A PROJECT REPORT ON

Impact of Multiplex
Submitted for

Prof. Reena Kakkar

Retail Marketing (25/09/2008)

Submitted by

VISHNU PARASHAR
 INDEX
Serial No Particulars Page no

1 THE CURRENT INDUSTRY SCENARIO 1

2 FILM EXHIBITION BUSINESS IN INDIA 1

TREMENDOUS SCOPE
3 MULTIPLEX 2

4 KEY PLAYERS IN MULTIPLEX 3-11

5 GROWTH DRIVERS 12-17

6 INCREASE PRODUCTION OF HINDI MOVIES 18-19

7 HOLLYWOOD STUDIOS EYE BOLLYWOOD 19-21

8 HOLLYWOOD LOOKING TO INDIA FOR POST- 21

PRODUCTION WORK
9 REAL ESTATE SUPPLY 22

10 MULTIPLEX BUZZ!! 23

11 INCREASING CORPORATIZATION OF 25
BOLLYWOOD
12 COST AND REVENUE ANALYSIS 26-29

13 RISK AND CONCERNS 30-31

14 WAY FORWARD 32
THE CURRENT INDUSTRY SCENARIO
India's craze for films has not been fully exploited by the "Film Exhibition"
industry due to the lack of screen density in the country coupled with the
poor quality of screens. "Multiplex Cinemas" offer an alternative to tap this
potential by providing a quality experience to the viewer as well as
economies to the multiplex operator.

"Films" has been one of the integral components of the Indian entertainment
industry contributing nearly 27% of the total revenues of the entertainment
industry. Besides, films also contribute to other components of the
entertainment industry like music, television and live entertainment. The
Indian film industry is one of the most complex and fragmented national film
industries in the world comprising of a number of regional film industries like
Hindi, Tamil, Telugu, Kannada and others. The Hindi film industry is the most
popular among them. Though India produces the largest number of films in
the world (Approximately 1000 per year), it accounts for only 1% of the
global film industry revenues. In spite of being over 90 years old, the Indian
film industry was accorded the status of industry only in 2000. Over the
years, the Indian film industry has been highly unorganized as film financing
was dependant on private and individual financing at extremely high interest
rates. Only recently, the industry has got access to organized finance. With
vertical integration taking place between producers, distributors, exhibitors,
broadcasters and music company’s corporatization is now taking shape in
the Indian film industry. We believe, that corporatization, will bring about
transparency, accountability and consolidation which will help to improve the
overall profitability of the Indian film industry as well as reduce piracy and
leakages which presently account for 14% of the Indian film industry's
revenues.

FILM EXHIBITION BUSINESS IN INDIA-

TREMENDOUS SCOPE
Film exhibition forms the most important component of the Indian film
industry. According to the - KPMG report domestic theatrical revenues
contributes 57% of the total Rs59bn film industry revenues and are expected
to grow at 17%. Overall, the Indian film industry is expected to grow at 16%
CAGR it is expected to reach Rs143bn in 2010. The main pockets for film
exhibition in India are Delhi, Mumbai and South India. Due to various regional
language film industries in the South, it has become an important film
exhibition pocket. Hyderabad and Bangalore are 2 southern cities where
occupancies are exceptionally high at around 70%-80%.

MULTIPLEX
India currently has 11500 existing screens, 95% are standalone, single
screens. These single screen cinemas are poorly maintained as the owners
find it difficult to upgrade and renovate their facilities, due to unavailability
of organized finance. The deteriorating quality of these cinemas dissuaded
viewers and they started using alternative viewing options.

Over the last few years, multiplexes have emerged as a trend in urban India.
"Multiplexes" are essentially cinemas with 3 or more screens. They provide a
quality viewing experience and are generally located around shopping malls
to increase footfalls in these malls. Each screen in a multiplex has small
seating capacities in the range of 150-300 seats as compared to single
screen cinemas which have capacities in the range of 800-1,200 seats.
With around 11500 active screens, India is under screened. China, which
produces far lesser films than India has 65,000 screens while the US has
36,000. India’s screen density stands low at 12 screens per million
populations. There is a need of at least 20,000 screens as against the current
11500. This gives multiplex operators enough room to grow as the traditional
single-screen theatres do not have the financial wherewithal nor do they
enjoy tax incentives.
KEY PLAYERS IN MULTIPLEX
1. PVR CINEMAS:

• Strong operational performance- PVR is one of the leading

multiplex operators with very strong performance on operational
parameters. The company has been able to establish itself as
one of the premier entertainment destinations, which has
resulted in the highest occupancies, footfalls and spend per head
as compared to all of the other multiplex operators.

• Aggressive expansion plans- PVR intends to open ~100

screens in the coming two years. We are assuming a 50%
discount to these plans for our estimates, in order to rule out
mall delays. Among the new screens, 20-30 will be high end PVR
Premiere screens with ticket prices in the range ofRs150-Rs750.
It has already opened 17 out of the total 30 screens that we
expect for FY09E, thus providing more certainty to our estimates.

• Foray into co-production- PVR has, through PVR Pictures,

entered into film co-production, after its first movie met with
beginner’s luck. It has 4 movies lined up for FY09E and intends to
ramp it up to 8-10 movies in FY10E. We expect the movie
business to operate at 13% EBITDA margin and contribute 11%
to the total revenues by FY20E.

• Leading Multiplex operator: PVR is one of the leading

multiplex chains in India with 101 screens under operation in 14
cities at present. PVR has been successful in building a lifestyle
entertainment brand because of its focus on customer service
and quality of experience. Because of the strong brand and
presence at prime locations, PVR has found a very encouraging
 response from the customers. It attracted 18 million patrons with
occupancy ratio of 41% in FY08, both the highest numbers
among all the multiplex players. Today, it contributes ~10% plus
to the total domestic box office collections in the country,
showing a clear dominance.

