UFO Moviez India Ltd

NSE:UFO

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the UFO Moviez India Limited Q4 and FY '22 Earnings Conference Call hosted by Prabhudas Lilladher. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Ms. Shweta Shekhawat from Prabhudas Lilladher Private Limited. Thank you, and over to you, ma'am.

[Shweta Shekhawat, analyst]

Thanks, Kritija. On behalf of Prabhudas Lilladher, I welcome you all to the fourth quarter FY '22 Earnings Call of UFO Moviez Limited. We have with us the management represented by Mr. Kapil Agarwal, Joint Managing Director; Mr. Rajesh Mishra, President and Group CEO; and Mr. Ashish Malushte, the CFO.

I would now like to hand over the call to the management for opening remarks, after which we can open the floor for Q&A. Thank you, and over to you, sir.

[Kapil Agarwal, executive]

Thank you, Shweta. Greetings, everyone, and thank you all for joining the Q4 and FY '22 earnings call. This is Kapil Agarwal.

Let me start first with the updates and highlights for this quarter, for Q4. So Q4 '22 was expected to start on a positive note, because of the overwhelming response to movies that were released in November and December of 2021. However, during the last week of December, as you all know, the third wave of COVID had started to spread across the country. As an impact of the urgent cases and ensuing restriction, some states orders the temporary closure of cinema in January '22, while many other states reinforced occupancy restrictions. Due to this, big movies that were supposed to release in January were deferred to a later date. And only some movies from the regional film industries were released.

However, the impact of third wave was short-lived and cinemas that closed during the period started to reopen in February, February '22.

Even though the cinemas across India were operational in February, there were not many much big releases during this month, except for some movies like Badhaai Do, Gangubai Kathiawadi, et cetera. The actual flow of new releases began only in the month of March, towards the end of March and many megahit movies like Kashmir Files, Radhe Shyam, RRR, et cetera, were released and were successful in attracting audiences back to the cinema. This is encouraging for business as it will encourage advertisers to increase their budget allocation towards in cinema advertising.

In addition, the removal of occupancy restrictions in the first week of March gave a head start to the recovery process and led to bounce back in the -- in our CDC and VPF revenue during the month, month of March. The decision to remove the occupancy restrictions by state government was a welcoming decision, which -- for which the industry had been waiting for since the beginning of the pandemic. It should now fast pace the recovery going forward.

Another positive development that I would like to highlight is the except tens of select south movies in the northern circuit, which is -- so now many more south movies releasing in the northern circuit, which is encouraging for our business. This is because earlier most south movies were only released in southern region, and we earned CDC revenue from there. Now as more of these will be released in northern circuit, it will offer a potential benefit to our CDC revenues. We have been supporting the wider release of south and other regional movies through our distribution business in the northern circuit.

Going forward, we expect a steady flow, a steady revival in business as our CDC revenues have already seen a bounce back supported by state release of the big films, as I said earlier.

Advertisement revenue has started, however, is expected to grow gradually. We believe FY '23 to be a year of substantial recovery for the business subject to no further pandemic use restrictions.

Coming to the headline numbers for the quarter and full year ended March 31, '22. Consolidated revenue stood at INR 561 million in Q4 '22, as compared to INR 335 million in Q4 '21. EBITDA loss in Q4 '22 was INR 119 million as compared with EBITDA loss of INR 159 million in Q4 '21. Loss at PAT level was at INR 189 million as compared to a loss of INR 255 million in Q4 '21.

For full year FY '22, the consolidated revenue stood at INR 1.639 billion as compared to INR 922 million in FY '21. EBITDA loss reduced to INR 472 million as compared to INR 837 million in '21. Loss at PAT level stood at INR 869 million as compared to loss of INR 1.176 billion in FY '21. The consolidated fund position of the company as of March '22 stood at INR 1.190 billion.

On the debt front, the company continues to be net debt free with net cash of INR 320 million.

Lastly, I would also like to inform you all that as I turn 62 later this year, I have decided to step down from active management of the company. However, I will continue to serve the company as a Non-Executive Director. Mr. Rajesh Mishra, who is presently President and Group CEO of the company, will take over my role and is being elevated to the position of Executive Director. He has been associated with the company since inception and is currently responsible for overall operations of the company. I wish him the very best in future.

