| Established track record of operations and experienced management
PIL has established track record of more than 3 decades in the industry and hence, is familiar with changing trends. The company is promoted by Mr. Jayantilal Gada, who has produced various successful movies in past such as Kahaani, Shivaay, Lakshmi. Further, the promoter has been infusing funds in the form of unsecured loan in order to support the operations of the group. The group has also established strong association with Zee Entertainment Enterprises Limited and other production houses such as Red Chillies. Further, the group companies such as Marudhar Entertainment Private Limited and Dhaval Gada Enterprises also infuse funds in the form of unsecured loans over the years.
Acuite believes, the experience on the promoters in picking up commercially viable projects can favorably impact the credit profile of the company in medium term.
Healthy operating performance
Pen Group (PG) reported a healthy growth in its operating income with a Y-o-Y growth of 57 percent. The group reported total operating income of Rs.889.68 crores in FY2022 (Prov.) as against Rs.564.32 crores in FY2021. Such growth comes at the back of increase in revenue from theatrical release of movies post Covid-19. Revenue from theatrical releases saw a significant improvement at Rs.144.82 crores in FY2022 (Prov.) as against Rs.0.96 crores in FY2021. PG released ‘Gangubai Kathiawadi’ and ‘RRR’ in FY2022 driving the growth in revenues for the group. Besides, distribution revenue has also seen a healthy improvement. More than 80 percent of the revenue is generated from sale of rights. Revenue from sale of rights stood at Rs.724.55 in FY2022 (Prov.) crores as against Rs.548.83 crores in FY2021.
Operating profitability of the group improved at 8.36 percent in FY2022 as against 7.81 percent in FY2021 driven by increased sale of operations of the group. The PAT margins also saw a subsequent improvement at 5.35 percent in FY2022 as against 4.67 percent in FY2021. The group has a total of 7 movies in its pipeline. However, it expects to generate only Rs. 170 crores from such movies. Any underperformance of these movies under production will adversely impact the groups ability to sustain the operating performance.
Acuite believes that the group’s ability to sustain its operating performance through sale of movie rights to OTT platforms supported by the revenue from movie production will remain key rating sensitivity
Healthy financial risk profile
Financial risk profile of the group remained healthy with a moderate tangible networth, low gearing and comfortable debt protection metrics. Tangible networth of the group stood at Rs.200.72 crore as on 31st March 2022 as against Rs.151.37 crores as on 31st March, 2021. The networth has strengthened over the years on account of accretion of profits to reserves. Gearing of the group remained low 0.43 times as on 31st March, 2022 as against 0.64 times as on 31st March, 2022. Gearing of the group has however improved from its peak gearing levels of 1.07 crores as on 31st March, 2020 and is likely to remain in the range of 0.38-0.28 times on account of healthy accretion to reserves. Total outside Liabilities to Total networth (TOL/TNW) has seen a consistent decline and stood at 1.87 times as on 31st March, 2022 as against 4.20 as on 31st March, 2021. Debt protection metrics of the group remained comfortable with comfortable Debt Service Coverage Ratio (DSCR) and Interest Coverage ratio (ICR). DSCR of the group stood at 0.89 times in FY2022 as against 4.47 times in FY2021. It is to be noted that the DSCR is below unity for FY2022 on account of prepayment of term loans of Rs. 56 crores funded from release of working capital blockage. DSCR is likely to range between 1.72-3.01 times in the near to medium term. Interest coverage ratio stood at 6.77 times in FY2022 as against 6.42 times in FY2021.
Acuite believes that any increase in debt for production of movie would impact the financial risk profile of the group till the content is monetized through sale of rights.
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| Working capital intensive nature of operations
The operations of the group are intensive marked by GCA days of 204 days in FY2022 as against 486 days in FY2021. GCA days are driven by inventory holding period and advances given to producers. PIL funds the projects majorly through advances from distributors and media companies like Zee Entertainment Enterprises. Further, the group gives advances to producers for production of the movies. Advances given to produces stood at Rs. 100 crore in FY2022 as against Rs. 392.60 crore in FY2021. Inventory includes movies that are in progress. Inventory holding period stood at 112 days in FY2022 as against 155 days in FY2021. Debtor days of the company stood low at 21 days in FY2022 as against 41 days in FY2021.
Risks incidental to the industry
The choice of acquisition of movie rights plays a crucial role in the industry. Once the rights are acquired it remains exclusive to the licensee for a period of more than 10 years from the date of production. Thus, the company would have to continuously acquire the right content to continue to grow in the long run and that stands crucial from credit perspective. The film industry otherwise, is also exposed to event-based risks like agitations against actors, producers, which can influence the release date and cash flows of the project. During the period under production, funds are invested in it which will be released only after realization of advances. Any unexpected delay in releases will have material effect on profitability and fund flow. The performance of the film is dependent on script, reception of the film by the audience. Acts of piracy can also impact the cash flows of the project.
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