. The brand manager's confidence is coming back at the cinema very, very strongly. We hope that by quarter 2 and more by the beginning of the festive quarter, which is the quarter 3, we will be able to get to very, very strong numbers on advertising. So some pathbreaking work is being done at the ground level to introduce and get these advertisers back to cinema. And we are very hopeful that within the next quarter, we should be able to get back on track, very strong. And this merger with INOX has really helped to accelerate and seal the gap in a big way because now the undercutting, all of that is gone. There is certain synergy in terms of rate card, the way we are selling all of that. So that really helped us as we move forward to bridge this gap.

Very helpful. Just one bit on this. Obviously, ad revenue is going to be one lever. But what about cost realignment? What are the key levers that you're seeing around cost heads, which can actually reduce over a period of time?

Well, let me tell you that where costs are concerned, after the merger, we are going through every line item with a fine toothcomb. Whether it is the repair and maintenance costs, whether it is the costs where food is concerned, whether it is hit like power, that how we can work together to reduce the units, yes, we cannot do anything much about the rate of power, but how to control the units. So let me tell you that each and every line item of P&L is being looked at. And yes, we are getting a lot of benefit from the economies of scale. And I think that by the end of the next couple of months, you will see adjusted reduction in all our cost heads.

Next question is from the line of Jaykumar Doshi from Kotak.

My first question is related to Slide 19. If I look at 4Q FY '23 versus 4Q FY '22, so four months for PVR and INOX, there's a 20% increase in admits, 6% increase in seats, but occupancy seems to have dropped by 290 basis points. So I'm just trying to understand how can occupancy declined Y-o-Y when admits have gone up 20% and seats have increased by 6%?

Jay, the main reason for that is in Q4, we were still operating at 50% capacity in a lot of markets. So when you calculate occupancy, the occupancy in Q4 FY '22 was still being calculated on half the capacity. So that is the reason in some markets there was a difference.

Okay. And I think associated question is on cost. On a Y-o-Y basis, rent is up 40%, personnel costs are up 49% and electricity utility is up 41%. Is this also because the base quarter had -- did not have costs pertaining to?

That's correct. We had a lot of rebates from our landlords, which finished on 31st of March FY '22. So we had a lot of discounts and rebates, which were continuing till Q4 of FY '22.

Understood. So 4Q FY '23 is more or less a normalized cost structure and you will start realizing synergy savings during the course of this year from these levels?

Correct. That's correct.

Finally, can you give some color on the other operating income that comprises of your ticketing contracts with BookMyShow and I think Paytm. I'm not sure if that is still on. And the virtual print fee related revenue. So what's your outlook from a 2- to 3-year perspective on these 2 revenue streams?

So we have long-term partnerships with all of our online aggregator, so these partnerships will continue. Some of that will come up for renewal during this year. We are in advanced stage of discussions and all these partnerships will continue. And we'll continue to monitor our aggregator partners and same for virtual print fee as well over the next 2 to 3 years.

So there is no sunset clause associated with VPF, right? VPF continues?

No, there is currently no sunset clause on VPF.

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

I have a bookkeeping question on the balance sheet side. So despite INOX being net debt free, I think the combined entity's net debt position has gone up by about INR 250-odd crores on a sequential basis. So does it mean that with few things that we have done in food, you have been funded by debt? And if yes, what is the sustainable debt level from here on?

So between INOX and PVR, we've added a lot of screens this year, including the acquisition of one of the cinema properties in Chennai called Jazz. If you include that, the overall CapEx of both PVR and INOX put together this year has been INR 300 crores approximately. And yes, the incremental debt is largely gone to fund the CapEx as the earnings have been slightly short. Yes, our net debt levels have gone up from 31st March, but largely the incremental debt has gone to fund the growth. We think this year as the earnings move up, our debt levels will get better and by the end of this year, our net debt levels should look lower than what we've ended at this year.

So basically, our screen guidance of 150 to 175, that we have repaid. Primarily that will be funded by internal approvals and not debt. Is that...

That's correct, that's correct.

And secondly, if you can just share what was the revenue and EBITDA loss from the 50 screens that we intend to shut down? And rather than closing these screens down, perhaps we could have entered into a variable rent model and brought down the fixed cost to be paid. And if despite evaluating that option, we have taken this decision to close down, I mean I was just thinking whether this is an indication of any change in consumption pattern or a routine decision. I thought of asking you this question because even some time back we had close of few screens and such instances have not happened quite frequently pre-COVID. So just wanted your thoughts on that.

I think that the second part of the question, your voice was quite muffled. But answering your first question, if I heard it right, was what was the EBITDA impact by including those 50 screens. So that will be a saving of INR 10 crores. So that's the EBITDA impact we'll have by closing down those 50 screens. And if you could just repeat the second part, what you said, please?

Yes. So what I was asking is that rather than closing these screens down, we could have perhaps entered into some kind of a variable rental model and brought down our fixed costs. And if despite evaluating that option, we have taken this decision to shut these screens, is this a routine business decision or any kind of change in consumption pattern that you are evaluating? Because pre-COVID, shutdowns were not as frequent as we have witnessed currently?

So I think Mr. Bijli answered that question that most of these have lived their end of life, they have reached their end of the life cycle. We feel that even if we put in more money in these properties, there will be hardly any return. So why put good money after the bad. That's number one. Number two, the consumption habits have not changed at all. The Indian quality is still the same. We still go to movies for great experience and it's all quantity of content which brings in people. So the consumption habits have just remained where they are. When you talked about speaking with various operators for revenue share, yes, we are in talks with various operators for revenue share and a few of our properties also are on 100% revenue share basis, if that answers your question.

Just one more clarification. Out of this 50 screens that we intend to shut down, do any of them belong to metro or Tier 1 market?

Well, it's a mixture of all, Tier 1 and Tier 2.

The next question is from the line of Aliasgar Shakir from Motilal Oswal.