• PVR Premiere to increase ATPs: The Company has recently

started a chain of luxury cinemas branded as PVR Premiere
which will be present only in the metros and other affluent cities.
These screens provide a very high quality digital cinema viewing
experience in luxurious setting. Average ticket price for these
screens is in the range of Rs150-Rs750, as compared to the
normal ticket price of Rs70-Rs250. From 2 screens at present,
PVR Premiere will reach 30 screens by FY10E which will help
increase the overall ticket revenues.

• JV with Major Cineplex to strengthen presence: PVR has

formed a 51:49 JV with Major Cineplex, the largest exhibition
player in Thailand, to further strengthen its presence in the
lifestyle entertainment space. The entity, branded as PVR Blu-O
Entertainment, will open bowling alleys, karaoke centers, ice
skating rinks and gaming zones across the country. We believe
that this venture is a well thought out move and complements
well PVR's positioning as a leading out of home entertainment
provider. With a strong and experienced JV partner like Major
Cineplex, execution will be fast paced. However, due to a recent
start, we are not factoring in any of the traction from this
initiative as of now.

• Entertainment tax burden to decline: PVR started its

operations from those territories where entertainment tax
exemption was not available, e.g. Delhi NCR region. At present, it
pays E-tax on 16 out of a total of 22 properties. E-tax as % of
gross ticket revenues is amount the highest for the company at
24% in FY07.We expect E-tax % to come down to 18% in FY09E
and 17% in FY10E due to more screen additions in areas where
E-tax exemption is available like Punjab, West Bengal and
Mumbai. Recently, Delhi government has lowered the
entertainment tax rate to 20% from the earlier 30% levels. This
will help PVR the most as it operates 46 screens in that region.
2. INOX LEISURE

• Consistent performer- Inox has shown impressive operational

performance, delivering a 65%CAGR in topline in the past 5
years with the highest EBITDA margins in the multiplex space.
The company has shown remarkable pace of expansion in the
last 3-4 years with commendable speed and quality of execution

• Expansion in tier I and tier II cities to be value accretive-

Inox has more than 50% of its screening the tier I and II cities,
which has rewarded the company very well in the past. It plans
to add ~100screens in the coming 2 years, 70% of which will
come up in select tier I and II cities. We believe that the move
will create value for the company as these locations are
comparable to metros at the EBITDA level.
• Impressive capacity ramp-up over the last 4 yrs: Inox
Leisure (Inox) was set up as part of a diversification strategy by
its parent company, Gujarat Flurochemicals. The company
opened its first multiplex in Pune in 2002. Since then, the
company has come a long way as one of the leading premier
multiplex chain operators with a strong brand recall. Starting
from just 4 screens in 2002, Inox has ramped up its presence to
84 screens in 24 locations at present. While registering a strong
capacity growth in the past 4 years, the company has also been
very successful in building a strong entertainment brand for its
cinemas. Operating in an industry marked by execution delays,
both the speed and the quality of expansion are commendable
considering that the promoters didn't have prior exposure to the
exhibition industry.

• Top 25 cites - compelling growth stories Crisil Research has

identified 25 cities where consumption potential is high due to
the strong economic growth and increasing urbanization. Taking
organized retail market size as a proxy for future growth
potential, they have identified 25 locations that have the
potential to become high consumption centers in the next 3-4
years. This combined with the past experience of the company
shows that there is a lot of room for leisure consumption at these
centers and hence the move into these cities will be value
accretive.

• E-Tax exemptions: Inox operates 24 properties but pays

entertainment tax only on 7 of them. 13 properties are fully
entertainment tax exempt and 4 are availing exemption partially.
This has resulted in an E-tax payment of 10% as a proportion of
gross ticket revenues during FY07. It has risen to 14% in FY08as
it opened two non E-Tax exempt properties and 2 of its properties
became eligible to pay E-Tax.

• Move to create value for the company: We believe that the

expansion in these locations is a well thought out move and will
create value for the company. While it's true that the average
ticket prices in these locations are lower than those in the
metros, it gets compensated with far lower rentals and staff
expenses on the cost side. Moreover, it gives the company
 access to prime locations in these cities which provide assured
footfall growth has the company has seen in the past.

3. FAME INDIA

• Fame India (Fame) is one of the smaller multiplex operators

among the listed Indian exhibitors, with a current slate of 16
properties and 61 screens under operation. Boasting of a
predominantly urban presence, especially in Western India, Fame
has been disproportionately focused on Tier-I cities. With 8 of its
currently operational 16 properties located in Mumbai, Fame is
looking to aggressively add to its existing screen count and
establish a pan-Indian presence.

• Heavy skew of properties towards Tier-I locations: 8 of the

company's currently operational16 properties are situated in
Mumbai, with three more lined up before Mar'09. This translates
into Mumbai accounting for a whopping 42% of the company's
proposed seat count (by Mar'09). In fact, the two Western states
of Maharashtra and Gujarat are likely to account for 75% of the
company’s seat count by Mar'09. This skew towards Tier-I cities
is likely to translate into marginally improving ATPs in the near-
term on a full-year basis from FY09 onwards. Fame currently
commands an ATP of~Rs97, a discount of 21% and 24% to that
of Inox and PVR respectively.
 • Scale to bring in margin expansion triggers: Fame is among
the smallest exhibitors in the multiplex space currently. As of
FY08, Fame commands fairly low EBITDA margins essentially
because of a low scale of operations. Given the high degree of
operating leverage (characteristic of the business), we believe
that EBITDA margins would improve once the company is able to
expand its screen and seat count.

