Multiplex industry

When it comes to reel life matters, India is way ahead of the rest of the world. With over 1,000 movies being churned out every year, it tops the film production charts - never mind that the vast majority of those flicks are box-office duds. India is also No.1 when it comes to attendance, with over three billion tickets sold a year. Where it lacks, though, is in the number of screens - there are just 10 screens per million people, unlike in the United States, where there are 120 per million. That unmet opportunity is what multiplex chains are lining up to seize. The Multiplex Association of India estimates that there are around 900 multiplex screens in India. By April next year, the count will increase to 1,350. At an average cost of Rs 2 crore per screen, that is an investment of Rs 900 crore. Nikhil Vora, MD of IDFC Securities, believes the industry is well capitalised to keep pace with its growth projections. Leading the charge is PVR Ltd, which says it will add around 127 screens by April 2013. Inox Leisure Ltd will have 80 more, while many smaller and regional players, such as DT Cinemas and Wave Cinemas are also expanding. Despite its parent, Reliance Media Works, being saddled with Rs 1,912 crore of debt, Anil Ambani's Big Cinemas, the industry leader by screen count, will add 30 screens. And Canadian company Imax Corporation is re-entering the Indian market this year in collaboration with Chennai-based SPI cinemas, which operates the Sathyam chain of cinemas.

But the real screen star will be Cinepolis, the world's fifth-largest multiplex chain. The privately held Mexican company plans to make investments of more than Rs 350 crore in India by the end of 2012. Cinepolis, which commenced operations in India in 2007, currently has 32 screens, mostly in Tier II cities. It plans to add 100 more by this year end and take its total count up to 500 by 2016. Of these, 440 have already been signed up with mall developers. "We are not in a race. We are only looking at opportunities," says Milan Saini, MD of Cinepolis's India unit. So what is behind this sudden explosion? Seen alongside annual ticket sales, which have been declining steadily over the years with the advent of satellite television, DVDS and the like, the ambitious plans seem all the more baffling. To understand the paradox, one need look no further than the neighbourhood mall.

10 No. of screens per million people in India

120 No. of screens per million people in the US

The growth in multiplexes over the next year, indeed, in the years to come, will be driven by malls. Multiplexes are an integral part of malls today. During the economic slowdown, the retail sector was hit hard and mall construction pretty much came to a standstill. But construction has resumed now and many malls are set to open. "The retail mall space was slow in 2008, 2009 and 2010. But supply started coming in from last year and is going to continue for this year as well," says Anshuman Magazine, Chairman and MD of CB Richard Ellis, South Asia, a real estate consultancy. Adds Swaroop Reddy, Director, SPI Cinemas: "We didn't get many properties on time. They started at different times and are getting delivered over a short period." The association between multiplexes and malls is symbiotic in nature, as both entities get to feed off each other's footfalls. "Malls are designed around multiplexes. So, it is 100 per cent sure (that a multiplex will open), once they sign the deal," says Ashish Pherwani, Senior Manager of Advisory Services at Ernst & Young. If anything, it is the mall owners who are wooing the multiplex owners. "Every mall wants to associate with us because our presence increases rentals by 20 per cent," says Pramod Arora, Group President, PVR. He says the company's expansion slowed over the past three years as there were not enough good malls coming into the market. Click here to Enlarge Real estate developers set up multiplexes in their malls primarily to attract more footfalls. These include DLF, India's largest real estate firm by market capitalisation, with its DT Cinemas. The same goes for Wave Group (Wave Cinemas) and SRS Ltd (SRS Cinemas). The security deposit plus rental system has collapsed in most malls, barring a few established ones in prime locations. Revenue sharing deals are now the norm. This has reduced the initial cost of opening new theatres. "It's a collaborative model, based on the ability to pay. It's more sustainable," says Saini of Cinepolis. Conversely, multiplex chains are no longer looking at independent properties. Big Cinemas and some others tried that route, acquiring single screens and converting them into multiplexes. According to Pherwani, this produced only mixed results. "The high acquisition cost combined with availability of cheap malls has made single-screen properties less attractive." Some are still trying, though. According to UFO Moviez, which provides digital screens to theatres, around 500 standalone cinemas have been converted into multiplexes over the past decade. The trend is set to continue this year as well. There are around 10,500 single screen cinemas today, according to the Single Screen Association. A decade ago, that number stood at 13,700. Many have been forced to shut shop and several more will have to follow suit.

