Everest GROUP National Case Study - GCC Cinemas

Team Zenith
XLRI

Furqan
Rohan Coelho
E XE CUTIVE S UMMARY
GCC a US Based Theatre company wants to foray into a South Asian Market to boost its revenue and address falling
profit margins from recent acquisitions across America and Europe .

An analysis of the current Movie Theatre industry in India, indicates a good potential with consistent growth and rising
income levels across newer markets along with general demand for entertainment solutions. After a through analysis
of Movie theatres across various geographies , we recommend a mix of investment in Tier 1 and Tier 2 Cities .
Additionally South India was identified as target geography with 55% of theatres in the country. While there is existing
competition in Multiplex market ( Inox, PVR, BIG Cinemas, Cinepolis etc), market growth should be sufficient to grant
smooth passage to GCC ‘s entry into India.

Basis Quantitative and Qualitative factors and analysis with respect to number of Theatres and Income levels along
with demand for vernacular and varied films of different languages Team Vibrant has proposed three projects be
opened . A 4-screen multiplex in Bangalore and a two screen project in Mysuru and Kochi . There are two proposed
strategies to develop these projects . Finer choice of option would be a function of exact location in city and upcoming
constructions which is currently beyond scope of study of this report .
FINANCIALS ANALYS IS

Balance Sheet ($000) 2015 2016 2017 2018 H1 2019 • Substantial Investment in Assets Observed in 2019
Net PP&E 1401.9 3035.9 3116.5 3039.6 7412.8 • Short term borrowings and current burden of long term loans
Short-term and Current Long-term Debt 18.8 81.2 87.7 82.2 603.1 have spiked of near 6 times
Non-current Long-term Debt 1995.9 4355.1 4799.0 5201.0 9674.5 • Substantial increase in Loans due to Asset Purchase

• Noticeable Dip in Operating Margins observed in 2019 (Possibly due to

Income statement ($000) 2015 2016 2017 2018 H1 2019
new property additions)
Operating Revenue, Net 2946.9 3235.8 5079.2 5460.8 2706.5 • Depreciation is eroding large part of accounting profit
Cost of Revenue 2396.8 2590.5 4178.2 4409.6 2309
• Projected Revenue is similar to 2018 despite addition of substantial
Gross Margin 18.67% 19.94% 17.74% 19.25% 14.69%
Recurring EBITDA 512.2 582.3 770 950.6 320 Fixed assets (Indicating dip in demand/ inefficient operations)
Recurring EBIT 279.3 314 231.4 412.8 95 • Company reporting loss will have negative impact on Shareholders
Depreciation Shield 232.9 268.3 538.6 537.8 225 and Share price, consequently giving less leeway for large Capex in
Depreciation to EBIT 45% 46% 70% 57% 70% new Markets
Net Income before Taxes 163.5 149.6 -333.1 123.7 -69.7
Net Income 103.9 111.7 -487.2 110.1 -80.8

Cash Flow ($000) 2015 2016 2017 2018 H1 2019 • The CFO (projected ) has declined near 40% despite no noticeable dip
Cash Flow from Operating Activities 467.6 431.7 537.4 523.2 153.6 in Income indicating shift of revenue stream to non cash accruables.
Cash Flow from Investing Activities -509.4 -1354.7 -959.3 -317.2 -221.3 • Exchange Rate may play substantial role like in 2017 when company
Cash Flow from Financing Activities 35.3 918.3 492.3 -194.8 -54.5
expands to new foreign markets
Effect of Exchange Rate Fluctuations -0.4 0.6 17.7 -5.5 -.0.6
Net Increase in Cash and Cash Equivalents -7 -4.2 88.1 5.7 -122.8 • Overall company has had a negative outflow of cash in H1 2019 which
Recurring Levered Free Cash Flow 69.8 50.7 -94.4 76.5 -53.7 will strain working capital

• Company is under pressure due to negative Income and has less resources to make Lavish expenditure in new Acquisitions
• Prudence is recommended in expansion into new Geos till Cash Stream and Net income Stabilize
• Company should consider refinancing of short term debts to Long term given substantial Capex planned
MOVIE THEATRE INDUSTRY AT A GLANCE

Threat of Threat of Bargaining power of Bargaining power of Competitive

new entrants - Medium substitutes - customers- Low suppliers- Medium rivalry- High
Medium

 In Tier 1 cities, Customers Distributers usually PVR and Inox

 Streaming Giants   
PVR and Inox generally do not have revenue cut of account for 1,294
like Netflix and
following the have much loyalty 40-50% of the ticket out of total 9,601
Amazon release
strategy of to theatres and sales as per deal. screens in the
new movies on
owning multiple would be swayed Suppliers may country
regular basis
theatres by price discounts decide to sell rights
 Jio Fiber’s “First  Aggressive Growth
 High capital and within a certain to TV networks or
Day First Show” seen by Market
Specialist barrier of streaming sites if a
threatens theatres leaders PVR.
knowledge convenience movie isn’t
industry generating enough
barricades revenue
smaller players
COMPARISON OF POTENTIAL LAUNCH MARKETS
Factorwise Comparison
Criterion Tier 1 Tier 2 Tier 3

Competition Major Movie Chains – PVR and Inox Standalone Legacy Theatres Local Screens

Ticket Prices High/ Very High Medium to High Fixed

Rents and Overheads Very High Medium Low

Revenue from Other Sources F&B + Ads – V . High Ads – High , F&B- Medium Ads - Low