4. ADLABS FILMS

• Integrated Play on the Media & Entertainment Sector:

Adlabs is the only player at present that has presence in all of
the three major segments in movies i.e. production, distribution
and exhibition. The integrated model adopted by Adlabs gives it
a competitive edge over others in terms of capturing value at
each level of the value chain. However, it also exposes the
company to more risks as risks of one segment are prone to
disturb the other segments.

• Exhibition Segment - The largest player: Adlabs has 170

screens at 65 properties under operation at present, making it by
far the largest player in the exhibition space. It has a two
pronged strategy of expansion - opening multiplexes at the prime
locations in the metros and other cities and expanding through
renovating existing single screen theatres in the tier II and III
cities which has helped the company add more than 100 screens
in the last two years.
• Expansion through acquisitions: Since ADAG group has
picked up the majority stake in the company, it has shown even
more aggression in its expansion plans by acquiring Rave
Cinemas, chain of multiplexes in India and Lotus Five star, an
exhibition player in Malaysia. Both of these acquisitions have
given Adlabs a head start in its expansion plans as compared to
other players

• Future Plans: Adlabs has forayed into production and

distribution of film and TV content since 2005. It plans to release
6-7 movies per year with varying genres and budge. On the T.V.
content side, it has produced 8 shows adding up to 214 hours of
programming in FY08. In the next year, it plans to launch 15
shows on commission basis.

• Film Processing - Leader controlling 70% of market share

Adlabs started as an ad films processing facility. The company
has made fast strides in this business and today controls 70% of
the film processing market in the Western part of the country. It
has set up film processing facilities in Chennai and Kolkata to tap
growing regional markets there. The company has been awarded
Kodak Image care Program Negative Processing Accreditation
recently. This establishes the film processing division among
some of the highly equipped units globally, thus opening doors
for business from other countries. The film processing division is
a high margin business contributing 70% to the total EBIT in
9MFY08. With the growing fold of the company in film
entertainment business, this division is expected to benefit in the
coming years.

• Film Production & Distribution: Adlabs entered the

production business in 2005; the company recently released its
first home production Johnny Gaddaar. Adlabs has signed long
term contracts with key Bollywood talent like Vipul Shah, RGV,
Harry Baweja, Akshay Kumar, and Ashok Amritraj. It plans to
release 6-7 movies per year with varying genres and budge. On
the distribution front, it is present in Mumbai, Maharashtra,
Gujarat, Delhi, UP, Punjab, Bengal, Tamil Nadu, Hyderabad and
My sore territories. These states contribute around 80% to the
domestic box office collection. Some of the movies distributed by
the company include Guru, Black Friday, Bheja Fry Spider-Man 3,
Vivah and Harry Baweja Love Story 2050.It has set up strong
overseas distribution network through its US and UK subsidiaries.
 In addition to this, the company has mandate to distribute all
films produced by Reliance Entertainment Big Motion Pictures.

• T.V. Content Production: Adlabs acquired a 51% stake in

Synergy Communications, which is a well known content
production house for television, associated with famous game
shows like Kaun Banega Crorepati, Mastermind and Jhalak
Dikhhla Jaa.The division produces only commissioned
programmers and has produced 8 shows adding up to 214hours
of programming in FY08. In the next year, it plans to launch 15
shows including Dus Ka Dum,Aap Ki Kachehri, Bindass Champ,
Kya Aap Panchvi Pass Se Tez Hai, Angrezi Mein Kehte Hain.

• Adlabs has shown the most aggression in its expansion plans so

far, mainly because of access to the deep pockets of ADAG
group. It has entered into an agreement with Rave Entertainment
to acquire the right to conduct cinema exhibition business at the
23 screens that the group is developing in NCR, Uttar Pradesh,
Punjab and Haryana. This gives the company access to 6
properties, 4 of which are tax exempt. Recently, the company
has acquired majority skate in Malaysia-based Lotus Five Star
Cinemas and will be operating a 51 screen cinema chain in
across Malaysia. The chain will be catering to the Indian,
Bangladeshi and Pakistani population in the country by playing
Hindi and Tamil films along with Hollywood, Chinese and Malay
movies.
5. CINEMAX

• Cinemax India (Cinemax) is one of the smallest multiplex

exhibitors within the listed space with 56screens across 19
properties, a majority of them concentrated in the Mumbai
territory. The company has a predominant presence in the
Western region and is the largest exhibitor in the Mumbai
territory with a 35% share of the multiplex screens in Mumbai.
Cinemax is now focused on expanding its presence across the
rest of India and is seeking to aggressively add capacity across
other regions

• Aggressive capacity addition plans: The management at

Cinemax has guided for adding 41screens during FY09E followed
by 72 screens during FY10E. The company employs two criteria
for selection of properties: a payback period of less than 4 years
and a target RoE of 18-20%.

• Tapping ancillary revenue streams: Cinemax has been

actively seeking means to tap ancillary revenue streams by
foraying into the branded food court business and the gaming
business. In an effort to reduce its over-dependence on ticket
sales (that currently contributes 70% of the operating revenues),
the company is focused on adding other ancillary revenue
streams to bolster the spender head from current levels.
Cinemax is targeting F&B contribution within overall revenues to
increase by about 300bps from current levels of 14%.

• Leased operating model to help improve margins: Among

the 19 properties that Cinema currently operates (as of Jun'08), 8
are owned while the other 11 are operated on the leased model.
With more properties being added on the leased model, the
proportion of owned properties within the overall mix would
reduce. This shift is likely to push the rentals up by about 600bps
(from 8% of the topline), which is likely to be offset by an
equivalent decline in overheads such as personnel costs and
administrative expenses.

