PVR Cinemas - House Empty - Future Bleak - Retail Shareholders Euphoric

Warren Buffett’s seemingly most popular quote “Price is what You pay and Value is what You get” doesn’t seem more destroyed or intrigues the patron more, when one pays ~Rs300 / USD 4.5 for a 100 gms box of popcorn at an Indian multiplex, whereas in India 700 million people earn less than Rs 100 per day or say ~USD1.4 / day

But this piece isn’t about the Indian Economy, its about the market darling - PVR Cinemas.

Allow me to place a disclaimer right here – I love PVR Cinemas, I along-with my wife and mother almost never miss a movie at PVR and she loves the popcorn - being from the old school. If I were to tell her that the ticket costs 2000 Rs a piece in Gold with green tea (that she loves) (a Twinnings tea bag worth Rs 3 dipped in hot water sold at some 80 times the cost) she might have a heart attack. But this is a secret between PVR and me. Mom never gets to know of it.

The purpose of this piece is to inform the gullible minority shareholder that while all the institutions are dumpin the favourite PVR stock, You are being made the muppets and when the music stops, you will have nowhere to run. Its pertinent to mention that the shareholding of people with less than 20,000 shares has shot up from 3.5 – 10.5% in a matter of just 9 months.

Lets analyse the company that’s now more expensive than TESLA - already trading at some 800 PE

PVR generates an EBITDA of Rs 60 per patron / movie watcher

Sale of F&B is Rs. 948crs or ~ 28.8% of total sales and 55% of Movie Sales Revenue or Rs. 93/patron.

Cost of F&B is 8% of sales thus 72.5% Profit Margin on Popcorn or say Rs. 67/Patron comes from F&B

Which means EBITDA Loss of Rs. 7/patron is generated by (Sale of tickets + Advertisement Income + Convenience Fees + Other Operating Income) the core business.

SO ITS SAFE TO ASSUME THAT PVR IS JUST A POPCORN AND A NACHOS COMPANY

I feel sorry for the shareholders of the company that places its QIP at Rs 1719 and within a few months has to come up with a rights issue at Rs 784 because the ever burgeoning debt, is unmanageable, future is uncertain and probably the promoters have to be paid arrears of their handsome increments even while the wealth of minority shareholders is being blatantly destroyed – some by pandemic – some by the promoters. 

Here are the statistics

As per the management, in a recent concall in May, the breakeven of PVR is at at 20% occupancy and Average Occ that PVR enjoyed is 35% in precovid times (And achieved an 18% EBIDTA and 0.8% PAT margin), One question that comes to mind is – if capacity utilisation in the best of the times is 35% generating such abysmally low PAT, what effect will a lower occupancy have on the P&L and the Balance Sheet

And the EBIDTA sucks because the promoters who own a mere 18.79% of this company draw a cumulative salary (besides all other perks and privileges) of ~ 28 Crores that is slightly more than the PAT of the company. A back of the envelope calculation pegs the EPS for promoters and family at approx Rs 32 per share while its a paltry Rs 4.95 for other shareholders.

It’s a shame – more so in India – because stockmarkets are shallow, lack depth, and most shareholders have no access to genuine research on the basic and key metrics of the company, intention of the management, and self centricity of the promoters at the cost of minority shareholders.

PVR has been incurring ~ monthly expenses of 63 Cr (assuming 50% waiver on rent and CAM charges) so if this year is more or less a washout, it would have burnt approx. 750 Cr without any mentionable revenue in FY 2021) And that explains the short runway of the amount of Rs 300 Cr collected thru the rights (in Aug 2020) that might not have lasted beyond 5 months.

“The business is under a grave irreversible threat”

Ask a producer of a film and he/she is under permanent nervousness till one week after release of his movie - not knowing whether one would be able to recover costs, make profit or lose the skin.

The immense sense of freedom that most of the producers such as Ronnie Lahiri have found by releasing movies on OTT is heartening. Gulabo Sitabo was a great hit, made him the money and de-risked his investment. Top OTT players are happy to buy movies at a cost + basis, thereby de-risking the producers and the OTT players such as STAR, Amazon, Netflix have pockets tens of times deeper than the size of Indian film industry at ~13800 Cr (1.8 B USD) where the Bollywood is a mere ~1000-2000 Cr per annum

For the record Amazon and Flipkart burn a combined sum In excess of Rs 1,500 crores just during their Diwali sale alone.