I would like to take this opportunity to also thank all our stakeholders for their continued trust in the company during the unforeseen times.

With this, I open the floor to take your questions, and I would request Mr. Rajesh Mishra, I'm welcoming him to this call today. And I will request him also to -- and Mr. Ashish Malushte, CFO of the company, to take the questions forward. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Niteen Dharmawat from Aurum Capital.

[Niteen Dharmawat, analyst]

Sir, despite achieving a higher revenue, I understand that the COVID situation was there, but COVID situation was earlier quarter also. And despite having a higher revenue, the losses have gone up. I also see that employee benefit expenses have substantially gone up almost 2x. So what is the...

[Ashish Malushte, executive]

Can you speak out a little bit higher because we can't hear you properly.

[Niteen Dharmawat, analyst]

Am I audible now?

[Ashish Malushte, executive]

Now it's better, and we'll be glad if you can repeat the question, please?

[Niteen Dharmawat, analyst]

Sure, sure. I'll do that. So my question is, since the revenue has gone up compared to last year's same quarter and since we have some seasonality in our business, quarter-to-quarter may not be a good comparison, but year-to-year, maybe a slightly better one. So the employee benefit expenses, I see gone up substantially during this quarter. So is this going to be the trend in subsequent quarters also? Or is it just one-off during this quarter that we have seen?

[Ashish Malushte, executive]

Yes. So you're right that the -- one of the biggest item of difference between Q3 and Q4 is the employee compensation expense, which has gone up by about INR 8.87 crores quarter-on-quarter. But the thing that I'm going to bring to your notice is that in all through these 2 years of pandemic, the entire company had taken a very serious salary cuts. And it was only when the theatrical business started opening up towards the end of December in '21 before Omicron. We decided to reinstate the severe deep salary cuts that we had given. As a result, out of this INR 8 crores of increase that you see, INR 4 crores is completely towards salary reinstatement.

Additionally, for 2 years, there was no salary hikes that were considered. And this was leading to a situation where a company was -- while the employees held back with the company for a long time, but some of the talent slowly started going away, and therefore, it was necessary to get them back into the salary increment stage. And as a result, the salary increments were rolled out in December.

The impact of that was close to INR 2.3 crores. So both these impacts put together is about INR 6 crores, INR 6.5 crores out of INR 8 crores. And the difference was annual incentives, which is more like a onetime. So if I have to answer your question, the Q4 salary number, which you see is more or less the number which you will see going forward, except about INR 1.5 crores, which is more like a onetime expense that has come. Rest, you can assume that as a base for extrapolating our salary course for next year.

[Niteen Dharmawat, analyst]

Got it. So considering the business situation now in Q1 of the current financial year, would it be fair to say that will turn EBITDA positive during this quarter?

[Ashish Malushte, executive]

So this quarter certainly will be a challenge because we are still slowly getting out of the problem. So you must appreciate that the film industry certainly has come back with a big bang and that's a very, very big positive for us. Never ever, we have seen that consistently performance, back to back, you have releases which are backed by audience and the theatrical collection is significantly going up for every movie.

Previously, we used to have annually a few such hits. But here in 3 months, you have back to back 4, 5, 6 hits. So it's positive for exhibition industry, but the service providers like UFO for them to get the benefit, it will still have some lag. And that's exactly what we expect that as we progress, we should start seeing our losses reducing. And then we will turn EBITDA positive, where a significant contribution is to come from advertisement revenue. You would see that my advertisement revenue is slowly coming by contract. But it will be some time before we could actually reach a stage of pre-COVID level or even a level where my EBITDA will turn positive.

At this stage, we don't want to give any estimate, but we are keeping all eyes on the consistency of the supply of the movies, which is pretty strong and the acceptance of audience. Because if these 2 things happen, the audience will come -- coming back to the theaters will give the confidence to advertisers to look at this medium more positively, which we are seeing the trend. And once that happens, the EBITDA positive stage for the company will quickly turn, but we don't want to give any timing estimate for that.