• Future expansion plans: On the exhibition front, Cinemax

intends to add 41 screens duringFY09E and 72 screens during
FY10E. The company has also forayed into the movie distribution
space with 'Kismet Konnection', which is scheduled for an all-
 India release on 18th Jul'08. Cinema has acquired the distribution
rights for the Mumbai and Punjab territories. The company also
intends to form a separate SPV for movie production with a total
investment outlay of Rs1bn over the next two years. Cinemax
plans to raise Rs1bn for this initiative of which Rs700mn will be
spent towards production and the rest towards distribution. At its
CMP of Rs87, the stock is currently trading at 18x its fully diluted
FY08 EPS of Rs4.91. We do not have a rating on the stock

• Property selection criteria: Cinemax applies two criteria for

selection and addition of properties to its existing count. Firstly,
the company targets an Roe in the range 18-20%. Secondly,
Cinema targets a payback period of less than 4 years for
selection decisions. The management has guided for the
following seat / property matrix over the next 3 years.

GROWTH DRIVERS
At a time when single-screen theatres are dying due to lack of footfalls,
people are queuing up at multiplexes that sell tickets at almost 5 times the
prices prevailing in single-screen theatres. This fact provides ample
testimony to the increasing prosperity as well as the Indian consumers’
willingness to pay for superior-quality entertainment. Given the prevailing
demand-supply dynamics, we believe that the sector offers high visibility for
steady cash flows.

Supply side - Improving dynamics

On the supply side, we look at content suppliers, real estate suppliers and
the prevailing regulatory environment in order to judge the visibility of
revenues from the sector.

Content supply set to boom

Multiplexes are in existence because people want to watch movies in a
quality ambience. Hence, as a direct corollary, more footfalls will be
generated with more movies being released. In this sense, the multiplex
operator can do nothing but depend on the suppliers of content (movie
producers and distributors) for a regular and high-quality supply of content to
generate higher number of footfalls. Content supply is set to boom in the
coming years mainly because of the following factors:

Increasing investment in film production

Film production is presently going through a wonderful phase as far as supply

of funds is concerned. This space has been attracting a lot of attention
because of its inherently strong fundamentals. A number of players with
deep pockets have entered this space, which should keep the content
pipeline robust over the coming years. In this year so far, an investment
pipeline of ~$1.7bn has been announced in this space (investible over the
next 2-3 years). Producers are now flush with cash and are no longer overly
dependent on informal sources of funding. We believe that this trend will
continue in the medium-term and supply of content will not be a problem for
multiplexes.
Moreover, ticket sale reporting is far more transparent in multiplexes than in
single-screen theatres. This results in higher film revenues for producers,
which can be ploughed back into movie production.

Reducing shelf life of movies making multiplex the

ideal format for distributors

The shelf life of a movie has dramatically reduced from a few months earlier
to merely a 1-2 week window now. This has significantly reduced the time
window within which producers/distributors can monetize the movie and
recover their costs. Multiplexes, with multiple screens, have far more
flexibility in scheduling of movies, which enables them to exhibit multiple
shows of a single movie simultaneously, thereby helping distributors recover
a majority of the anticipated revenues from the film during the first week
itself. For instance, 31 shows of the movie 'Race' were shown on a single day
by a multiplex operator in Mumbai.

Today, multiplexes are contributing 35-40% to the overall domestic box office
collections with less than 5% of the total screens under operation. We
believe that the format is highly relevant for the distributors and none of
them can afford to bypass it and still make money on films.
Hollywood films gaining ground - more content
supply

Hollywood films are increasingly finding acceptance in India, making India

the fifth-largest market of Hollywood films in Asia and the 15th largest
market for Hollywood globally. An increasing number of Hollywood films are
being released in India in multiple languages with greater number of prints.
For instance, Spiderman 3 was released with 600 prints in 4 languages. The
film was a blockbuster on the Indian domestic circuit, clocking $4.5mn during
the opening weekend.

We believe that the number of foreign films released in India is set to grow,
especially with large studios such as Reliance Big Entertainment and Yash Raj
Films foraying into foreign film distribution. We expect this trend to benefit
the multiplex industry in terms of ensuring a steady stream of content.

Real Estate Supply

Multiplexes are often regarded as the footfall magnets for malls. The concept
of shopping-cum-dining- cum-entertainment outing is gaining popularity
among the urban populace, where multiplexes in malls become the most
relevant destination choice. Almost all upcoming malls have a multiplex
operator as an anchor tenant. Hence, we believe that the supply of real
estate will not be an issue for the sector, even though the pace might be
slow due to development delays.

India is presently witnessing a retail revolution with many big players

foraying into organized retail and many mall development plans being
announced in order to cater to their expansion plans. The pace of mall
development will surely ensure availability of quality real estate for multiplex
operators.
Encouraging regulatory environment
All entities linked to the entertainment space are required to pay
entertainment tax, which is a state subject. Entertainment tax in the past
was as high as 100% of the ticket revenues in some states, which made
exhibition projects unviable in many cases. However, many state
governments appreciate and understand the need to rationalize E-tax levels
and have provided for either entertainment-tax exemptions for multiplex
operators or reduction of e-tax to more affordable levels.
  Demand Side - Strong pull
Demand side environment has never been better for the whole media &
entertainment industry in general and multiplex sector in particular. A lot of
demographic changes coupled with sector fundamentals are expected to fuel
demand side of the story for the sector.

Prosperity to drive discretionary spend

India is a highly favorable country for consumer industries with all the key
indicators pointing towards higher consumer spends in the coming years. It
has seen its per capita income doubling in the last 6 years, it has more than
60% of its people under the age of 60, urbanization and exposure to western
lifestyle is rising, all leading towards increasing consumerism in the coming
decade.

