PVR-INOX: Tag team for broke Bollywood

Good afternoon!

Welcome to The Impression, your weekly primer on the business of media, entertainment, and content.

If someone shared this newsletter with you or if you’ve found the online version, hit the button below to subscribe now—it’s free! You can unsubscribe anytime.

One of my few happy moments during the lockdown was getting a chance to watch Tenet on the big IMAX screen. It was a surreal experience, straight out of a dystopian film: everybody nervously taking seats one apart from another, all masked up, with no popcorn or drinks. A family near me was covered head to toe in PPE suits. But when the lights went out and the opening credits began to roll, I forgot about the horrific reality we had been living for the past year. I would go on to watch the film two more times in theatres, partly because I missed the experience (and partly because it took three tries to figure out what the hell was going on in Tenet).

Theatre owners would be thrilled to hear such stories. Ever since pandemic restrictions were lifted, they have been trying hard to get customers back to cinema halls, reminding them of the smell of warm popcorn and the thrill of the big screen.

It’s not exactly working.

PVR-INOX’s do-or-die year

PVR and INOX are India’s largest multiplex chains, and together, they are the largest by a significant margin. This week, the merged PVR INOX Ltd reported its first quarterly earnings. The merged entity reported revenues of ₹3,829.7 crore (~$465 million) for the financial year ended March 2023 (FY23) and an Ebitda margin of nearly 30%. Ebitda stands for earnings before interest, tax, depreciation, and amortisation.

On the face of it, PVR and INOX together are in a better position to lead the recovery of the cinemas business than they were apart. Now, they can stop competing for locations for their new multiplexes, footfalls, and additional crucial lines of revenue, such as in-movie advertising.

“Like we’ve guided, the bulk of the synergies will come from revenue,” PVR’s management said in an investor call yesterday. “Advertising [revenue] is one number lagging behind, but this will not change dramatically.”

That’s great, and it underlines why this merger made good business sense for both parties. But other operational metrics of the PVR-INOX combine seem to be in dire straits.

The merged business reported a loss (after tax) of ₹336.4 crore (~$41 million) for the financial year. Compared to the pre-pandemic financial year, admits and the occupancy rate for the merged entity were down by 16% and 21%, respectively. But the average ticket price grew, which means PVR INOX is making more money by selling more expensive tickets to a shrinking audience. PVR and INOX together sold over 27.5 billion tickets in FY23, but that was 3% lower than what they sold in FY20, just before the pandemic.

Malls and real-estate developers have also rescinded all concessions they had made on rent for their tenants, so PVR INOX’s rental costs are up 40% year-on-year, along with a steep increase in employee compensation and utilities.

To clean up the combined operations, PVR INOX is shutting down 50 screens. The management says these are mostly theatres that have “lived the end of their life cycles” and are located in malls, shopping centres, and other locations that are losing relevance in their neighbourhoods. To compensate for this, PVR INOX is adding 150-175 screens in the year ending March 2024.

Herein lies the shift in the business.

Thirty-eight percent of these planned screen openings will be in southern India, as per PVR INOX’s investor presentation. And of the 168 screens it has opened so far in FY23, 74 (or 44%) are also in south India (followed by north India). Why is this? It’s got to do with the ongoing turmoil in the Hindi film industry.

In the last 12 months or so, Hindi films are barely making money in theatres, barring one or two big hits. That has led to what PVR INOX management calls “volatility” in Hindi box office collections. From ₹531.4 crore (~$64.5 million) in the June 2022 quarter, PVR INOX’s Hindi film collections fell to ₹335.5 crore (~$41 million) in the next quarter, then back up nearly 30% in the next quarter, and then back down by about 10% in the quarter ended March 2023. It’s becoming hard for cinemas to rely on the earnings from Hindi films, because only a few are actually making money.

So, other Indian language films are doing the heavy lifting. A stream of hit films in Tamil, Telugu, Kannada, Malayalam, Punjabi, and Marathi are helping cinemas keep revenues steady.

This is a problem for PVR INOX. Regional films mostly earn from other theatres, including single screens.

A look at PVR INOX’s numbers shows the split. The multiplex chain comprised at least 40% of the total gross box office collections of recent, highly anticipated Hindi releases like Tu Jhoothi Main Makkaar, Shehzada, and Selfiee. It is an even bigger contributor to English film collections such as Avatar: The Way of Water and Ant-Man and the Wasp: Quantumania (about 50-60%). But for the year’s biggest Tamil and Telugu releases like Varisu and Waltair Veerayya, PVR INOX accounted for barely 10-15% of total revenue from ticket sales.

Clearly, PVR INOX is missing out on the audience that filmmakers are profiting from. That explains why it’s opening so many more screens in south India, while equally focusing on the north. It wants a bigger piece of the southern-language box office collections pie.

But that doesn’t mean the Hindi film industry will cease to be the multiplex’s mainstay. “...last year has been very volatile but we don’t see this continuing,” Ajay Bijli, MD of PVR INOX said in the investor call cited above. “This is something we are very confident [about, that] the supply and quality of movies connecting with the audience is already happening, and on the demand side consumers will continue to go out and entertain themselves. The number one form of entertainment out of home is still cinemas. This is just an aberration we have had, a post-Covid symptom of the last 12-14 months. But it will improve, there is no question about it.”

