Midvalley Entertainment - Avoid

Midvalley Entertainment - AVOID

A cursory glance at the business strategy in the Red Herring Prospectus (RHP) of Midvalley Entertainment (Midvalley) - a film production, exhibition and distribution company indicates its intentions very clearly. It intends to create a huge theatre chain, spread its presence through class B and C towns and cities, upgrade the theatre infrastructure, digitalise them, improve viewer’s theatre experience and a lot more. It suddenly brought back memories of a company called Pyramid Saimira Theatres (Pyramid), who spelt out similar plans when it came out with its IPO in 2006. Pyramid did get a huge response and premium over its peers to its IPO at that time, primarily because it was looked at as more of a concept stock then. This isn’t the case now. Pyramid was fairly successful in ramping up its theatre chain network after its IPO, how successful will Midvalley Entertainment be in replicating this model needs to be seen. Would history be repeating itself, with the management falling prey to its too ambitious targets?

Midvalley is the second theatre chain company based out of Chennai after Pyramid to come out with an IPO. It wants to raise Rs 60 crore through the issue. The issue opens on January 10, 2011 and closes on January 12, 2011. The company has set the price band for the issue at Rs 64-70. Through this price band the company could issue approximately 93.75 – 85.71 lakh fresh shares, thus taking  its post issue capital to around 3.49 – 3.41crore equity shares from 2.56 crore equity shares currently. Out of the funds so raised, Rs 15 crore would be utilised towards entering in to screening agreements with 300 cinema theatres (Midvalley currently has 46 screens), Rs 29.95 crore would be towards renovation and upgradation of cinema infrastructure with digital equipment for select 100 screens, Rs 12 crore would be utilised towards acquisition of companies or acquisition of screening rights of companies in a similar line etc. and the balance would be spent towards general corporate purpose.

Though the company has some ambitious plans, there are some serious concerns we have about the company and these dent our confidence in the issue. Firstly, the company’s promoter though has promoted various businesses namely plantations, investments etc lacks the experience of running a film production, exhibition and distribution company. Thus with limited management bandwidth to the table, how successful could this venture be needs to be seen. Secondly, what attracts our attention is the financials of the company, which have deteriorated consistently since FY08 wherein its total revenues declined from Rs 73.62 crore to Rs 21.16 crore in FY09 and further to a mere Rs 12.94 crore in FY10. What prompted this decline? A sharp decline in distribution and exhibition revenues and zero contribution from the production segment was primarily responsible for the slide in revenues over the three year period. Profits for FY10 stood at mere Rs 3.93 lacs.

For the quarter ended July 2010, 53 per cent of its revenues or Rs 2.56 crore came from the distribution segment, while the balance Rs 2.26 crore came from the exhibition segment,. Production though a segment has not contributed to single rupee in revenue since FY08. However, the management explains the steep decline to change in focus of the company from volume based to a more focussed and targeted location. This explanation looks quite in contrast considering the fact that Midvalley has ambitious plans to tie up with 300 screens by FY12 from 46 screens, which indeed would give it volumes. In fact we would also take these ambitious plans with a pinch of salt considering the fact that the management has actually scaled down its screening agreements to 46 screens from 85 screens over the last three years due to either reduction in footfalls, collections, closure of theatres, expiry/non renewal of theatre lease etc. If this has been the performance over the last three years then how can one trust the management’s ability to execute such huge ambitious plans of touching 300 screens in a single fiscal, forget the digitalisation of 100 screens the company is talking about to increase viewer experience. Besides, though the management speaks of improving customer delight, there is no information on how the company would go about pricing the tickets as they are spreading in to class B and C towns and cities and this would give them volumes but not margins. Thus would this gamble work considering the fact that the company is spending Rs 30 crore or 50 per cent of its issue proceeds on digitalisation of 100 screens. Besides, very high content risk in movie business, rampant piracy across the country too will affect the company’s revenues in coming years.

Other concerns such as income tax litigations, history of loan default by company, four attempts to tap the capital market since 2001, refusal of listing by NSE in 2009, sharply declining profits and almost 50 per cent of the pre-issue holding with private corporate bodies and other individual holders reduces our comfort level with the company. Last but not the least the valuations, on fully diluted capital, the EV/EBIDTA comes to around 37.28x- 39.84x, which is very steep and certainly not worth investing in a company, which has various concerns as mentioned above. Hence it is better to stay away from this IPO.