Institutional Equities

Institutional Equities
Five Forces analysis of Indian exhibition sector
Entry barriers- High
Location is a key driver of demand and occupancy. Being located in a well-run mall in a good neighborhood is
critical for success of a multiplex. Being located in a mall which has little competition in a catchment area is
even better. Incumbents like PVR and Inox Leisure have sewn up leases for 15-20 years not only in existing
malls, but also in quality mall space that is coming up over the next three to five years. Both multiplex
operators and property owners are locked in for this time frame (15-20 years) although multiplex operators
have the choice to opt out after five to seven years if the mall is not run successfully. Renewals typically go
through smoothly and change in the tenant is a rare occurrence. This is one of the reasons why Cinepolis, a
large Latin American player has been able to add only ~185 screens organically (it currently has ~270
screens) in the past eight years of its presence in the country.
Competition-Low to medium
With location being a key factor and consumers in cities not wanting to travel more than 5-7km to go to a
multiplex screen, we believe competition is constrained to a location. In many parts of the country, in micro
markets, the industry is monopolistic. In other parts, these tend to be at max oligopolies. The competitive
situation has changed quite dramatically over the past five to six years because of consolidation. This is
reflected in the steady increase in rates year after year by both PVR and Inox Leisure, the two large listed
players. Single screens are no longer competition to multiplexes in a material way. Already multiplexes
account for 40%-45% of domestic theatre revenues in India (despite having only about 25% of the screens)
and the number will only keep rising on a yearly basis. More choice of content, location in a mall, better
ambience, better all round viewing experience, better F&B, etc reduces competition from single screen
theatres.
Bargaining power of buyers- Low
For consumers who want big screen entertainment, there are no other options. The convenience of going to a
nearby mall, enjoy watching the movie in a theatre with a good ambience and facilities and being able to
combine the visit with doing things like shopping and eating out reduces bargaining power significantly. The
size of the personal wallet and the content, however, constrain demand. Currently, those who are considered
buyers is a very small set.
Bargaining power of sellers- Low to medium
There are various kinds of sellers including those that: (1) Provide content to be exhibited (the distributors), (2)
Providers of raw materials that are used for F&B outlets and (3) Agencies that source advertisements. The
general impression is that film distributors’ bargaining power will diminish with rising consolidation in the
exhibition industry and that at some point the existing revenue-sharing structure (which involves sharing of
about 42%-43% of net box office revenues – after deducting entertainment tax) could potentially be tweaked
lower. In fact, the distributors’ share was raised in 2009 by about 150bps after a dispute between the two.
However, we believe it is unlikely. Content is the lifeblood of the film exhibition industry. Data suggests a large
percentage of movies released do not recover their investment. It is in the film exhibitor’s interest that
distributors and producers make good money so that it can be invested back in developing good content. In
F&B context, we believe the bargaining power is not very high. Advertising agencies do have some bargaining
power when it comes to deciding the mix of media that they need to use to maximise the impact for a
customer. However, compelling customer statistics will also help film exhibitors bolster their case for in-theatre
advertising.
Threats from substitute-Low
We believe there is absolutely no substitute for big screen film entertainment. There are other screens or
formats of viewing film content, but we believe the immersive experience that a big screen viewing entails,
especially with enhanced film exhibition technology involving 3D, 4DX, IMAX, DOLBY ATMOS, etc is
something that is unlikely to be replicated.
33 Indian Film Exhibition Sector