[Niteen Dharmawat, analyst]

Okay. Got it. So -- okay, I got it. So I'm not taking any predictions from you on the EBITDA front. But on top line front, when do you think that we'll be able to go back pre-COVID level because most of the industries or other industries, which were impacted by COVID has started going towards pre-COVID level.

So what is our estimate in terms of going back to pre-COVID levels? And since we have started some new business as well, some new offerings, like for example, distribution with now would have been done. So when do you think this could happen?

[Rajesh Mishra, executive]

So if we analyze the question, our revenues are comprised of critical revenues from rental from CDC and from advertising perspective. With the coming back of films into the cinemas, the flow of content, as Ashish just mentioned, has steadily increased, and there is a very good lineup going forward also. And this is -- there has been a very good development that south films have also started faring well in the Indian market and the north built for the Hindi-speaking markets. So this has increased the number of films or the big films and full films that will release in the north. So VPF revenue, CDC revenue and our rental revenue will very quickly come back to normal, and it is well on its way, also even right now as you see.

Advertising revenue is something that will take time because advertising was -- went on the back seat in the first quarter during the lockdown entirely in cinemas. And there will be a time lag for the advertisers to come back into the situation. So -- 2 revenues, the theatrical revenues for the rentals and VPF will move to pre-COVID levels by very soon, I would say, advertising will take some time, especially the government advertising, which still has to see some uptick, whereas the corporate advertising is seeing good traction right now. On the government front, we have some concerns, and that is where we are working on in that part.

[Operator]

The next question is from the line of Akshay Ajmera from Nizar Securities.

[Unknown Analyst]

My question was regarding advertising and revenue. It has shown a 0.94 in your presentation. So this is less than 1 minute, average minutes sold.

[Ashish Malushte, executive]

That is average minute sold per show. So that is -- so what it says is on an average, we are selling less than a minute at this stage on our entire network in every show, it's nothing, but it shows the upside that is possible. You don't know if we go and watch a movie in a premium multiplex would be in a good festive period, this can go as high as 20 minutes, 25 minutes sometimes. I'm adding both intermission and in the beginning of the show. So that has kind of opportunity which exists for the volume -- on the volume front. And this particular point or in our presentation, sir, would bring out where exactly we stand on our network. If nothing else, but it's an indication of what kind of upside exists in the volume.

[Unknown Analyst]

And the advertising sharing with exhibitors a percentage is higher than earlier year. So is there some renegotiation with our exhibitors in the sharing?

[Ashish Malushte, executive]

So in our case, what happens is we also have a minimum guaranteed arrangements with the theaters. So what happens -- so if there's a theater, he is charged a rental fee. And against that rental fee, we take advertisement rights from them. In a normal scenario, the advertisement revenue that we earned should be shared in a pro rate -- on a percentage basis. However, we also have a clause right from beginning, where we commit a minimum guaranteed sum to them, which is generally equal to the rental amount. So as such, the rental amount equal the cost currently the revenue and our minimum guarantee of cost. That gets nearly knocked off against each other. When the same costs when you're comparing, the minimum guarantee cost, which is more or less equal to rental, when you are comparing only with the advertisement revenue, in a pre-COVID scenario, that percentage was quite low.

But as we -- in the current scenario, when the revenues are lower, this percentage will find more because only because of the minimum guaranteed direct rent. So to answer your question, there are no major deals where we have really renegotiated the -- There would be some but not many, which would have caused this kind of a move. This is primarily because the revenue line is currently at a lower level.

[Unknown Analyst]

Okay. And we would have given some discounts on the virtual print fee or other charges in the pandemic. So now those discounts are all gone away or we are back to full prices.

[Rajesh Mishra, executive]

Yes. So you're right, during the pandemic to encourage the opening up of cinemas and for the films to release, we had extended discounts in the initial period. And also, one of the reasons was that many of the states were shut down, they have not opened up the cinemas. And even where the cinema had opened up, there was opening up of cinemas with limited capacity. So in order to support the industry during those times, we had extended discounts, but we are glad to inform that all the discounts have been removed. And currently, we are on full charge.

