Multiplex operators strike gold in Bollywood-mad India

For a country that produces twice as many movies a year as Hollywood, India has a problem that's making cinema theatre operators beam: a shortage of modern multi-screen cinemas and plenty of increasingly affluent film fans.

Multiplex operators like PVR Ltd, Inox Leisure, Reliance Mediaworks and Mexican chain Cinepolis are scrambling to set up theatres targeting the rapidly growing number of middle-class Indians willing to pay to watch Bollywood movies in more comfortable surroundings.

These plush theatres, often in big city shopping malls, are a far cry from the single-screen cinemas most Indians still frequent and which range from huge, purpose-built halls to sheds where the deluxe seats are wooden benches.

The potential is huge, provided operators can find the right location in a country where prime urban real estate is costly and in short supply.

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Multiplexes account for just 8 percent of India's 12,000 screens but rake in a third of total box office receipts, according to the Single Screen Association of India and a report by consultants KPMG and the Federation of Indian Chambers of Commerce and Industry (FICCI).

Averaging 160 rupees each, tickets at Indian multiplexes cost almost three times more than a ticket at single-screen cinemas, the KPMG-FICCI report said. At the Inox multiplex in a prime Mumbai area, tickets for a recent showing of blockbuster "Krrish 3" sold for as much as 380 rupees each.

"Indians love their movies, their Bollywood stars and the middle class is increasingly ready to spend on a better movie-watching experience," said Pramod Arora, president of India's biggest movie theatre operator PVR, which expects revenue growth of 25 percent a year for the next three years.

By comparison, KPMG forecasts overall film industry revenues to grow 10.8 percent a year through to 2017.

"We want to grow in the bigger metro areas as they have limited real estate available and we want to capture all that first because that represents the prime consumption story in this country," Arora added.

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Movie madness

Multiplexes made it to India with the advent of modern shopping malls in the past decade or so.

PVR set up India's first multiplex in 1997. Last year, it acquired rival Cinemax and has seen its share price double this year. India has just 8 screens per million people, far less than the 117 per million in the United States and 31 per million in China, according to the KPMG-FICCI report.

PVR runs 398 screens and plans to open another 300-360 in the next three years. Cinepolis, the world's fifth-largest operator, plans to have 500 screens in India by the end of 2017 from 68 now.

Finding the right location, however, is a challenge for multiplex operators as mall development slows along with the economy. Economic growth this fiscal year is expected to be well below the decade-low rate of a year ago.

"We haven't grown at the pace at which we would have liked," said Cinepolis country head Ashish Shukla.

"We entered Brazil later and we are already three times the size of what we are in India because the development of real estate hasn't been as per the commitment made to us," he added. Cinepolis began operating in India in 2009.

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Debt is another issue for the industry. PVR is the most leveraged of the listed Indian multiplex operators, according to Thomson Reuters StarMine data, with Rs 600 crore (Rs 6 billion) in debt for a debt-equity ratio of one.

"Once the free cashflows are higher than the need for us to grow then obviously we will retire the debt," Arora said. "In the next 4-6 quarters we should be coming to that stage provided we don't get another good acquisition opportunity."

Some investors, however, are cautious.

"The business model of PVR is reasonably good," said R.K. Gupta, chief executive of Taurus Mutual Fund, which owns shares in the company.

"But debt is a big concern for the company and the industry in general. It is fairly high and if say for some reason several movies in a row flop then there might be concerns."