In the buoyant times; people tend to spend more on the leisure based
consumption. For the multiplex sector, the target group is in the age group of
15-60 years of age, which visits the theaters more often than others.
Where will you watch them?
India is an entertainment hungry nation, and the major sources of
entertainment are cricket and Bollywood. More than 3.3bn tickets are sold in
India annually, this makes us the most cinema going population in the world.
Even then, there are only ~11,000 screens operational in the country.
Secondly, 95% of these are single screen theatres many of which have poor
quality ambience.

Most of the single screen theatres are run by single proprietor, often without
proper operational management skills. Moreover, because of the poor quality
of prints supplied to the single screen theatres in the rural areas, footfalls
have been coming down. On top of it, these screens are not eligible for
entertainment tax exemptions. These factors have eroded the viability of
these screens resulting in poor infrastructure spend which further reduces
footfalls.

People willing to pay for quality

With the entry of multiplexes, which provide better quality movie watching
experience at a higher price compared to single screen theaters, more and
more middle income group people are coming back to the theatres thus
unlocking a latent demand. This is a classic case of leisure consumption
winning over value proposition in India. As content supply booms, more and
more people will turn to multiplexes because of the rising willingness of
people to pay for such services.

Enough space for more multiplexes

We believe that there is enough space for more multiplex projects given the
quantum of demand and lack of supply in the sector. Our preliminary
analysis suggests that at national level and considering only the urban
population demand in the age group of 15-60 years, 662 multiplexes with 3
screens per property i.e. ~2000 screens can operate at 35% capacity. All of
the multiplex players combined are operating only ~500 screens at present,
hence, we believe that even though there might be a case for overbuild in
some pockets, overall there is enough scope for further screen supply.

PRODUCTION OF HINDI MOVIES

The Indian film industry, with over 3 billion admissions per annum, is the
largest in the world, in terms of number of films produced per year. This
industry, which was worth US$ 2.12 billion in 2006, is estimated to grow at a
CAGR of 16 per cent to US$ 4.42 billion by 2011.

The opening of the film industry to foreign investment coupled with the
granting of industry status to this segment has had a favorable impact,
leading to many global production units entering the country. For example,
Walt Disney has partnered with Yash Raj Films to make animated movies, the
Warner Group is funding the Sippys' film projects, Viacom has joint-ventured
with the TV 18 group to form Viacom-18, and Sony Pictures Entertainment
has co-produced Saawariya with SLB Films (Sanjay Leela Bansali FIlms).

Simultaneously, advancements in technology along with a rise in consumer

income and change in consumption patterns has led a massive shift in all
spheres of the film industry -- production, exhibition, distribution and
marketing.

One perceptible change has been the rapid growth of multiplexes, which
meets consumer demand for quality entertainment and has also helped
boost production of niche films targeted at niche audiences.

MULTIPLEXES FEEDING INDIA’S

MOVIE MANIA
Indian and Hollywood films, although a ticket now costs about $3 (Rs121).
Moreover, many are located in big malls, adding the attraction of shopping to
a day out at the movies. Earlier, it was like one film in one hall, you don’t get
tickets you go home said Dipti Varma, a young executive with a business
forum. Now you have a choice of films under one roof.

Such has been the runaway success of this cinema viewing experience that
today, even though multiplexes make up just 2% of India’s nearly 11500
screens, they account for more than half the box office revenue of Hollywood
releases in the country and more than a third for Bollywood. That success,
however, has not been limited to the glitzy cinema halls.
Industry analysts say that multiplexes, with their smaller halls, have also
redefined filmmaking by creating a niche for experimental cinema among
urban, educated audiences.

Multiplexes, where ticket prices are five times that at a single-screen cinema,
ensure a faster return on investment for producers and, because of quick
turnarounds, have become instrumental in raising the output of films, he
said. “The idea now is to recover investments within the first weekend,” said
Bose, who has authored several books on Bollywood.

Independent film-makers like Madhur Bhandarkar agree, saying multiplexes

have proved to be a blessing as many recent hits would never have been
made if it were not for them. “Exhibitors would never run my films in a
1,000-seater hall,” said Bhandarkar, a leading director known for his
unconventional films. For businessmen who kept their faith in movie halls
and invested in multiplexes, it has been a gamble that paid off. They have
thrived on the back of tax incentives over the last five years, and are now
looking to expand, according to industry group Ficci. Aiming to widen their
base in search of greater profits, they are now moving to smaller cities and
towns, where operating costs are lower, allowing for greater flexibility in
ticket pricing. “Multiplexes will first reap the more lucrative markets— reap
the low hanging fruit first—and then move on to the smaller markets,” said
Deepak Asher, director of multiplex operator Inox. “It is just a question of
time before multiplexes hit the B and C towns big time.” While PVR Ltd, the
pioneer, has about 70 screens, Inox has about 50. Adlabs Films Ltd, which
branched out from film processing to multiplexes, plans to have about 80
screens by 2007-08.

The multiplex industry is expected to grow more than 44% to $220 million by
next year, according to a recent report by brokerage B&K Securities. The
overall Indian film industry, now worth about $2 billion, is expected to grow
to $4.3 billion by 2011, Ficci says.

While more and more single-screen cinemas are converting to multiplexes in

cities, they still remain the entertainment mainstay for millions in small
towns and villages. They are also popular with the urban poor because of
their cheaper tickets. Analysts say high ticket prices have also meant that
average occupancy levels in multiplexes have hovered at around 40%. They
say that as multiplexes mushroom and begin cutting into each others’
territories, occupancy levels could plummet to 30%. “This could mean the
multiplex boom is a bubble that will burst unless ticket prices are brought
down,”

HOLLYWOOD STUDIOS EYE

BOLLYWOOD
This year's much awaited Bollywood film Saawariya, with a mega budget of
over Rs 50 crore (Rs 500 million), will be the first movie to be produced by a
Hollywood studio. Co-production of Bollywood movies is on the rise, with
more Hollywood production houses -- Paramount Films and Warner Brothers
-- eyeing the space. And this trend is catching up.
The co-production between renowned filmmaker Sanjay Leela Bhansali and
motion picture company Sony Pictures marks Sony's foray into the Bollywood
production space.