Revenue sharing with malls is a sustainable model. It is based on the ability to pay: Milan Saini South India, where almost 60 per cent of the screens in the country are located, is still largely dominated by single screens. In part this is because Southern cities have been slow in embracing malls. That is set to change. According to CB Richard Ellis South Asia, 12 malls are ready for delivery in the South this year and another eight will be ready next year. Ultimately, it is a revenue game. According to ticket sales tracker BoxofficeIndia.com, multiplexes accounted for 65 per cent of the box-office collections of the top 50 Hindi films last year. They may be ten times more in number, but single-screens accounted for only 35 per cent of collections. Expansion will also give multiplexes some bargaining clout with film distributors, food and beverage (F&B) suppliers, and mall developers. They will also be in a better position to strike lucrative advertising deals with large companies rather than depend on smaller revenues from ads run by local businesses. The overall film exhibition industry's growth has been steady, if not stellar. It grew 11.5 per cent in 2011 to Rs 7,000 crore, according to the KPMG Media and Entertainment industry report, 2012. The industry expects the Southern and Eastern markets to drive the next phase of growth, the report adds. For multiplexes, any city with a population of one million or more, with malls, is good enough to open a property. In the South, they are set to come up in Coimbatore, Madurai, Mysore and Kochi, among other cities. PVR will open around 80 screens in South India over the next three years, while Cinepolis will have 30 per cent of its screens there. Up North, chains such as Glitz Cinemas is targeting smaller towns such as Muzaffarpur in Bihar and Muzaffarnagar in Uttar Pradesh. "If you get (a good) location, you become the leader in that market," says Sumant Bhargava, MD of Stargaze Entertainment, which operates cinemas under the Glitz Cinemas brand. Cinepolis will also open three megaplexes - more than 10 screens in one location - this year, in Thane (14 screens), Pune (15 screens) and Kochi (11 screens). "A consumer will never return without a ticket and he will have more choice in terms of timings and availability of regional movies," says Saini. Megaplexes may benefit when a film has a wide release. For instance, Don 2, Bodyguard and Ra.One were released with over 2,500 prints. Assured of a ticket, moviegoers may flock to a megaplex. This could make a big difference during the first week of a film's release, always the most profitable. First-week collections accounted for 60-70 per cent of total box-office collections for the top 50 Hindi films last year.

Still, while they get the best films and have much higher ticket prices, multiplexes are not assured of profits. Margins are constantly under pressure as they have to share revenue with distributors and mall owners and deal with high costs and taxes. On every Rs 100 ticket, Rs 20 goes towards entertainment tax. Of the remaining Rs 80, a film's distributor gets Rs 36. That leaves the multiplex with Rs 44. But it also has to cope with high operations and maintenance costs as well as fixed costs. This has a telling effect when a film is a dud. "It is a capital intensive industry and difficult to monetise. Growth is a double edged sword. Unlike other retailers, our cost is fixed," says Sunil Punjabi, CEO of Cinemax. The picture is brighter on the F&B front, with margins at around 65 per cent and advertisements, with margins of 80 per cent. "If we look at balance sheets, most of the profits of big multiplexes are what they earn as margins in F&B as well as through advertising," says Ajay Mehta, CEO of Interactive TV, a cinema advertising agency. Globally, Cinepolis generates 48 per cent of its revenue from non-ticketing activities, says Saini. Exhibition alone is not enough to survive, says Sanjay Kaul, president of M2K multiplexes in the National Capital Region. Standalone cinemas have it far worse. And that is one of the reasons more than 3,000 screens of them have closed down over the last decade. Still, things are getting better, says Abneesh Roy, Associate Director (Research), Edelcap Securities. He points out that profitability has been improving over the last two years. For instance, PVR'S net profit rose from Rs 17 crore in April-December 2010 to Rs 42 crore in the same months of 2011. Cinemax's net income increased from Rs 15 crore to Rs 21 crore over the same period, while Inox, the largest multiplex by way of revenues, has seen its net profit go up from Rs 12 crore to Rs 20 crore. Inox, which acquired Fame multiplex three years ago, has bounced back after a period of consolidation. Return on investment may drop, but it will continue to post profits, says Upen Shah, VP, Finance. But not everyone is convinced that there are better times ahead for the multiplex segment. Leena Jaisani, head of industry lobby FICCI'S entertainment division, doubts there will be enough good content to fuel this explosion. After all, whether it is in a standalone cinema or a multiplex, only a good film will attract people