Cinemax Properties Ltd

ECONOMIC OVERVIEW

The year 2009-10 proved to be a year of global economic resurgence. The global economy,after faltering due to recession during 2008-09, witnessed an improvement, mainly onaccount of infusion of stimulus funds by respective countries. China and India led therecovery from the front, on account of huge domestic demand and continued thrust oninfrastructure creation, further propelling demand within the core sectors. The USrecovery, largely driven by fiscal and monetary stimulus, is expected to clock a GDPgrowth of 2.8% in 2010.

The Indian economy grew at 7.4% in 2009-10 mainly driven by factors like risingper-capita income, urbanisation, favourable demographics, declining household size andincreasing job security. Barring any problems caused by the country's fiscalvulnerability, growth is expected to strengthen in subsequent years, as it will continueto reap the benefits of the ongoing opening up of the economy and gradual improvements ininfrastructure.

Entertainment and Media (E&M) Industry

Indian Entertainment and Media (E&M) industry went through a tough phase in thelast two years due to the economic slowdown which impacted businesses in the country. Theindustry which is dependent on advertising for almost 38% of its revenues was hit due toshrinking advertisement budgets of the corporate world. The overall E&M industry sizegrew from Rs. 579 billion in 2008 to Rs. 587 billion at a rate of 1.4% as compared to 12%in 2008.

Some sectors were impacted more than the others like Films, Radio and Out of Home(OOH), registering a negative growth during the year. In 2010, they are expected torecover somewhat with a moderate growth rate. Print showed a flat trend and music grewmoderately. TV industry showed a good growth rate, and Internet, Gaming and Animation,brought reasons to cheer for the industry with their growth rates touching double digits,albeit on a smaller base.

The industry is looking at reaching newer target segments, geographies and mediums,while tapping the potential of the existing ones. The year 2009 was a year marked withinnovation and a focus on cost efficiencies across sectors, more as a necessity to combatthe pressures on bottom line. Newer content formats and strategies adopted by the playersin the industry helped ensure that customers had more choices which led to the evolutionof the industry. Cost efficiencies which came about last year proved to be a silver liningfor the industry in a bad year, and many of these measures are here to stay and couldbenefit companies in the long run.

Film Entertainment

The Indian Film industry outshines Hollywood both in terms of number of films producedand theatrical admissions. The total annual theatrical admissions in Indian cinemas arearound 3 billion, as compared to 1.50 billion tickets sold annually in the US.

While the film entertainment sector had grown by over 15% between 2006 and 2008, theindustry witnessed a de-growth in the year 2009. In 2009 the industry is estimated to havedeclined by nearly 14% to Rs. 89.30 billion from Rs. 104.40 billion in 2008. This waslargely on account of lower domestic theatrical collections in 2009 compared to theprevious year. As per industry estimates, the industry is projected to grow at a CAGR of9% to touch an estimated amount of USD 3.02 billion over the next five years.

Growth drivers for the sector would include expansion of factors like an increase inthe number of multiplex screens, digital screens facilitating wider releases, higher cableand satellite revenues, improving collections from the overseas markets and supplementaryrevenue streams like DTH, digital downloads, etc., which are expected to emerge in future.

Apart from Indian movies, additional revenue has been generated by international filmstudios. They continued to capitalise on the potential of their Hollywood portfolio in theIndian market place by releasing a larger number of prints and increasing the number ofdubbed film screenings in regional Indian markets.

Similarly, 3D films are now gaining prominence. A case in point was Avatar, JamesCameron's epic 3D film which opened to packed theatres in India and abroad. Encouraged bythe response that Avatar received in India, many Indian producers are also planning theirown 3D films targeted to the Indian audiences. Their aspirations are well supported bytechnology providers who are in the process of implementing 3D compliant projectionsystems.

Thus continued interest by global studios in India, investment in technology such as 3Dand digitisation, introduction of miniplexes, coupled with strong government supportagainst piracy is likely to help the Indian film industry strengthen its position in theyears to come.