"Given the growth potential and scope in the Indian cinema, the market is
very important for us. India figures in the top-15 markets for Sony Pictures'
business plans," said Uday Singh, managing director, Sony Pictures. Adds
Sarabjit Singh, general manager (India operations), Paramount Films, "Co-
productions are strategic alliances wherein one makes use of the other's
network strength in a particular region."

Paramount Films too is believed to be in talks with Subhash Ghai-promoted

Mukta Arts for crossover movies. Confirmed an official of Paramount, "The
discussions with Mukta Arts are at a nascent stage." Warner Brothers too is
following suit.

Hollywood studio experts explain that making a Hollywood film is becoming

an expensive business with audiences' expectations on the rise. A Hollywood
production budget could range anything between $30 million and $120
million, apart from an additional $60 million for marketing and promotional
activities.

The overseas market for Indian films continues to be growing rapidly. The
overseas market for Bollywood movies is currently estimated to be Rs 850
crore (Rs 8.5 billion) and is expected to grow at a compound annual growth
rate of 18 per cent (higher than the estimated 16 per cent CAGR of the
domestic box office collections), according to the latest PWC’s report.

For instance, Mira Nair's much acclaimed movie The Namesake was co-
produced by UTV Motion Pictures and FOX Searchlight. If that wasn't enough,
UTV Motion Pictures and 20th Century Fox recently announced their strategic
tie-up for the co-production of director Manoj Night Shyamalan's forthcoming
Hollywood thriller The Happening. The movie has a budget of $ 57 million.
UTV and Fox will co-produce and enjoy global revenues equally.

Said UTV's CEO Ronnie Screwvala, "The key to a successful international co-
production is that you have global distribution partner from day one and that
partner needs to be a co-producer." UTV has five foreign co-productions up
its sleeve with studios such as Sony Columbia, 20th Century Fox and Disney.

Co-production alliances are mainly to make use of one another's business

network and expertise. "Bollywood movie budgets are shooting up.
Collaboration of international and domestic studios provides the essential
money and helps entry into each other's territory, thereby opening newer
markets," said film analyst Komal Nahata.

Using each other's resources is the major driving factor for co-production.
Like in the case of Sony Pictures' tie-up with Sanjay Leela Bhansali, while
Sony has the money, Bhansali has an understanding of Indian cinema and
audience appeal. The same holds true for UTV and 20th Century Fox. UTV
has its own business expansion agenda, Hollywood movies being one of
them.

Consequently, being a new market for UTV, Hollywood sought partnership

with an established player. "It is a de-risk model for new players wanting to
enter a new territory for operations. Most of the production houses are now
looking at increasing their level of film production, thereby increasing their
intellectual property rights value and market capitalisation," said movie
financier Sanjay Bhandari.

According to the PwC report, the Indian film industry in 2007 is estimated to
be Rs 9,680 crore (Rs 96.8 billion) and is expected to grow at a CAGR of 16
per cent to Rs 17,500 crore.
With the numbers the Indian filmdom is expected to churn out this year, the
entry of Hollywood studios is not surprising.

Going forward, Sony Pictures plans to increase its footprints across three
verticals, co-production of Bollywood films, production of Indian cinema and
movie distribution. Consequently, last month it has named Deborah
Schindler as the president of International Motion Picture Production and
Gareth Wigan (vice-chairman of Sony's Columbia TriStar Motion Picture
Group) to head the new international movie division.

The newly created wing will facilitate 'increasing production in India' and
other countries.

"At the moment, our focus is on Saawariya. The movie will mark the
beginning of the state we intend to develop in India. We will look at similar
ventures in the near future. However, acquiring distribution rights, co-
production and production are on our agenda," said Uday Singh.

Sony Pictures in the past has distributed nearly 20 Hindi movies such as
Monsoon Wedding; Bend it like Beckham, among others.

Audience base and also the scope of production houses," said film analyst
Taran Adarsh.
HOLLYWOOD LOOKING TO INDIA FOR
POST-PRODUCTION WORK
Impressed with the low-budget and good production quality Bollywood films,
Hollywood is eyeing India to outsource its post-production and shooting work.

"There is obviously a lot of talent in India. Hollywood is looking back to India

to commission a lot of the post-production work and shooting work," Kishore
Lulla, Chairman and Chief Executive of Eros International said.

"If you look at the quality of Bollywood movies, we can produce those movies
at maybe 10 or 20 per cent of the cost that Hollywood can do. If Hollywood is
spending 100 million dollars a movie, we make the same kind of movie for 10
to 20 million dollars budget in India," Lulla, who recently won the BDO Stoy
Hayward Business of the Year Award at the Eastern Eye Asian business
awards function, told the The Daily Telegraph.

REAL ESTATE SUPPLY

Multiplexes are often regarded as the footfall magnets for malls. The concept
of shopping-cumdining-cum-entertainment outing is gaining popularity
among the urban populace, where multiplexes in malls become the most
relevant destination choice. Almost all upcoming malls have a multiplex
operator as an anchor tenant. Hence, we believe that the supply of real
estate will not be an issue for the sector, even though the pace might be
slow due to development delays. India is presently witnessing a retail
revolution with many big players foraying into organized retail and many
mall development plans being announced in order to cater to their expansion
plans. The pace of mall development will surely ensure availability of quality
real estate for multiplex operators.
PROCEDURE OF SETTING UP A
MULTIPLEX
The procedure of setting up a multiplex is divided into 3 phases after the
multiplex operator has decided the location of the multiplex and entered into
the agreement with the mall developer.