OTT is really the future because a family can watch a movie in the convenience of ones Living room where the annual subscription of the most expensive platform is less than the cost of “just one” movie with the family at a multiplex. We haven’t yet discounted the pain of navigating the traffic, parking, lack of social distancing, risk in the AC (after Corona) world where the human psyche has got permanently mutated because of the present unexpected vicissitudes. The brilliant analysis by Seetharaman in The Ken sums up the dilemma and the zero sum game for the cinema halls.    

No wonder that the sale of large TVs and projectors that cost as little as Rs 10 K on amazon has shot up in the recent times because of the newfound freedom by the movie buffs.

Low budget films, some of these dramatically  awesome in content and direction, that cannot afford a big budget theatre release have found a new freedom and recognition and have been able to shed the risk bias of the patron because the incremental cost of watching this movie is almost nil for a family (if at all the same turns out to be a dud or below expectations). Not that the wounds inflicted on the populace by Salman Khans Tubelight or Aamir Khans Thugs of Hindostan  can ever be healed. And on top of that the Rs 300 popcorns.

OTT reduces/almost-eliminates piracy and provides a reach to the most under provided sections of society where access might be a problem, but internet works at a good speed.

The demise of Cineworld with 9500 screens was a shock that had to down its shutters on almost 90% of its business due to the pandemic. And the hunger of retail shareholders to lap up the PVR stock seems unsatiable.

If this virus - that has permeated such degrees of fear in the society is here to stay for a foreseeable future then the future of multiplexes is in grave danger and that explains why the institutions or the big boys of the stock markets are strategically reducing their stake while holding the price at present levels and retail muppets (shareholders) are hungrily buying the stock to take the retail shareholding up from 3.55% in Dec 2019 to 10.32% by Sep 2020.

Unless another equity infusion takes place, The PVR debt will continue to burgeon, for many many years, to its peak of approx. 2100 Cr by Mar 2022.

Its loss might peak out at Rs 566 Cr by the end of this FY 2021

But the fact remains that – at the CMP of 1250 and FY 21 fwd PE of ‘maybe’ 1000, this is the most expensive stock on the planet beating Tesla dry and hollow and far ahead of its global peers such as AMC, Cineworld, Cinemark and Cineplex most of which have corrected by 60-90% while PVR is being distributed to the minority and gullible retail shareholders. (As there is absolutely no certainty on quantum and timing of full recovery, we have used Trailing numbers to benchmark globally. Also, a size discount is applied)

Going by these calculations and benchmarks, PVR (ceteris paribus) while deserving its rich valuations should slide down to under 400 when its performance, reasonable valuations meets to say hello to its eventual fate.

Minority shareholders singed by the narrative built around a stock always almost are left holding a rotten tomato.

Looking fwd to gain some confidence post this Virus, when I can again take my loving mom to get her favorite popcorns at PVR – in the meanwhile sell the family silver to check-in into PVR ‘only if' there is no other show going on.

Co-authored with 
Ravi Sharma @caraviusharma ; https://www.linkedin.com/in/ca-ravi-u-sharma-65901b97/

 

10 Blunders - 1 Arrogant Company - Millions of Shareholders Suffering (The story of ITC)

 

Dear Board Members,

As a minority shareholder while I sift thru the 368 page Annual Report (AR) of my company, it seems and appears to be a manifesto of a large political party that is proud of what its done in the past and what it hopes to do even if nothing sounds or appears to be value accretive for the shareholders. 

Markets are wise and perceptions are strong and the 1.5 million investors who have reposed their faith and trust in you, seem to be losing the confidence in Your leadership. Else ITC that was once the most respected company wouldn’t have performed so miserably on the bourses inspite of the 368 page chest thumping manifesto.

I must say you are failing miserably while sitting in the comfort of your mahogany and leather lined offices, a mutual appreciation club of 14 people presiding over an annual revenue of over 50,000 Crores each one building large personal empires thru generous grant of stock options and over the top compansation while I am seeing my wealth erode by the hour.