Multiplexes

With the growing relevance of multiplexes over the last few years, the Indian filmexhibition industry has undergone a metamorphosis. The first multiplex came up in Delhi in1997 and today the total number of multiplex screens in the country stands at over 800.Over the last few years, multiplexes have brought back audiences to the theatres. Ascompared to the poorly maintained condition of many single screen theatres, multiplexesoffer an enhanced viewing experience that has attracted audiences despite higher ticketprices. Growing disposable incomes, favourable demographic changes, increase in the numberof films targeted at niche audiences and entertainment tax benefits granted by variousstates have contributed to the growth of multiplexes.

Distribution of multiplexes and single screen is in India

Note-In South India single screens have a stronghold and the four southern statesaccount for nearly 60% of the single screen theatres and only 10% of the multiplexes inthe country.

Multiplexes, with lower average seating capacities and a differentiated viewingexperience, have led to producers experimenting with film content for niche audiences.Multiplexes also offer more choices to audiences due to the flexibility in pricing andprogramming.

With multiplexes playing such a critical role, understandably the producer-multipleximpasse had a deep impact on the entire industry. A significant event that happened lastyear was the multiplex strike. The strike launched by Hindi film producers and backed byUnited Producers Forum lasted for two months and stalled several movie releases inmultiplexes. As collections from multiplexes contribute a considerable percentage of afilm's gross domestic theatrical collections, the lack of major films released during thisperiod resulted in significant losses for the industry. After the strike a number of filmswere released together, leading to cannibalisation of revenues.

The key reason for the standoff was the revenue sharing norms between multiplexes andfilm producers with multiplex owners demanding a higher share of the revenues. As per thefinal settlement, producers will the rights of distribution of the films whilst exhibitorsare to control the showcasing rights. The revenue share between multiplex exhibitors andproducers is as follows:

Pre-standoff

Post-standoff

Recently the industry has also seen the launch of miniplexes (a multi-use theatre withtwo screens, seating capacity of approximately 75 per screen and price point of nearly Rs80 per ticket). These miniplex operators have aggressive roll out plans of having over 500miniplexes across the country in the next few years.

Gaming

The gaming segment is expected to be the fastest growing sector in the E&Mindustry. The sector showed a 22% growth in 2009 and is expected to grow at a CAGR of 32%to reach USD 7.05 billion by 2014, while the animation segment is expected to record aCAGR of 18.7% in the next five years.

BUSINESS OVERVIEW

Cinemax India Limited (Cinemax) is one of India's leading entertainment companies,currently focused on the film exhibition and gaming segments. A part of the Kanakia Groupwhich has over 24 years of experience in real estate, having developed over 8 million sq.ft. of residential and commercial properties, the Company owns and controls all the movieexhibition businesses of the Group. The Company started its operations in 1997 byacquiring a single-screen theatre in Mumbai and later retrofitting it into a two screenmultiplex. Initially, the Company worked on this model and ended up owing most of theproperties. Once the Government announced the multiplex policy, Cinemax opted for thelease model for its upcoming projects. The Company has limited interests in malldevelopment and gaming parlours.

Cinemax runs one of the largest film exhibition theatre chains in India having 94(FY09-74) screens in 29 locations (FY09-25) with 25,173 seats (FY09-20,305). As Mumbai'slargest theatre chain with 13 properties and 40 screens it accounts for nearly 32% of thebox office collection from Mumbai from multiplexes. (Around 40% of the total box officecollections for Hindi films in the country come from the Mumbai territory.) The Companycurrently operates in two distinct business segments-film exhibition and gaming. TheCompany has 27 tax free screens.

Due the tough conditions last year, the occupancy rate grew marginally to 26%(FY09-25%), while the Average Ticket Price (ATP) remained the same as last year at Rs. 128and the total Spend Per Head (SPH) is now at Rs. 159 (FY09-158).

