Rating Rationale
March 23, 2020 | Mumbai
INOX Leisure Limited
Ratings placed on 'Watch Negative'
 
Rating Action
Total Bank Loan Facilities Rated Rs.319.68 Crore
Long Term Rating CRISIL AA- (Placed on 'Rating Watch with Negative Implication')
Short Term Rating CRISIL A1+ (Placed on 'Rating Watch with Negative Implication')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has placed its ratings on the bank facilities of INOX Leisure Limited (ILL) on 'Rating Watch with Negative Implications'.
 
The rating action follows the closure of movie theatres across India by orders of state governments to contain the spread of Novel Coronavirus (Covid-19). While the present closure is valid until March 31, 2020, it could be extended if the pandemic worsens. Prolonged closure may significantly impact credit profiles of the film exhibition industry, including ILL.
 
ILL has been taking proactive steps to reduce its cost and augment liquidity. Lease is a major fixed cost for ILL, and it has invoked the force majeure clause for lease agreements with mall developers. It expects no payment of leases during the closure. ILL is also looking to conserve cash by reducing workforce, deferring maintenance, and capital expenditure (capex) outlay.
 
Currently, ILL has liquidity (cash and bank balance, undrawn committed bank lines, treasury shares, and other liquid investments) of more than Rs 240 crore, which should sufficiently cover its curtailed operating costs as well as debt servicing for the next few months. ILL is looking to further augment its liquidity to enhance the cushion. ILL's total debt outstanding was around Rs. 85 crore as on 31st December 2019.
 
CRISIL will continue to engage closely with ILL to ascertain that operations are being run at curtailed costs and will closely monitor its liquidity position. CRISIL will remove the ratings from watch and take a final rating action once there is clarity on resumption of operations.
 
The ratings continue to reflect the company's established market position in the film exhibition business, healthy operating efficiency, strong financial risk profile, and high financial flexibility from being part of the Inox group. These strengths are partially offset by exposure to risks inherent in the film exhibition business.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of ILL and its subsidiaries. This is because all the entities, collectively referred to as ILL, are in related businesses, have common promoters, and hold operational as well as financial linkages.
 
Please refer to Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established market position
With 626 screens across 147 multiplexes in 68 cities, ILL is the second-largest multiplex operator. Its strong market position is also reflected in its ability to maintain ticket prices (average ticket price was Rs 199 in the nine months ended December 31, 2019, against Rs 200 in the corresponding period of the previous fiscal). Any capex plans to add screens have been put on hold temporarily given the current uncertainties regarding the spread of Covid-19. However, once the situation normalises, earlier plans to add 70-80 screens per annum over the medium term should help ILL maintain its leadership position and healthy business risk profile.
 
* Healthy operating efficiency
Revenue contribution from the advertisement segment increased to 9.4% in the first nine months of fiscal 2020 from 6.5% in fiscal 2014, while contribution from the food and beverages segment rose to 26.2% in first nine months of fiscal 2020 from 25.6% in the corresponding period last fiscal. Driven by healthy non-box-office revenue, operating margin was 18.8% in fiscal 2019 and remained healthy at around 20% in the first nine months of fiscal 2020. While the company's operating performance could be impacted in fiscal 2021, its ability to sustain its healthy margin after operations are restored will remain a key monitorable.
 
* Strong financial risk profile
Gearing should remain healthy at below 0.15 times, while debt to earnings before interest, taxes, depreciation, and amortisation (EBITDA) and interest coverage ratios should remain below 0.3 time and above 25 times, respectively, in fiscal 2020. Despite the impact of Covid-19 in fiscal 2021, the financial risk profile should remain healthy, with gearing below 0.2 time and interest coverage above 15 times. Being a part of the Inox group, ILL enjoys financial flexibility, aided by treasury shares, which had market value of Rs 118 crore as on March 18, 2020.
 
Weakness
* Exposure to risks inherent in the film exhibition business
Fluctuations in profitability inherent in the film exhibition business will continue to affect operations, though the impact should be cushioned marginally by the large scale and increasing contribution from the non-ticketing business. Given the high fixed cost, multiplex players should remain dependent on occupancy (ILL's occupancy was 29% for the nine months ended December 31, 2019, compared to 27% in the corresponding period of the previous fiscal), which is driven by the success of films. Availability of other forms of entertainment and new properties expose ILL to challenges of sustaining profitability and growth.
Liquidity Strong
ILL has current liquidity of more than Rs 120 crore, including cash and bank balance, undrawn committed bank lines, and other liquid investments. The company also holds treasury shares with market value of Rs 118 crore as on March 18, 2020; these can be liquidated in case of any exigencies. The company has plans to further enhance its undrawn committed lines. In case operations remain disrupted throughout the quarter ending June 2020, the total cash outflow, including fixed costs and debt obligation, is expected at Rs 95-100 crore; this should help the company tide over the current situation in the next few months. Upon resumption of normal operations, the company's cash accrual should sufficiently cover its capex as well as debt obligation. CRISIL will continue to monitor the company's current liquidity position.
 
