Multiplexed on tax exemptions
Capacity ramp-up to take toll on the bottom line of the film distribution-cum-exhibition company

Film exhibitor and distributor Shringar Cinemas has a major presence in the western region. The company currently operates three multiplexes under the brand name, Fame. The Fame Adlabs (Swanston Multiplex Cinema) at Versova, Mumbai, is a joint venture with Adlab Films, while the other two at Malad and Nasik are fully owned. The company is promoted by South Yara Holdings and India Value fund, a venture capital fund. Altogether, the multiplexes have 14 screens. The company plans to add on another 28 screens through lease and retrofit model by the end of FY 2006 at various locations. Out of this, 15 screens (4 multiplexes) will need a capex of Rs 33.70 crore. In addition Rs 10 crore will be used to fund the distribution growth through its 100% subsidiary Shringar Films Private Limited.

Strengths

For a typical multiplex, the cost structure would roughly include 22% of entertainment tax, 20% of distribution expenses, 10% lease expenses and rest 22% others. Consequently, the profit margin before depreciation is 19%. Entertainment tax is, thus, the largest cost component. However, there are exemptions for initial periods in certain states, subject to the fulfillment of certain conditions. The company will enjoy 100% entertainment tax exemptions for the initial three-year period in Maharashtra and 75% for the next two consecutive years. Out of the 10 multiplexes operational by FY 2006, the three in Mumbai and other 4 in Maharashtra will have to pay 45% and 40% entertainment tax, respectively, from the fifth year.

Weaknesses

The tax benefits for the multiplex in Surat (tax @ 100%) and Hyderabad are uncertain. Thus, though the margin will be high due to exemptions, it is only for a limited period and profitability may crash on completion of exemption period or changes in the government’s whims.

The distribution business is risky and volatile especially in view of the poor success rate of Hindi films in the last few years. Without entertainment tax benefit, the multiplex business also turns out to be risky business for the same reason.

The company made a consolidated pro-forma loss of Rs. 1.71 crore for FY 03-04, which scalated to Rs. 3.78 crore for the 9 months ending December 2004.

In the short term, the company will face pressure on margins due to capacity ramp-up and the losses are likely to continue and can even increase till FY 2006.

Valuation

The shares are being offered in the price band of Rs 47 to Rs 53. Due to losses, there is no EPS. The company will remain in the investment mode for a couple of years. Nearest comparable company viz Adlabs Films which is also into Imax and Multiplex business trades at a trailing twelve month P/E of around 15. However, Adlabs has a cash cow in terms of highly profitable and stable film processing business, while Shringar’s other business viz film distribution is much riskier business.