PVR INOX has identified a content pipeline it’s excited about, but it leans heavily on big-budget English films and Indian non-Hindi films. In particular, theatres are hoping the cash registers will ring through June and July with the release of Fast X, the tenth instalment of the Fast & Furious franchise, along with Barbie, Oppenheimer, the latest Indiana Jones, and a couple of Marvel/DC superhero films. Somewhere in there are also Hindi titles like Adipurush (which was viciously mocked for its terrible trailer last year), Animal, and Maidaan.

Hindi films need to bring in more footfalls and higher occupancy, or PVR INOX will be in financial trouble.

“We have a robust pipeline of screens handover this year. But we want the volatility in the film industry to settle, so we have delayed all new handovers that are coming up,” the company’s management said in the investor call. This is the year to invest some, then wait and watch if the recovery they’re hoping for comes through.

That is in line with the company’s stated focus for the year—profitable growth. Usually, mega mergers of top players in an almost-oligopolistic industry should come with endless cash and big spending to corner more of the market. But that’s not what PVR INOX is doing. Instead, its management says it is going through “every expense line item with a fine-toothed comb” to find any savings it can.

And the company wants to quickly move off debt and finance its anticipated ₹700 crore (~$85 million) annual capital expenditure through internal accruals. While the PVR management didn’t offer a clear timeline of when it will become profitable, it said it hoped to close FY24 with lower net debt. The company wants to hit ₹5,000-6,000 crore ($600-730 million) in total revenue by the end of FY24, or nearly 1.5x of what it made in the year gone by.

That’s a tall order. Every major operating metric will need to reverse course: footfalls, number of tickets sold, occupancy rates, and box-office collections across languages. Already, PVR INOX tickets have gotten more expensive over the past year, even as Indians cut discretionary spending to deal with rising inflation.

Most of all, it will need everyone in the Hindi film industry to put their best foot forward and make films so good that they make you want to ditch your mobile phone and TV and go watch them in a cinema hall, with the smell of warm popcorn and the bright lights of the big screen.

Last Scroll Down📲

News is breaking: It’s been an action-packed week for news organisations. Vice Media filed for bankruptcy, and the company’s chief reconstruction officer said the downfall happened because it raised too much money, at too high a valuation, and then spent it all on non-starter growth plans. Meanwhile, Austin Russell, the founder of auto tech company Luminar Technologies, has acquired the publisher of Forbes magazine. Rumours have it that the transaction may be funded by Russian money. New York Times Co. and News Corp reported a drop in their ad revenues for the quarter gone by.

Meger leaders: Sony-Zee has announced leadership changes as it races to complete its merger. Longtime Sony India executive Danish Khan will now lead the digital business, which includes SonyLIV and Studio NEXT. Meanwhile, another Sony India veteran, Neeraj Vyas, will take over the company’s Hindi language TV business. Livemint had first reported the reshuffle.

It’s through: Europe’s antitrust commission has cleared the Microsoft-Activision deal, even as the tech behemoth appeals a rejection from the UK’s Competition and Markets Authority (CMA). Microsoft has suggested that CMA’s stance is hurting large businesses’ confidence in the UK. The US regulator is also yet to approve the deal. Earlier this year, Microsoft had promised to licence Activision’s biggest games, such as Call Of Duty, to rival gaming platforms.

We want change: Dish TV’s minority shareholders are demanding an extraordinary general meeting to pick a new board of directors and appoint new management that can whip the company back into shape. They have also flagged poor decisions by the current leadership, including an investment in OTT platform Watcho. Shares of Dish TV are down by over 17% year to date, and it has been making losses since 2019.

Search for leads: Conversion rates of paid search ads have decreased across industries in the US, while the cost per lead has risen steadily, as per a Search Engine Land analysis. Conversion rates fell most for advertisers in the apparel, fashion, and jewellery industries, but cost per click remained the same.

The OTT police…: …is at it again. Members of a parliamentary panel told executives of top streaming platforms to stop airing “obscene” content and abusive language. Last month, the Delhi High Court granted the Ministry of Electronics and IT time to draft rules for OTT content. It all started with an FIR against TVF series College Romance; the Delhi High Court allowed the complaint to be registered and said the series was “obscene, profane, and vulgar”.

Trumpet 🎺

In a first for the Indian Premier League (IPL), Gujarat Titans wore a lavender-coloured kit to support the fight against cancer. Some fans gushed over the colour, while others were unhappy with the change, arguing that blue suited the boys better. Nevertheless, it’s a nice gesture for a noble cause.

But many are mocking it. They’re pointing out that the IPL, and legendary cricketers, are raking in big ad money from companies that sell gutka and pan masala—among the leading causes of cancer in India. This season, fans were taken aback to see Virender Sehwag and Sunil Gavaskar in an ad for gutka brand Kamla Pasand, promoting a surrogate mouth freshener product. Pan masala ads have dominated ad volumes during the IPL this year; their share is double last year's. KP Pan Foods is one of the top advertisers this year, as it was last year too. So much for cancer awareness.

That’s all this week. If you enjoyed reading The Impression, please share it with your friends, family, and colleagues. And please write to me anytime at [email protected] with thoughts, feedback, criticism or anything you’d like to see discussed in this space. I'd love to hear from you.

Thanks for reading, and see you again next Wednesday!