After two years of jumping from one crisis to another, Indian cinema firms appear to be heading for better times. Their share prices have underperformed the broad market in the past two years.

PVR Ltd’s share price fell by 12%, Inox Leisure Ltd’s share price fell by 37% and Cinemax India Ltd’s share price halved. The benchmark Sensex rose by 10.5% in the period.

Graphic: Yogesh Kumar/Mint

Fame India Ltd was an exception, gaining by 60% in the same period. It became the target of a takeover tussle, with Inox and Reliance MediaWorks Ltd buying stakes.

In the March quarter, both Inox and Cinemax’s revenues rose by 32% and 34% year-on-year, respectively. Fame’s revenue rose relatively faster by 75%, helped by a lower base, while PVR’s increased at 17%. PVR is the larger among the four firms. Revenue growth was boosted by ticket sales, which accounted for around half of the revenue for all the four.

But PVR, Inox and Cinemax saw a decline in operating profit margins (OPM). Inox’s OPM fell to 10.4% from 29.3% in the year-ago period. Inox’s margins were dented by higher other expenditure, which increased to Rs16.8 crore from Rs4.4 crore in March 2009. PVR’s OPM declined to 12% from 20.5% last year, while that of Cinemax dropped by 138 basis points to 9.2% from 10.5% last year. One basis point is one-hundredth of a percentage point.

Their margins declined due to higher film distribution expenses and higher rents due to new property addition, and service tax provisions.

Despite lower margins, Inox’s recurring net profit was higher at Rs5.2 crore in the March quarter, compared with Rs3 crore a year ago, mainly due to other incomes. PVR’s depreciation costs dropped sharply from Rs20.3 crore to Rs8.3 crore, enabling it to post a net profit of Rs30 lakh. Cinemax posted a net profit of Rs4.4 crore, partly aided by a reversal of prior-period taxes. Fame incurred a net loss of Rs2.67 crore, against a net profit of Rs6.22 crore last year, partly due to higher depreciation costs.

The outlook for these firms has improved, barring unforeseen adverse events. Better economic prospects and rising disposable incomes should see multiplexes get back their core customer traffic. A strong movie pipeline should give them enough reasons to keep coming back. But all this appears to be factored in the high valuations that can be only justified if earnings growth recovers in the coming quarters.

Inox’s earnings are likely to be affected due to higher interest costs and debt taken to finance the Fame acquisition. But if it does get control eventually, its valuation will improve as it will reflect the value of Fame’s business.

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