[Unknown Analyst]

And one more question, you had also gone into a fee base distribution business. Can you share some outlook on that business?

[Rajesh Mishra, executive]

Yes. So the distribution business, we started actually during the pandemic period. And while we -- the primary need that we felt over here was that to help opening up of the cinemas, someone had to take the lead to ensure that some content flows. And that is where a chicken and execution was happening. And we saw this as an opportunity and we got into the distribution business. Now the distribution business, the way we have structured it and the mandate that we have with the team is that it is a zero risk low-profit strategy with a dual aim to provide content to our cinemas so -- which will help feed the cinemas.

And on the second hand, once the cinemas get content, that also provides traction to our advertising business. So with this dual purpose, we entered into a low cost, zero-risk strategy of distribution. And primarily, we have worked with South Indian content and has helped them to bring them to the north Hindi-speaking markets. And one of the basic offshoot of this that we are seeing over here is that more and more South Indian language flows are finding traction as you are well aware. And this will stand us in good stead in the long run also because if you increase the number of films, which is coming to the north market. It directly has an impact on our CDC and our advertising revenue in the future. As I said, distribution is a dual-purpose vehicle that we have used.

[Unknown Analyst]

All right.

[Rajesh Mishra, executive]

Yes. And till date, we have released around 35 films of various languages.

[Unknown Analyst]

And what will be the revenue from this?

[Rajesh Mishra, executive]

The revenue is low because a lot of them released during the pandemic period and all that, but we have not incurred any losses. The revenue around -- on that is around INR 63 lakh profit ever.

[Unknown Analyst]

And could you give us some update on the few -- we have done a few new wins and we have invested in few companies taking small stakes for some update on some of those activities?

[Rajesh Mishra, executive]

Any particular ones you would want to mention?

[Unknown Analyst]

So we have taken a stake, I understand in a production company, which is supposed to become a coproducer to regional films, then we have a stake in an online library of information. And plus we have some initiatives where we have social media agency, we have a tie-up with that. Maybe a couple of those.

[Rajesh Mishra, executive]

Yes. So we had invested in Mumbai Movie Studios Private Limited. This is a company which was primarily targeting low budget films from the regional markets production. And it is designed to go into production of these films along with the producers and coproduction model. So all the films that were looked at under this company are in the realm of where the producers are already there, and we invest a part of it into it and take a position in the company. The typical way that deals that are worked in business looking at the regional flow of content to the all India level. And Hindi films or big budget films, they carry much higher risk. And even one film failure rate of, say, INR 100 crores films can have a very drastic impact on company. Here, we took a question over here of very, very small budget films between INR 2 crores to INR 4 crores or something in that region. And we have released 3 films under this category as of now, under MMSPL, and we have had a good experience on these fronts. We've not lost money on any of these fronts.

[Ashish Malushte, executive]

So here, the objective or the intention is that this basically was promoted by the professionals in this case, and therefore, we decided to back them. So it is operated independent of UFO. But for us, the major synergetic advantage was if the focus which they have of giving impetus to the regional films of our lower budget. If we see that kind of genre and category picking up the production in number, it directly helps us because as Rajesh mentioned in the last question, any increase in number of films first. It is might be better VPF or CDC revenue. And more importantly, that leads to higher occupancy in the theater, directly impacting positively by advertisement revenue. So in that direction, we have supported them. So therefore, we are more looking at whether how many more movies they can make and whether they can give that kind of a remote to other producers to create more movies. And simultaneously, whatever profit is generated there, a part of a debt comes to us and whatever movies they have made so far, they have made reasonable profit, and they have not lost money there, so far.

[Unknown Analyst]

Our other expenses have shown a spike this quarter? Are there any one-offs like in salaries in the other expenses? or what...

[Ashish Malushte, executive]

This is what we explained? Let me check the earnings presentation.

[Unknown Analyst]

Yes, other expenses.

[Ashish Malushte, executive]

[indiscernible] So if you go to the earnings presentation, Slide 11 where we are giving consolidated financial highlights note, which is about a provision that we have done for diminution in value of one of the investments, that is a onetime of INR 4 crores.