Development of property
In this stage the mall developer develops the property according to the
specifications agreed upon by the multiplex operator and the mall developer.
The mall developer has to get certain approvals from various authorities.
After the mall developer completes development and gets approvals, the
property is handed over to the multiplex operator.
Fit outs:
After the property has been handed over to the multiplex operator, the
interiors are done up by him. This includes civil and architectural work,
designing, seating, carpeting, putting up the screens etc. This stage normally
takes between 2-6 months depending on the size and scale of the project.
Approvals:
After fit outs are completed, the multiplex operator has to get various
approvals before he can commence operations. On an average this stage
takes around 1-3 months depending on the state as he has to get approvals
from the fire department, electrical department, health department and
various other licenses.

MULTIPLEX BUZZ!!
The nation's multiplex industry is all set for an unprecedented boom buoyed by positive
regulatory changes and booming consumerism. Multiplexes /megaplexes have been instrumental
in contributing 28 percent of the total theatrical sales for the film industry according to a report
by Systematix Institutional Research. Industry experts estimate that top six multiplex chains have
plans of 300-500 screens each by FY-10.

• DLF, a leading real estate player in the country, plans to invest US$ 298.12 million for
the expansion of its multiplex business. The company has planned to add at least 500
screens in the next four to five years across the country.
• Entertainment conglomerate Adlabs Cinemas has drawn up a plan to build 12 megaplexes
in India where you can not only see movies but also cricket and soccer matches on
screen.
• Multiplex chain PVR Cinemas, which currently has 92 screens, is also planning to add
over 150 screens across India, staggered over a period of three years from 2008-2010,
with a total investment outlay of around US$ 71.55 million.
• Cinemax India, the multiplex chain which currently has 55 screens over 17 properties
across the country is planning to scale up its presence to 299 screens across about 100
properties by fiscal 2010

AGE WISE DISTRIBUTION OF CINEMA

VIEWERS
INCREASING CORPORATIZATION OF
BOLLYWOOD
Film production historically has been a fragmented segment, dominated by a
few family production houses and individual producers. Recently, the
segment has begun attracting corporate funding and along with that a
corporate style of project management. Better planning and discipline in the
production process will bring in higher efficiency, thereby reducing project
delays and cost overruns.
Corporatization of Bollywood has actually widened the canvas for movie
producers. Movies are being produced on a much larger scale with larger
budgets, employing more sophisticated technology.

REDUCING SHELF LIFE OF MOVIES

MAKING MULTIPLEX THE IDEAL
FORMAT FOR DISTRIBUTORS
The shelf life of a movie has dramatically reduced from a few months earlier
to merely a 1-2 week

window now. This has significantly reduced the time window within which
producers/distributors can monetise the movie and recover their costs.
Multiplexes, with multiple screens, have far more

flexibility in scheduling of movies, which enables them to exhibit multiple

shows of a single movie simultaneously, thereby helping distributors recover
a majority of the anticipated revenues from the film during the first week
itself. For instance, 31 shows of the movie 'Race' were shown on a single day
by a multiplex operator in Mumbai.

Today, multiplexes are contributing 35-40% to the overall domestic box office
collections with less than 5% of the total screens under operation. We
believe that the format is highly relevant for the distributors and none of
them can afford to bypass it and still make money on films.

% split of ticket revenues across the life of a film Week

1 2 3 4

FY08 53% 25% 10% 12%

FY07 58% 24% 9% 9%

FY06 55% 22% 10% 13%

Source: Fame India Note - Numbers are only for comparable screens

REVENUE BREAKUP
The revenue breakup is divided into three distinct parts namely :

- Ticket which generates 69% of the revenue

- Food and Beverages is leased out to agencies which generate 19% of
the revenue. These include various stalls like cold drinks, juices,
chocolates and various other snacks.
- Advertisements as a whole generate 12% of the revenue.

Conduction fees a key part of the revenue breakup generates revenue with
activities related to the conduction of a particular show.

Companies today are putting in immense effort to try and expand their
operations in prime cities like Mumbai.. Companies are also focusing on
increasing food and beverage spend by introducing new items and offering
attractive packages like food combo's and providing additional facilities like a
gaming zone which attracts huge number of kids thereby generating more
revenue for the companies.

GROSS REVENUE MADE BY FILMS

Sr No. Film Total Gross

1 Ugly Aur Pagli 3,0399443

2 Mission Istaanbul 3,83,56,380

3 Mony Hai Toh Honey Hai 2,06,52,608

4 Kismat Connection 17,34,56,122

5 Jaane Tu Ya Jaane Na 30,81,34,906

6 Sing Is Kinng 46,90,03,356

(Figures in Indian Rupees)

As you can see the chart Sing Is Kinng a mind boggling comedy which has
done exceptionally well all across the globe has broken all records to gain the
title of the best comedy movie of the year. This movie as the figure shows
has generated Rs. 46,90,03,356 gross revenue followed by Jaane Tu Ya jaane
na and Kismat Connection as far as gross revenue is concerned.

FRANCHISE MODEL
The company operates two multiplexes under the franchise model; PVR SRS
in Faridabad (3 screens, 776 seats) and PVR Spice in Noida (8 screens, 1,821
seats). Under this model, the property the company sells its expertise in
developing and managing the operations of the multiplex to the mall
developer.

PVR advises the mall developer on design specifications, business plan and
the financial and operational feasibility of the multiplex. PVR manages the
operations of the multiplex and uses its brand name to attract patrons. For
these services, PVR is entitled to a revenue share from the multiplex. In the
case of PVR SRS, PVR charges 5% of the net revenues of the multiplex as
management fee. For PVR Spice, the management fee is calculated as 3% of
the net revenue and 5% of the net profit of the multiplex.

