Cinemax India Ltd Merged Management Discussions

The following Management Discussion and Analysis Section should be read in conjunction with the financial statements and notes to accounts for the period ended 31^st March, 2013. This discussion contains certain forward looking statements based on current expectations, which entail various risks and uncertainties that could cause the actual results to differ materially from those reflected in them. All references to "Cinemax", "we", "our", "Company" in this report refers to Cinemax India Limited and should be construed accordingly.

Industry Structure & Development

After several years of muted growth, 2011 and 2012 were exciting years for the Indian film industry. India’s domestic theatrical revenues grew at a CAGR of 23.8 percent, contributing 76 percent to the INR 112.4 billion film industry and this trend is expected to continue in the foreseeable future. Digital distribution played a significant role in increasing the reach of the industry. The industry has begun penetrating tier II and III markets and entertaining the un-served population which sits near the bottom of the pyramid. All this has been made possible by leveraging technology which allows for a movie watching experience at an affordable cost and in a secure environment.

Indian cinema has continued to enchant the Indian audience for a century now and it is expected to continue on its growth trajectory and be worth INR 193.3 billion by 2017. Domestic theatricals will continue to be the major growth driver for the industry while ancillary revenue streams will also grow rapidly albeit off a smaller base. (Source: FICCI- KPMG Indian Media and Entertainment Report 2013)

Opportunities

Largest Industry

The Indian film industry is one of the largest globally with a history of steady growth. With films being the most popular form of mass entertainment in India, the film industry has witnessed robust double-digit growth over the past decade.

Under screened market:

India continues to be heavily under screened with 8 screens per million available, unlike in the United States, where there are 117 per million. The opportunity is huge and the exhibition industry is expanding its supply, although it is constrained in recent times by the slowdown in the growth of the commercial real estate market.

Penetration into tier II and tier III markets

Digitization has changed the face of the movie industry in a number of ways, one being simultaneous release of Indian movies on several screens, including those in tier II and tier III cities. Movie Exhibitors now see tier II and tier III cities as potential drivers of growth. With lower real estate prices in smaller towns and the leeway to launch a no frills cinema, the exhibitors are able to considerably bring down the cost per screen.

Digital dominance

Digitization has changed the landscape of Indian cinema in several ways. Widespread release of movies across several screens, curtailment of piracy, reduced cost of prints, lower storage and maintenance expenditure and release of small budget films in a cost effective manner are some advantages offered by this technology. Over the past few years the industry has steadily shifted from releasing films with physical prints to digital distribution. The share of the digital format has increased from roughly 50 percent in 2010 to around 80-90 percent in 2012. Digital distribution has enabled films to broaden their reach and most films now garner about 60-80 percent of their revenue in the first week of release.

The main driver behind this is the huge price difference between digital and physical prints, which now makes it affordable for a distributor to release a greater number of prints for a film. Big-budget movies are now released across as many as 3,500 screens now as compared to 1,000 three years ago.

Emergence of 3D films:

3D films are slowly gaining prominence both in Hindi and Hollywood films released in India. 3D technology comes at a price but allows multiplexes to marginally increase ticket prices and provide a differentiated experience to the viewer. Moreover, this viewing experience cannot be readily replicated on the television and internet.

Transparency of ticket sales & In Cinema Advertising:

The industry has witnessed a marked improvement in transparency of ticket sales over the years. Systems and processes introduced by multiplex chains in addition to digitization of theatres is the key contributor. The growing penetration of digital distribution has given rise to the growth of cinema advertising, giving the advertiser the flexibility to target a captive audience in the desired region. Currently, an exhibitor’s revenue comprises 70 percent ticket sales, 20 percent food and beverage and 10 percent cinema advertising. While the proportion of each is expected to remain the same, the volume in absolute terms is expected to go up.