ARE YOU ANSWERABLE?

The unbridled power that you wield without being questioned by a real promoter / entrepreneur has spelt a real disaster as I fear that my company is being taken on the same self destruct path that General Electric, Nokia, Blackberry and Exxon Mobil have been taken in the last 2 decades and the less said the better as to how value destructive this journey has been for them because there was no one to shake up Jack Welch at the right time (he became the greater God without being one). For way too long these companies and their respective managements suffered from Hubris not able to see a fast approaching train while being frozen on tracks, not able to course correct - eventually leading to their demise. 

While I will ask some specific questions, the crux of this note is that if you cannot protect my wealth thru the alleged magic of your strategy and leadership – You don’t have the moral right to hold these positions and lead my company.

ARE YOU ANSWERABLE?

The First Blunder 

The biggest blunder of diversifying into hospitality and continue to burn cash and capital in this black hole using cash generated by the cigarette business (which is the only meaningful cash flow division) is nothing short of financial hara-kiri on minority shareholders. You have acted no differently than most of real estate developers who want to own a hotel / hotel chain from their free cash flows because its sexy to own one when it’s the most unprofitable industry and most susceptible to economic mood swings. 'Dala Bhukara' is fine – I appreciate it and love it too, You should have stopped at that, but then it was simply stupid to burn thousands of crores of my money by assuming that every hotel will be as successful as dal bhukara. I would like You to share with the public – Who is advising you to spend thousands of crores of shareholder wealth to build these large hotels (and overspending on most of these).

Who (employee or consultants) is regurgitating on excel sheets - the potential of new hotels and how are these people made accountable? The AR must include a detailed P&L and BS of each of my subsidiaries hereafter clearly mentioning the ROCE on a quarterly basis.

At Rs.17.9 lacs revenue per room per annum of revenue you have missed the bus of being any formidable hospitality brand even while you can't stop gloating on all the award and accolades that the hotel division has got. Mind You - most of these are all subscription based awards (awards and accolades is a paid international scam at the cost of the hospitality industry) the sooner we realize this the sooner we will stop burning cash. I would like to know how much money has been burnt in annual subscription of these awards.

ITC Grand Bharat with 104 keys is generating a mere revenue of 28 Cr p.a, that’s is lesser than some successful Lemon Tree Hotels on a revenue per key per annum basis.

It is pertinent to ask what’s the spend per key of all the hotels that have been built grounds-up in the last 10 years. If it is anything more than 2 Cr per key (all in) there is something dramatically wrong with our projects team and financial forecasters. How many hotels have performed in line with approved financials from the time of board sanction of these projects within the next 5 years. This is an important analysis that You should seek and make the same public.

ARE YOU ANSWERABLE?

The entire rigmarole of Fortune Hotels with 4000 rooms is generating a mere profit of 2.76 Cr – who is responsible for this and why is this abysmal performance being tolerated at my cost?

Welcome Heritage does a NP of  a mere 40 lacs with 36 hotels , 900 rooms and the management bandwidth at my cost.

Which international brand / concept are we benchmarking ourselves against to justify our investment in the business and which of my employees has his/her skin in the game in this business and how is the executive compensation tied to the performance of the Hotel Division.

ARE YOU ANSWERABLE?

The Second Blunder

Small irrelevant businesses that we have ventured into must be taking immense bandwidth and time (board meetings, audits, finalization of accounts, consolidation) why are we in the businesses such as Antrang Finance that generates a mere 6 lacs a year. I would like to know the details of every business / subsidiary that generates less than 50 Cr of NP after taxes. In the scheme of things and larger objectives there should be a board resolution passed that defines / disallows continuity, if certain thresholds aren’t met by any subsidiary.

The Third and Series of Blunders

Our acquisition history and parameters are abysmal. That eeks of internal misjudgements. I might not need to tell you that a series of these judgemental calls, gone wrong with alarming regularity, might be perceived to be fraud. Nimyle, B Natural, Savlon – have you ever calculated the price paid for acquiring these businesses and the value accretion/destruction that these businesses are doing for me. Your endeavor to build on these brands might be noble but the subsequent performance is abysmal.