The franchise model is a good strategy for the company in places where they
want to take limited risk or in areas where the company wants to take
exposure but the mall developer desires to own and operate the multiplex.

COST BREAKUP
The costs are divided into 4 distinct parts, namely :
  Direct Cost which is further divided into various sub parts

- Distributors share-This refers to a stipulated amount which

needs to be paid to the distributor for distribution a particular
movie to the multiplex.

- Entertainment Tax which is a mandate tax which needs to be

paid and is charged to the viewer within the cost of the actual
ticket purchased by him.

- Food and beverages cost refers to the cost incurred by the in

house brands to producing or making a particular product or item
available for the end consumer.

 Personnel Cost refers to the cost incurred right from the sweeper
and the security guard right up to the manager of the multiplex.

 Depreciation refers to the ware and tare of a particular

machinery over a period of time which can this case refers to the
projector and various other assets bought to commence the how.

 Interest refers to the amount which needs to be paid on the

borrowed capital by the company.

RISKS AND CONCERNS

  Slowdown in content supply
As multiplexes are the consumers of content, they have no control over the
supply quality and quantity. Multiplexes thrive on rising footfalls which in turn
depend on the better supply of films from producers. Hence, any disruption
on the supply side will definitely have a negative impact on the multiplex
players' growth.

 Alternative entertainment avenues

Movies compete for customer attention with other forms of entertainment
viz. DVDs, TV, cricket, festivals etc. An increased acceptability of these
avenues will divert footfalls away from multiplexes.

However, we believe that there is enough room for all to exist and grow
simultaneously. A case in point is US, where almost all forms of
entertainment are present and have been well received by the consumers.
Even then, footfall growth hasn't halted over there. Moreover, there might be
possible synergies among these formats which might benefit multiplexes,
e.g. showing of IPL matches on cinema screens.

 Mall development delays

Supply of quality real estate has been a problem in the past for multiplex
players. Mall delays due to various reasons will hurt expansion plans of the
companies. We are building in a 50% delay in mall handovers to the
multiplexes in our analysis. Any delay more than this will hurt future growth
of multiplexes.

 Uncertainty over entertainment tax

Entertainment tax in India is among the highest in the world leading to a
much higher occupancy levels required for break even of multiplexes. Even
though state governments have announced tax free windows for these
players, uncertainty looms over the viability of multiplexes after the window
expires. We believe that the levels entertainment tax will come down in the
future, otherwise any increase will be passed on to the consumer to a large
extent like it is done at present.

 Worsening economic environment

The whole footfall growth story depends on rising prosperity in the country
leading to higher discretionary consumer spends. If the economic
environment starts worsening for a prolonged period, it will affect patronage
levels negatively pulling down topline growths. We are assuming very low
CAGRs at the topline levels for all of the players and are quite optimistic that
multiplexes will grow as expected.

 Great success of IPL

Bollywood regularly competes with cricket as an entertainment category.
One such property, the Indian Premier League (IPL) was floated by the BCCI
during Q1FY09 and held between Apr'08 and Jun'08. This has been a double
whammy for multiplex operators. On the one hand, movie producers were
reluctant to release their movies during the quarter, on the other hand,
popularity of IPL reduced cinema visits. Since no fresh content was
forthcoming, multiplex operators had to churn the old movies a little longer
and hence, could not generate footfall growth.

Our interaction with the management at various multiplex chains indicates

that all operators experienced low occupancy rates during the quarter. Given
the fact that the DLF IPL is here to stay as a property, at least in the
foreseeable future, we believe that low occupancy levels would characterize
the first quarter performance. However, we also believe that going forward,
once the novelty factor wears off, and multiplex operators would be able to
progressively improve their occupancy levels.
WAY FORWARD
Kishore Biyani''s Future Group media arm Future Media has acquired the on-
screen media rights for all Inox Leisure multiplexes in India, for the next two-
and-a-half years. It also owns the rights to ad spaces within the Future Group
retail formats, and provides brands with opportunities to reach their target
consumers in the ambience of consumption, be it at malls, airports, or
cafeterias. This deal marks its foray into the multiplex space as well.

Future Media India Ltd is a part of the Future Group, which owns multiple
retail formats such as Pantaloons, Big Bazaar, Food Bazaar, Central and
hometown. The company plans to expand its gaming business by opening
seven new Giggles gaming zones at some of its future multiplexes at
different locations in India. Include pubs and bar.

Kishore Biyani-promoted Future Media is set to launch Future TV Lounge next

month to capture a slice of the profitable liquor and tobacco advertising that
is banned in the general media. Future TV Lounge would be a special vehicle
that would put up television screens for advertising in hotel lounge,
restaurants, bars and pubs.

Mumbai's multiplexes are growing bigger and better and working towards
transforming themselves into complete entertainment zones. others are
trying to get liquor licenses so that you can wash down your movie
experience with the choicest of liquor. And, if your kids are bored with the
movie, you can also leave them out in the children's play area or, better still,
book a ticket for them in the theatre where the screen is dedicated to kids'
films. Reliance Adlabs is one of the firms that is planning a double-digit
number of screens in one of its megaplexes The firm is investing Rs 30 crore
on what will be India's largest megaplex. It will have 15-16 screens, including
an IMAX 3D digital screen, food and beverage lounges, special screens for
kids and sports screens. Adlabs is also opening a nine-screen multiplex at
Ghatkopar also PVR coming up with 8 screens. Adlabs has also tied up with
kingfisher airlines were u travel by airlines and you accumulate points on
which you can get a free ticket in adlabs after you have reached a specific
number of points.