The Company operates in the gaming business under the brand name 'Giggles'.'Giggles-The Gaming Zone' includes irresistible arcade games, LAN games and fun rides. TheCompany is renowned as a pioneer in this field for introducing outdoor activities likeBungee Jumping, Carousel and Giant Wheel inside the mall area. Currently, there areseveral Giggles outlets in the country. At Eternity Mall, Thane (60 games spread over12,500 sq. ft.); Eternity Mall, Nagpur (5,000 sq. ft. with 35 games); Iscon Mall, Rajkot(jungle theme spread over 4,000 sq. ft. and offering 32 games) and at Sion, Mumbai (1,500sq. Ft. and 20 games) etc.

OPPORTUNITIES

With revised growth estimates for GDP at 6.8% in 2009 by IMF, which is higher than theworld average and the expected recovery from the slow down, the E&M industry isexpected to grow steadily over the next five year period. The growth rate is expected toincrease to approximately 11.2% in 2010, as the industry witnesses a recovery. The CAGRfrom 2006 to 2009 has remained at 10% and the industry is expected to grow at a rate of13% in next five years.

Though the previous year witnessed a decline for the film entertainment industry, thetrend is likely to reverse in 2010 to grow at a CAGR of 8.9% to reach Rs. 136.70 billionby 2014.

The industry learnt some important lessons from the business cycle of 2009. Althoughthe multiplex strike temporarily derailed the industry, it sowed the seeds of an openconstructive dialogue between the stakeholders. This augurs well for the industry as it isexpected to lead to a more collaborative approach towards business in the future.

Over the last year and a half, falling consumer confidence and slow down in the realestate sector, led to nearly many of the major multiplex chains delaying their expansionplans. However, the long term multiplex story is still intact; and by 2013 the number ofmultiplex screens in India will likely cross 1,600.

The rising number of digital screens also provides the film industry with a largernumber of release centres. While earlier an average film released in approximately 250centers, increased penetration of digital screens is enabling filmmakers to release theirfilms in 700 to 800 centers on an average due to lower costs and ease of logistics. Thetotal number of digital screens in the country is currently over 3,000. As per industrysources, the number of digital screens is expected to increase significantly in the futureas producers and distributors start to utilise more number of digital screens to ensure awider release of their films, reduce print costs and piracy.

Thus rising disposable incomes of the working population and increased spend ondiscretionary items, not only in Tier-I but also Tier-II and III cities is expected tocontinue impacting the E&M industry favourably. Also, growth of newer deliveryplatforms with superior technology and functionality is likely to expand horizons for theE&M business. Aspirations of Indian players to go global and foreign players enteringthe industry are likely to help the industry target a double digit growth in next fiveyears. The role of the new media is becoming increasingly important in the distributionportfolio of advertisers. A strong focus on talent development, consumer research andinnovation can help players in differentiating themselves amidst growing competition.

OUTLOOK

Cinemax is on a high trajectory growth path. The Company has an aggressive expansionplan to increase the number of screens in operation by 42 taking the number to 136, panIndia in the next 12 months. The number of seats to be added is 9,375. Keeping in linewith the latest technology, nearly 30 new screens added will be digital. This will helpthe Company to showcase 3D Hollywood blockbusters and combat privacy. Cinemax will enterseveral places for the first time such as Raipur and Sangli.

The Company will continue to ramp up its presence in retail entertainment landscape byopening several new Giggles outlets in various parts of the country such as Kalyan,Ahmedabad, Bengaluru, Delhi etc. These will enhance the out of home entertainmentexperience for Indian consumers.

In India the number of screens per million of population is just 14 whereas the averagein western countries is approx. 40. With robust long term outlook and expansion plans,Cinemax is poised to capitalise on this opportunity.

Regulations differ from state to state making it difficult for a chain to operate on apan India basis, underlying the need for central jurisdiction. Also, archaic rules framedas back as 1953 require nearly 40 licenses and up to 3 months for a multiplex to startoperations.

The Company has successfully set up properties in eight states across the country. ThusCinemax has sufficient experience in handling regulatory procedures and prepares well inadvance to avoid any delays. Cinemax believes that this risk is thus adequately mitigatedif not completely.

Piracy continues to be a major concern for the film industry particularly the HindiFilm Industry.