Distribution of Hollywood content

The distribution of Hollywood content is also evolving rapidly. 2012 proved to be a blockbuster year not only for Bollywood but also for Hollywood films in India. The share of Hollywood movies in gross box office collections increased to 8.5 percent in 2012 with total collections of INR 9.5 billion. A wider distribution network due to digitization, growth in multiplexes and robust marketing has aided the growth of Hollywood content.

Growth of Multiplexes

The exponential growth in domestic theatrical revenues can be attributed to the growth in number of screens via growth of multiplexes, coupled with increased ticket prices and delivery of robust content. In 2012, the industry added 152 new screens with major growth coming from expansion of multiplexes. Growth of the multiplex industry will be highly correlated to the level of real estate development as most players intend to grow both organically and inorganically. Organic growth of the industry will be mostly through greenfield investments as most multiplex players do not perceive value from converting single screens into multiplexes. In the short run, organic growth will be limited by the bottlenecks created due to slowing development of malls and commercial real estate.

Shortening of the movie shelf life

First week business has increased driven by the wider release and number of prints. The first week and weekend contribute almost 60-80 percent of a film’s total collection. Even within the first week, the trend is getting skewed towards the weekend. Considering this, multiplex chains are experimenting with pricing strategies to maximize revenue. By adopting a differential pricing model for weekdays and weekends, they are able to maximize footfalls across the week.

Use of social media in pre-release marketing strategies

With Social Media grabbing about 25 percent of the internet surfing time in India, this medium is rather hard to ignore. India has more than 70 million social network surfers – a potentially large platform for digital marketing. These consumers are already being targeting by the film industry. Yash Chopra’s Jab Tak Hai Jaan trailer received 30,000 likes in the first week of its release on YouTube, breaking records worldwide.

Threats/Risks and Mitigation Measures Piracy

The issue of piracy remains a critical issue for the Indian film industry. However, there are some changes that have helped the industry battle this issue aggressively. A few years ago, a film reached television and home video only after six months of its theatrical release. Pirates could take advantage of this delay, and would flood the market with pirated DVDs/VCDs. Currently the theatre-to-television window has been reduced to less than 3 months. This has discouraged the business of pirated DVDs to some extent.

In this context, it is important that industries collaborate and create efficient mechanisms for content protection. With cooperation from the government and internet service providers, site-blocking measures can combat online piracy. The initiatives of Telugu film industry are a significant step in that direction. A major deterrent to piracy will come only from a change in mindset on the part of consumers.

Under-penetration of theatre screens

While India leads world averages in terms of the number of films produced each year and attendance, the under penetration of theatre screens in India remains the biggest challenge for the industry. There are just 8 screens per million people, unlike in the United States, where there are 117 per million.

Quality of Content:

Success in the film exhibition business is heavily dependent on the flow of the content and quality of content being released during the year. The success of a release can be highly unstable and seasonal, therefore impacts the performance of the business. With the advent of more and more professional entities into film production, the industry is becoming better and organized and is all set to roll out quality movies on a consistent basis thus producing quality movies for cinema goers. A film that is strong on content is well cast and marketed, can earn good returns.

Slow Development of Malls

The number of screens is highly correlated with commercial real estate development in the country, which is currently challenged due to the overall economic slowdown. At many places urban land supply is controlled by state-owned development bodies and housing boards, leaving limited space for development of malls. Restricted land supply also leads to high real estate prices. Moreover, the approval process for a multiplex is very slow and cumbersome, as it is largely controlled by the local municipalities. Obtaining a theatre operating license can take as long as 6 months in certain cases.

Ticket price controls

Ticket pricing in many states is regulated by state governments. In Tamil Nadu, single screen theatres are allowed to charge a maximum of INR 50 per ticket and multiplexes can charge a maximum of INR 120 per ticket depending on the set of facilities.

The industry expects the governments to relax regulations on fixed number of shows and cap on ticket pricing and let the exhibitors decide on the admission rates according to demand. Flexible pricing will also help to reduce black-marketing of tickets since theatre owners will have freedom to revise the rates according to the audience inflow.