[Unknown Analyst]

INR 4 crores.

[Ashish Malushte, executive]

I request to you and everybody when you're looking at my Q4 EBITDA, when you're looking at the core business EBITDA, this INR 4.1 crore being onetime effect should not be considered by evaluating in your analysis. The performance of the company for Q4 as well as the full year. It's a one time INR 4.1 crores.

[Unknown Analyst]

What is this regarding?

[Ashish Malushte, executive]

This is regarding one of the investments where -- which was done before pandemic, which was -- we thought that it has a very -- and we still believe has a synergistic value to us. Unfortunately, during pandemic the whole film industry came to a grinding halt which there were no revenues which could be generated there. Now what happens is while on a business front, you can -- you will always have a view and you can see in a way where the business is leading to. But when you look at accounting, the accounting norms don't allow you to carry the cost of the investment unless your current level, our past performance is justifying it. And as a result of which, due to accounting reasons, these provisions in the values required to be taken. So currently, it is a provision and not a direct cost diminution in value. Hopefully, post pandemic now when the business is coming back on track for the entire film business industry. When this company also turns around, if it turns around, we'll be able to reverse this impact. But if it doesn't go in that direction, then probably this will be a permanent hit to us. But what you see now is that provision in the books is already paid.

[Unknown Analyst]

Besides that, is there any other reason? Because I think the other expenses have gone up substantially.

[Ashish Malushte, executive]

So to give you a more realistic way of looking at my other expenses. Generally, you can refer as SG&A the full year number that you will see is about 20 -- sorry, INR 48 crores. And the quarterly number is INR 20 crores. So from this INR 20 crores, as I requested, if you knock off INR 4 crores, there are 2 other items which are more like a direct expenses. You come to a level of INR 14 crores, which is annualized cost of INR 57 crores of SG&A. if you see my pre-pandemic level, the pre-pandemic level of SG&A was in the range of INR 80 crores in FY '19, INR 77 crores in FY '20. During pandemic, we had a very severe cost-cutting measures, which led to pandemic level coming down in the range of INR 42 crores to INR 44 crores from a level of INR 78 crores to INR 80 crores.

But as from Q4 onwards, the business is coming back on track, most of these expenses are coming back in the same nature, which were their pre-pandemic. However, we are still able to reduce these expenses at many places as a result of which Q4 annualized this INR 57 crores against INR 80 crores of pre-pandemic level. And we are expecting that as we progress and as completely the business comes back, like the rental comes back, other expenses come back from this INR 57 crores annualized revenue level, we will move up by about, say, 15%, 20% as we close the year, but still it will be lower than FY '20 levels. That is where we have got the cost reductions or cost optimization.

[Unknown Analyst]

My last question is, are we comfortable with the funds that we have raised or we may need to raise any more funds? In the future for any...

[Ashish Malushte, executive]

Absolutely comfortable. And fortunately for us, finally and all of us, the pandemic we can safely say has come to end. Omicron was also 1-month phenomena. So now only the whole world is only going north in terms of coming back out of the pandemic problems. So same should for us.

[Operator]

[Operator Instructions] The next question is from the line of Akhil from RoboCapital.

[Akhil Hazari, analyst]

Am I audible?

[Ashish Malushte, executive]

Yes, sir.

[Akhil Hazari, analyst]

So I just want to know regarding your opening remarks about the advertisement business, you're seeing a revival. But currently, right now, there will be a time lag and in advertising revenue will take time to pick up. So I just wanted to know what would -- when would you reach that INR 200 crore top line that you did in advertisement business? Would it be in FY '24? Would that be right?

[Ashish Malushte, executive]

Hopefully, soon. But at this stage, we're not even 3 months into full-featured operations. Luckily, the advertisers have started coming back to this industry, not just us, but also the premium demographic screens. So we really hope that it will be a fast-based move from here. In one of the previous questions, we brought to your notice that the volume headroom is very high. So keeping fingers crossed at this stage to give any estimate on timing is not really fair even to ask my advertisement team to say when we'll reach that level. We should only see how the incremental progresses.