Enron wasn’t a fraud at the beginning , But they lost their way alongside because they didn’t know when and where to diversify and how to wisely allocate capital and burnt cash and rapidly eroded shareholder wealth. Don’t take my company down that path or history will find it difficult to forgive You.

When I read about the ITC Sangeet Research Academy I couldn’t stop laughing for 5 minutes. The cacophony of the music of frustration is still ringing in my brain. While I would like to know the total cumulative annual spend in this musical initiative since 1977, I kept wondering that the music for all the gurus and the budding musicians is playing fine while the music for the shareholders is dimming with an alarming speed or might already have stopped a few years ago. What a paradox..

BECAUSE YOU ARE ANSWERABLE

The Fourth Blunder

The FMCG division launched in 2000 generates just 3-5% PBT, thats a meagre 6% segment ROE (vs >35% of other FMCG players) – put Your hand on your heart is this justified. The QOQ and YOY narrative, propagated by You that 'we are becoming a global FMCG brand' is fine – how is it value accretive for me – because our operational performance is miles short of our competitors.

Are our employees lackadaisical and suffering from sloth because they don’t have a real BOSS or there is something drastically wrong with our strategy and execution. How have we benchmarked ourselves against the top 5 competing FMCG companies?

I would like to know if the salary growth of all the people earning over 35 lacs per annum is directly correlated to Revenues and EBIDTA of those divisions and if NO – it tantamounts to the very premise where we begun – My cash business is being used to fund the inefficiencies of the entire company without a credible benchmarking against other brands / businesses that are doing well. How are we different today from an inefficient PSU. 

The so called Dividend Yield is a paradox - How would You justify the same to investors who entered the stock on ~14th July 2017. Yes agreed i am getting some 7-10 Rs a year in dividend while losing a major part of my capital. 

The Fifth Blunder

For a Balance Sheet of my company’s size you have failed repeatedly to disclose Your CAPEX plans and capital allocation plans in advance – isn’t that taking the executive power to a level of unsanctioned discretion? While I am suffering with my capital erosion you guys are building personal empires of reputation and brand building.

ITC Infotech @ 2300 Cr per annum of revenue and single digit PAT must be the most underperforming IT company in the country. Do we take pride in investing businesses that underperform and continue to make the shareholders believe that the future is bright (why has the board not thought of divesting this and all such small divisions) and if NO – what’s the boards commitment on revenues and PAT in the next 5 years for this company.

The Sixth Blunder

You recently acquired Sunrise at approx. 3.7 X the FY 1920 revenues of 591 Cr at a PE of 37.

How does this deal add to my geographical diversification? How is this value accretive to me? And why would you pay this valuation when you aren’t able to sustain a 15 PE for my company? How did the board approve an acquisition at 37 PE while struggling to keep my valuation even at 15 times.

Why could we not expand our own spices division to strategically expand our geographical reach with internal talent and resources and had to go thru the path of an expensive acquisition.

Norway’s food major Orkla acquired Eastern Condiments (almost double the size of Sunrise) at 2.1X Sales and at 18.5X earnings. Which team was responsible for the due diligence of Sunrise and it would be in the interest of the shareholders if the negotiation documents and files are brought out in public domain.

For a minority shareholder watching from a distance, this is nothing short of an internal fraud. If my company is receiving Outstanding Performance Award by CII for its spices, does our management not have the wherewithal and talent to setup and expand our products’ geographical reach rather than paying a hefty premium just to capture a market share.

ARE YOU ANSWERABLE?

The Seventh Blunder

The executive compensation keeps going up and shareholder wealth keeps coming down. It’s a shame that in the last approx. 12 years the revenue has gone up from 16000 Cr to 50000 Cr and the employee cost is almost stagnant at 9% or has marginally inched up. Where is the operational leverage? Where is the demonstration by the management to incrementally and geometrically increase revenue and thereby profitability for every additional crore spend in Executive Compensation?

Some of the most progressive companies on the planet (such has Amazon) have a cap on executive compensation at less than 160000 USD per annum and all additional comp is through stock awards.