Demand for New Releases Very High High Low to Medium

Demand for Vernacular Content Medium High High

Quantitative Modeling – Factor wise Weights

Demand for Prime Price of Opportunities Potential for Competition Investment / Total
Theatres (0.2) Locations tickets(0.2) of Non-ticket Growth (0.1) from Big Rents (0.1)
(0.05) sales revenue players (0.15)
(0.1)
Tier 1 5 5 5 5 5 1 1 3.6

Tier 2 4 2 4 3 3 3 3 3.35

Tier 3 3 1 1 1 3 1 5 2.4

Based on Above Model – We recommend a Mix of Tier 1 and Tier 2 Cities for GCC to Launch their Venture
 PROJECTED OPERATIONS

Criterion (Yearly) Tier 1 Tier 2

Ticket Price expected to rise in
No Of Screens 4 4 (2x2)
accordance with rising income levels
CAPEX Per Screen (CR)* 6 Crore 3.75 Crore which will reduce breakeven period
Total Capex 24 Crore 15 Crore
Margins can be improved by boosting
Seat Capacity per Screen 300 300
Additional revenue to more than 30%
Average Ticket Price 250 150 of Revenue stream
Occupancy Rate** 30% 30%
Number of Shows can be adjusted
Number of Shows a day 4 4 after observing demand
Ticket Revenue - Yearly (365 day Year) per 3.28 Crore 1.97 Crore
Screen Occupancy maybe increased through
Additional Revenue @3/7 times Ticket 1.40 Crore 0.49 Crore promotions and other methods
Revenue (F&B + Advertisements)***
Total Revenue 4.68 Crore 2.46 Crore (Suitable Assumptions Taken as per references)

Operating profit ( 20% Margin ) **** 0.94 Crore 0.49 Crore

Breakeven Period @10% interest Rate 10.25 14.58

*https://www.thehindubusinessline.com/companies/pvr-plans-sub-brand-to-enter-smaller-towns-may-also-take-over-single-screen-theatres/article25656399.ece
**https://www.statista.com/statistics/948752/india-occupancy-rate-of-cinemas-by-company/
***https://www.livemint.com/Companies/bRsLnQOJ4D9Xm2zZ8FAnbM/Inox-PVR-make-every-fourth-rupee-selling-food-drinks.html
****http://www.careratings.com/upload/NewsFiles/Studies/Media%20entertainment%20FILM%20segment.pdf
SELECTED CITIES FOR OPERATIONS
• Bengaluru – Tier 1
• Mysuru – Tier 2
• Kochi – Tier 2

Reasons for Selection of Cities :

• Bangalore has the highest average income among metros along with a large
percentage of population who are young and would be likely to frequent theatres
• Bangalore due to its cosmopolitan background has healthy demand for films of
many Languages including English , Hindi, Kannada , Telegu and Malayalam
• The rental prices in Bangalore are cheaper compared to Mumbai and Delhi .
• As we are choosing our Tier 1 location in the south , Tier 2 are selected from
locations which are from same/neighbouring state so as to consolidate operations
• Mysuru and Kochi have the Highest population per Theatre among the surveyed
south cities. The average income in these cities too is high compared to similar
cities and thus would make for good locations for opening of theatres .

Model of Operation :

1. Buy over Older Single Screen : There are some single screen theatres in all cities
which have been hit by multiplexes due to Non modern Infrastructure

2. Negotiate New Contract with Upcoming Malls : For Tier 2 Cities upcoming malls can
be negotiated with for a long-term contact for 5-10 years .
 NOTE TO THE CEO

We at Team Zenith would like to suggest that GCC proceed with Caution to enter the Indian market using a modest
approach. As per our research, while the Movie business is growing steadily with suitable potential observable both by
growth of Industry and growing topline of leaders in the industry (PVR) , there are still many extraneous factors to be
considered while venturing into the movie theatre space in India. Our Recommendation was to start small by an
investment of about 39 Crores (5419 K USD)( 8 Screens – 4 in Banglore and 2 each across Mysore and Kochi) .

The modest approach is also recommended given the recent acquisitions already executed in 2019 and current debt and
interest burden due in 2019 along with declining cashflow from operations. The threat of streaming giants and Media
suite providers like Jio may also have a negative effect on this promising industry. Given these circumstances, the
operations from the 3 projects suggested would give the company the requisite insights to take a more informed decision
on a more ambitious step in the industry 3 years hence .
Appendix
• EMIS Intelligence
• https://www.ijltemas.in/DigitalLibrary/Vol.5Issue10/63-65.pdf
• https://www.livemint.com/Companies/p7ICDx03MlSNPfhrDDMcaK/Multiplexes-
opt-for-revenue-sharing-with-malls-as-rents-rise.html
• https://www.indiatoday.in/budget-2019/infrastructure/story/budget-2019-ficci-
recommends-incentives-lower-tax-rates-for-movie-theatres-1559331-2019-06-30
• https://www.business-standard.com/article/companies/india-s-box-office-
growth-runs-into-a-screen-problem-116011801209_1.html
• https://www.business-standard.com/article/companies/j-jagannath-pvr-to-
invest-rs-70-cr-to-build-21-4dx-screens-by-2019-117121300305_1.html
• https://www.thehindubusinessline.com/companies/pvr-plans-sub-brand-to-
enter-smaller-towns-may-also-take-over-single-screen-
theatres/article25656399.ece