The Maharashtra Prevention of Dangerous Activities (MPDA) act was amended and enforcedin 2009. Similarly in Karnataka, the Karnataka Prevention of Dangerous Activities,popularly known as the Goonda act bought film and video piracy under its purview in July2009. The industry expects the legislations to help curb revenue losses due to audio andvideo piracy in the two states.

Cinemax has 37 digital screens out of its existing 94 screens which has helped arrestpiracy to a great extent.

The shelf life of movies in theatres has seen a steady decline, where most movies facea make or break situation in the first weekend itself. The growing importance alternatedistribution platforms like DTH, satellite television and the soon expected 3G enabledmobile handsets are a threat to the profitability of theatres.

The Indian Film Industry enjoys mass appeal in India. Despite the entry of multiplemediums, Indians have always enjoyed watching movies in the theatre. Besides, withincreasing income of the lower middle class, more people can now afford to watch movies.Theatre owners on their part are making the movie watching experience more memorable byoffering snacks on the seat, fancy lounge chairs, home delivery of tickets even at twohours notice. Cinemax offers the gaming experience in some of their locations and avariety of dishes from international cuisine. Thus going to the theatre is no more justabout watching a movie and overall fun experience.

The Company faces competition from other exhibition players in the industry.

Cinemax has established phenomenal brand recall and goodwill in the market. Thecinematic experience offered by the Company's 'Red Lounge' remains unmatched, having set abenchmark in the industry. Given its strong relationships in the film business, aggressiveroll out across the country, increasing emphasis on the gaming business, sound financialsand a highly qualified and experienced management team, Cinemax does not expect to besignificantly affected by this risk.

Besides the Indian Film exhibition market is hugely under penetrated which gives enoughscope for multiple players to exist.

The film industry is seen as a soft target for terrorists and miscreants as they canhold the entire industry to ransom if the domestic theatrical releases are impacted due toany reason. The industry needs to beef up security to combat this threat and trainsecurity personnel adequately

The Company has adequate security guards and have installed high quality securitysystems to check for miscreants. Every person is frisked when they enter the property.

INTERNAL CONTROLS AND THEIR ADEQUACY

The Company has a cyclical process for identifying, assessing and managing its internalcontrol, which has been in place for the full year under review and up to the date of thisreport. The process is designed to enable the Board to be confident that such risks aremitigated, or controlled as far as possible. It should be noted however that no system caneliminate the risk of failure to achieve business objectives entirely and can providereasonable and not absolute assurance against material misstatement and loss. The AuditCommittee is delegated the task of reviewing all identified risks, with the absolute keyrisks retained for full board view. Risks and controls are reviewed to ensure effectivemanagement of appropriate strategic, financial, and operational & compliance issues.

Income: The Company recorded total income of Rs. 17,607 lacs, as compared toRs. 15,402 lacs for 2008-09, a growth of 14.3%.

Of the theatrical exhibition revenues, 73.94% comes from ticket sales, 18.21% fromF&B sales, 6.06% from advertisements and 1.79% from others (includes gaming revenue).

EBIDTA: The EBIDTA of the Company was Rs. 4,036 lacs in 2008-09 and Rs. 3,593 lacs,a reduction of 11%.

PAT: The Company's Profit After Tax (PAT) stood at Rs. 1,697 lacs against Rs. 1,105lacs in 2008-09, an increase of 53.6%.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES

The Company believes that human resource is one of the most vital resources and a keypillar providing the organisation a competitive edge in current business environment. Thework environment is very challenging and performance oriented, recognising employeepotentials along with providing them with opportunities. Cinemax takes adequateprecautionary measures for its employee's welfare.

As on 31 March 2010, Cinemax had staff strength of 1297on its payroll.

CAUTIONARY STATEMENTS

This report contains forward looking statements that involve risks and uncertaintiesincluding, but not limited to, risk inherent in the Company's growth strategy, acquisitionplans, dependence on certain businesses, dependence on availability of qualified andtrained manpower and other factors. Actual results, performances or achievements coulddiffer materially from those expressed or implied in such forward looking statements. Thisreport should be read in conjunction with the financial statements included herein and thenotes there to.