Higher Tax Regime

High entertainment tax acts as a major impediment to the growth of exhibition industry, as the overall tax implication is as high as 40-50 percent in states like Maharashtra, Uttar Pradesh, Bihar and Karnataka. It is estimated that approximately 25-30 percent of the ticket sales is under reported by these theatres. Hence, it is imperative that the entertainment tax structure across the country be rationalized by bringing down rates of entertainment taxes.

Also, it will be useful to provide tax holiday benefits for infrastructural development on setting up cineplexes in tier II and tier III cities to incentivise the sector and boost growth and development of such cities.

Cable and satellite rights

Revenue from Cable and satellite (C&S) rights grew at 20 percent in 2012. With digitization likely to provide greater clarity in terms of TRPs, Video-On-Demand (VOD) services, and greater number of movie channels, the demand for all genres of films on cable and satellite platforms is expected to increase. The theatre-to-television window is reducing with movies being broadcast on television within 60 to 90 days of their theatrical release. Films such as ‘Kahaani’, ‘Ek Tha Tiger’, and ‘Son of Sardar’ were broadcasted on TV within 3 months of their release.

Reflecting a reversal of the trend of showcasing new movies on GECs, television networks are now premiering new movies back on the movie channels. They are also launching strong marketing campaigns to mark the premiere of movies.

Pay per view (PPV):

With the net DTH subscriber base growing at 18.8 percent in 2012, pay per view is expected to grow robustly over the years. The phase 2 of TV digitization is set to cover 38 cities by March 2013 (although with likely delays) and phase 3 aims to cover smaller towns and cities by November 2014. There will be considerable monetization potential for regional pay per view services. PPV will also aid the airing of parallel cinema movies, which often struggle to find slots in the exhibition space. With the emergence of new talented directors producing movies with strong storyline and inclination of Indian audience towards good quality content, PPV will be a strong driver for indian cinema.

Product wise analysis

The Revenue Growth under various heads during the year under review is summarised as under:

Revenue Growth

	Rs. In Lacs
	31.03.2013
Income from Ticket Sales	24246.40
(Net of Entertainment Tax)
Advertisement Income	1988.47
Rental Income	53.45
Sale of Food and Beverages	8073.89
Gaming Income	547.64
Web Booking Income	512.72
Net Operating Income	35422.57
Other Income	497.90
Total Income	35920.47

Performance of the Company

The Company’s financial performance is discussed under the head "Financial Review" in Directors Report to the Shareholders. Figures for the previous year are not available as the present theatre Exhibition business of your Company was vested with Cineline India Limited (Formerly known as "Cinemax Properties Limited").

Operating performance

1. Footfalls & Occupancy

We entertained around 46.4 Lacs patrons at our cinemas during FY 2012-13. With the addition of 15-20 new screens planned in 2013-14, your Company expects a robust growth in footfalls during the current year.

2. Future Outlook

Future outlook for the FY 2013-14 is positive and barring the unforseen circumstances the company’s performance is expected to show continued growth.

Internal Control Systems and their adequacy

The Company has adequate internal control systems commensurate with its size and need.

M/s Ernst & Young, Chartered Accountants periodically review all control systems and assists in monitoring and upgrading the effectiveness of control systems. The Audit Committee also reviews this process.

Material Developments in Human Resources: Recruitment & Selection

At Cinemax, we believe in hiring potential talent and develop their skills further by putting up a structured and extensive training programme to develop them of professionals who would handle patrons by providing highest level of customer services in the entertainment world.

The stern process of selection encompasses evaluating candidates based on their educational background, Skill & Industry experience. Our linkage with best education and training institutes ensures constant supply of resources that are industry trained and ready to deliver on the values that govern the organization.

Industrial Relations

With our fair management practices across the board we ensure a congenial work environment and a good quality of work life.