Rating Sensitivity Factors
Upward Factor
*Significant improvement in the market position while sustaining financial risk profile
*Sustained growth in profitability, with operating margin sustaining above 20%
 
Downward Factor
*Prolonged closure of operations leading to weakening of the credit risk profile
*Large, debt-funded capex or acquisition leading to debt to EBITDA ratio sustaining above 1.5 times.
About the Company

Incorporated in 1999, ILL operates multiplexes. The company set up its first multiplex in Pune in May 2002. It acquired a majority stake in FAME and, thus, became the second-largest multiplex operator in India. FAME was merged with ILL effective April 1, 2012. In August 2014, ILL acquired a North India-based multiplex chain, Satyam, which had 38 screens.
 
For the nine months ended December 31, 2019, on a consolidated basis, profit after tax (PAT) was Rs 97 crore on operating revenue of Rs 1,526 crore, against Rs 85 crore and Rs 1,213 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators
As on/for the period ended March 31 Unit 2019 2018
Revenue Rs crore 1,663 1,326
Profit After Tax (PAT) Rs crore 133 115
PAT Margin % 8.0 8.6
Adjusted debt/adjusted networth Times 0.12 0.46
Interest coverage Times 13.73 7.63

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs.Crore)		 Rating Assigned with Outlook
NA Cash credit NA NA NA 25 CRISIL AA-/Watch Negative
NA Bank guarantee NA NA NA 50.85 CRISIL A1+/Watch Negative
NA Letter of credit NA NA NA 20 CRISIL A1+/Watch Negative
NA Overdraft* NA NA NA 32 CRISIL A1+/Watch Negative
NA Term loan NA NA 04-Mar-21 40 CRISIL AA-/Watch Negative
NA Term loan NA NA 26-Mar-22 70 CRISIL AA-/Watch Negative
NA Proposed long-term bank loan facility NA NA NA 41.83 CRISIL AA-/Watch Negative
NA Proposed short-term bank loan facility NA NA NA 40 CRISIL A1+/Watch Negative
*One-time short-term loan of Rs 32 crore and short-term line of credit, bank guarantee, and letter of credit aggregating Rs 16 crore is a sub-limit
 
Annexure - List of Entities Consolidated
Name of company Extent of consolidation Rationale for consolidation
Shouri Properties Pvt Ltd Full Operational and financial linkages
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  248.83  CRISIL AA-/(Watch) Negative/ CRISIL A1+/(Watch) Negative      14-05-19  CRISIL AA-/Stable/ CRISIL A1+  23-11-18  CRISIL AA-/Stable  22-08-17  CRISIL A+/Positive  CRISIL A+/Positive 
                28-09-18  CRISIL AA-/Stable  03-08-17  CRISIL A+/Positive   
Non Fund-based Bank Facilities  LT/ST  70.85  CRISIL A1+/(Watch) Negative      14-05-19  CRISIL A1+  23-11-18  CRISIL A1+  22-08-17  CRISIL A1+  CRISIL A1+ 
                28-09-18  CRISIL A1+  03-08-17  CRISIL A1+   
All amounts are in Rs.Cr.
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 50.85 CRISIL A1+/Watch Negative Bank Guarantee 50.85 CRISIL A1+
Cash Credit 25 CRISIL AA-/Watch Negative Cash Credit 25 CRISIL AA-/Stable
Letter of Credit 20 CRISIL A1+/Watch Negative Letter of Credit 20 CRISIL A1+
Overdraft* 32 CRISIL A1+/Watch Negative Overdraft* 32 CRISIL A1+
Proposed Long Term Bank Loan Facility 41.83 CRISIL AA-/Watch Negative Proposed Long Term Bank Loan Facility 41.83 CRISIL AA-/Stable
Proposed Short Term Bank Loan Facility 40 CRISIL A1+/Watch Negative Proposed Short Term Bank Loan Facility 40 CRISIL A1+
Term Loan 110 CRISIL AA-/Watch Negative Term Loan 110 CRISIL AA-/Stable
Total 319.68 -- Total 319.68 --
*One-time short-term loan of Rs 32 crore and short-term line of credit, bank guarantee, and letter of credit aggregating Rs 16 crore is a sub-limit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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