For the last 3 months, it is quite positive. And we'll keep connecting with each other at the end of every quarter on these calls, and you can keep getting updates from us.

[Akhil Hazari, analyst]

Definitely. And so, I just want to know also what is the operating cash flow for this quarter in Q4?

[Ashish Malushte, executive]

So let me get this working done. In the meantime, if we can go to the next question and will coming back with you on the operating cash flow front.

[Akhil Hazari, analyst]

I also had -- I want to operating cash flow outlook for FY '23, actually.

[Ashish Malushte, executive]

That is something which we will not be able to give at this stage, which would basically mean that we will be giving an outlook on the business, which we normally, as a policy don't give, but we give very clear indication of how the business is heading on a long run basis on a short-term basis. But we don't give the number estimates. But I can surely share with you through my IR team. The current level of operating cash flows if we may connect with you off-line.

[Akhil Hazari, analyst]

Okay. No problem. Those were my questions.

[Operator]

[Operator Instructions] The next question is from the line of [indiscernible] from VMSPL Capital.

[Unknown Analyst]

Basically, I wanted to understand pre-COVID, what was your VPF revenue contribution and percentage terms? And just if you could give us a little update on the latest stance when the users on paying these current VPF rates?

[Ashish Malushte, executive]

So what you call VPF is basically a content delivery charge, which we charge to the distributors for providing service of taking their movie from -- into various theaters in a secured way and getting it played out there. Generally, we charge on a per show basis. So your question was what was the margin there. So my request is if you could go to whenever you get a chance, if you go to our website in Q4 FY '20 presentation, I'm telling you now, but you may not have it handy. So I'll tell you which slide to refer to.

[Unknown Analyst]

No, no, I was asking how much is VPF sales as a percentage of total sales?

[Ashish Malushte, executive]

Yes. So okay. So that...

[Unknown Analyst]

In a pre-COVID standardized time.

[Ashish Malushte, executive]

So pre-COVID levels in FY '20, what we call the distributor revenue was 31% out of the total [indiscernible]. The remaining 2 were exhibitor revenue and advertisement revenue. So that is the immediate answer to your question, 31%, which was a pre-COVID level scenario. And currently, that proportion would be slightly higher, I suspect. So currently, if you see distributor share is 58%.

[Unknown Analyst]

Okay. And what is -- most importantly, what is the -- I believe at some point, there was some agitation from the producers and on the rates that they're paying for this virtual print fee. So what is the latest update on that?

[Ashish Malushte, executive]

Can you repeat this, we can't really...

[Rajesh Mishra, executive]

Can you speak a little louder, please.

[Unknown Analyst]

Yes. No, what I was saying was that at some point, there was some sort of agitation from the producers and on the VPF fees. So -- and the intent of paying the VPF fees are not to the extent of which the fees which is charged, the rate of the rate which is charged. So what is the latest update over there and the dialogue between you guys?

[Rajesh Mishra, executive]

Yes. So I wouldn't say agitation. During the lockdown, what had happened was many of the states have not opened up the cinemas and wherever the states had also opened up, they had opened up with limited capacity. And -- which was affecting their revenue in capacity also and there were requests from -- and also proactively, we had given discounts on this front so that the films could come -- start coming to the cinemas. And ultimately -- the ultimate goal was to have the cinemas open up and the release of film flow to accelerate. And towards the section and we had given discounts. But as I mentioned earlier, we have stopped all discounts, and we are currently charging full rates.

[Unknown Analyst]

So just to confirm, this was not an agitation on their side. It was a COVID issue, which caused this...

[Rajesh Mishra, executive]

Exactly. Exactly.

[Operator]

[Operator Instructions] As there are no further questions from the participants. I now hand the conference over to Ms. Shweta Shekhawat, for closing comments.

[Shweta Shekhawat, analyst]

Thank you. On behalf of Prabhudas Lilladher, we would like to thank the management of UFO Moviez and the participants. Good day.

[Ashish Malushte, executive]

Thank you, Shweta. Thank you, everyone.

[Rajesh Mishra, executive]

Thank you, everyone.

[Operator]

Thank you. On behalf of Prabhudas Lilladher Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.