Inox Leisure: Blockbuster show

The stock of multiplex operator, Inox Leisure (Inox) has gained 20 per cent since our hold call last August. This is thanks to the company’s blockbuster financial performance in 2015-16 on account of several big box office hits.

Despite the rise, at ₹261, the stock trades at 29 times its consolidated estimated earnings for 2016-17. This is cheaper than the stock’s last five-year average valuation of 46 times. With the company’s prospects too looking good, investors can buy the stock.

The spectacular success of Kabali along with the strong show by Rustom should boost Inox’s September quarter box office collections. Apart from that, other upcoming movies, such as M.S. Dhoni, Ae Dil Hai Mushkil, Shivaay and Inferno should bump up the company’s revenue. Inox, the country’s second-largest multiplex operator, has plans to expand further in 2016-17. This should hold it in good stead in the coming years.

Besides, Inox will also benefit from the implementation of the Goods and Services Tax (GST).

Inox, which operates 109 multiplexes with 429 screens and over 1.1 lakh seats, has a pan-India presence. Many big movie releases such as Bajrangi Bhaijaan, Baahubali, Avengers and Prem Ratan Dhan Payo boosted the company’s key performance metrics in 2015-16.

Inox reported footfalls of 53.4 million (up 30 per cent year-on-year), occupancy rate of 29 per cent (up 16 per cent), average ticket price of ₹170 (up almost 4 per cent) and food and beverage spend per head of ₹58 (up 5.5 per cent) for the fiscal.

The impact of this is reflected in the 31 per cent surge in the company’s revenue to ₹1,333 crore in 2015-16, compared with the year-ago period. This, in turn, translated into a 55 per cent jump in operating profit to ₹190 crore and the near-quadrupling of net profit to ₹77 crore during the period.

Revenue growth in the June 2016 quarter, though, was relatively modest at 11.4 per cent (year-on-year) given the absence of significantly big movie releases during this quarter compared to the previous year corresponding quarter. Accordingly, both operating profit and net profit declined a tad during this period.

About 85-90 per cent of the company’s revenue is accounted for by gross box office collections and food and beverage spends, both a function of successful movie releases. In fact, advertising revenue, which accounts for a much smaller share, too, is impacted by the quality of movie content lined up.

With many promising movies set for release in the remaining part of this year, the company’s revenue and earnings growth aare expected to be healthy.

Moreover, Inox plans to expand to 120 properties with 479 screens and over 1.2 lakh seats by the end of the current fiscal. Over the last few years too, the company has been undergoing expansion, both organic and inorganic. Future expansions are to be funded though a mix of debt and equity (60:40). With a mild leverage (consolidated debt-to-equity ratio of 0.4 times as of March 2016), Inox is well placed to fund these growth initiatives.

That apart, according to Inox, GST will bump up its operating profit margin by 2-4 percentage points, assuming the tax rate is kept at 18 per cent. Today, multiplex operators pay entertainment tax of around 21 per cent on their gross box office collections.

They also pay value added tax (VAT) of 11-12 per cent on average on sale of food and beverages. The replacement of both these taxes by GST of 18 per cent will lower the company’s tax burden.

This is because box office collections (which attract the higher entertainment tax) account for a much larger chunk of a multiplex’s revenue, compared to food and beverages (which attract the lower VAT).

Under the GST regime, multiplex operators will also be able to claim tax credit for the 15 per cent service tax that they pay on several input services, such as property rent, housekeeping and security, thus resulting in savings.

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