Our compensation system acts as a disincentive for executive outperformance and in the absence of a real my-baap of my company, I – THE MINORITY SHAREHOLDER am suffering.

In 12 years the revenues are up approx. 3.12 times and employee cost is up 3.26 times. And most likely the perks, hidden benefits, Pension Plans, Travel Plans, Drivers, Cars, Leave Encashments are not even a part of this metric. I would like a declaration / system – where every penny spent on every employee is a function of CTC that’s declared and filed without any benefit being accrued under any other account head.

Do you – dear Board Members understand the concept of operational leverage?

ARE YOU ANSWERABLE?

The Eighth Blunder

Our stakes in EIH and Leela have a MTM loss of approx. 1250 Cr in just one last FY. What's the rationale in holding onto these investments when we don’t really know how to manage our own hotels in the first place or make them world class by any stretch of financial performance. Not a single rupee should be allowed to be invested in the hospitality business to fund losses or any further CAPEX. And every business balance sheet should fend for itself for its OPEX and CAPEX without dipping into our cash generated from the primary business – Cigarettes.

The Sri Lanka investment of 1800 Crores (~236 M USD) so far, baffles me as a shareholder. And I understand that the project is far from complete. Who are we building this empire for and how will we get our investment back? Do You have a plan besides just an excel sheet to justify this black hole.

ARE YOU ANSWERABLE?

The Ninth Blunder

Our abysmal ability to engage with capital markets / investors / analysts is nothing short of abject neglect (no mybaap syndrome). If you had succeeded in creating any mentionable shareholder value – this attitude is pardonable. But while You are all doing exceptionally well, with your compensation and hefty sitting fees and perks, the lack of investor and market engagement is taking me and my shareholding for a ride. Why cant we have a mature set of professionals who have the knowledge and the art of engaging with investors and the media.

ARE YOU ANSWERABLE?

The Biggest Blunder

You are conducting an average of 41 committee meetings a year. Take out the weekly offs and holidays, You are meeting approx. every 5^th day. FOR WHAT? And what are you achieving for me? Except strategically destroying my wealth and value of my shareholding at my cost and charging exorbitant sitting fees? Gentlemen the average age of my board is approx. 65.6 Yrs. God give You all a happy healthy life but don’t treat my company like a retirement resort.

You talk of Triple Bottom Line repeatedly trying to be the 'pallbearer' of goodness – While every section of society gets a mention – the shareholder is left out of that focus - high and dry. If I was on Your mind – You wouldn’t waste a single rupee in reputation management through charity and social activities and alleged multiple bottom-line spiel till the interest of minority shareholder is protected and demonstrably served.

While every corporate house has declared salary cuts in view of the pandemic – there is no evidence of any salary cuts in my company. on the contrary you have recently chosen to reward yourself for destroying shareholder wealth. Is that morally and ethically correct even while the latest Tax filings reveal that our advance tax returns are lower by almost 50%. That portends that the Net Profit is likely to fall dramatically - At whose cost?? – MINE!

Another large conglomerate / business house indulged in empire building, international acquisitions at obnoxious valuations, over leveraging, failed product/car launches all at the cost of minority shareholder and to sate the ego of a few top guys in position of authority and they have reached a precipice of existential crisis.

Its becoming increasingly irritating to be repeatedly reminded through media, about the deep value and future potential of my company under Your leadership – Lets stop behaving like the state that talks of glorious vision in year 2050 (safe distance away) – because by that time none of us will likely be alive. Its not to take the credit away for many good things that are happening in my company but pls remember Good is not Good enough because we need to be Great. I must confess we are far from Great and not even looking in that direction.

Pls get Your act together and don’t allow my company to get to a point of no return. A few more mistakes and a little more neglect – And you would have succeeded in destroying one of the finest companies in the country to a mere HAD BEENS…… Remember markets are unforgiving and it would take no more than a few quarters to get our share-price to double digits.

God Bless You and God bless ITC

A distraught shareholder…………

Co authored with 
Ravi Sharma @caraviusharma ; https://www.linkedin.com/in/ca-ravi-u-sharma-65901b97/
Uday Bhaskar https://www.linkedin.com/in/uday2210/