Alpha Invesco Research Private Limited

BULLSbook
Stock Of The Month : Cinemax India Limited

June
2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

Editors Desk

Dear Investor,

Here is a brief of what you will come across in this edition of BULLSbook.

In the first section, we have focused on equity dilution. Many of us simply stay away
from companies who dilute their equity. What exactly does it mean, and what are its
implications ? Every investor must know the facts behind equity dilution.

In the second section we have included the latest interview by Rakesh Jhujhunwala on
his thoughts on markets & investing. Markets take his opinion quiet seriously & so we
do !

Third section has the stock of the month. We are recommending Cinemax India Limited
for this month. Cinemax is into multiplex & entertainment business. Majority of its
revenue comes from the box office collections through its chain of multiplexes across
India. This is an upcoming sector & the company is well poised to exploit the huge
opportunity that exists.

All the best.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

Our Approach

Equity Dilution – Good or Bad ?

What is equity dilution?
When any business needs money for expansion, to meet
liabilities, to repay debts etc., it has two options to raise money.
1. From Bank by a way of loans or 2. Selling certain percentage
of shares of the company & get funds. When promoters/management of the company
decides to raise funds by issuing shares of the company to new investors or
shareholders, total number of shares outstanding will go up & the percentage of
existing shareholders will come down.

For Example :
Company XYZ Limited has 100 shares. 60 shares are owned by the promoters & 40 are
owned by common investors. Net valuation of the company is 1 crore rupees. The
company needs 20 lac rupees for business purpose. And investors are ready to pay 20
lacs in return for 20% stake in the company. XYZ limited decides to raise funds by
issuing new shares. New shares will be issued by using a formula;

X / (100 + X) = 0.20

That means, XYZ limited will have to issue 25 new shares to new investor. After this
deal, total number of shares of XYZ limited will go up to 125 (100 previous shares + 25
new shares). Now out of 125 shares, new investor holds 25 shares, promoters hold 60
shares & common investors hold 40 shares. i.e. promoter stake has gone down from
60% to 48% & common shareholders stake has gone down from 40% to 32%. Now, it
will impact company’s EPS ( earning per share ). Suppose XYZ limited had earnings of
1000 rupees resulting into an EPS of 10 rupees per share (i.e. 1000/100). Post the
issuance of new shares, this EPS will come down to 8 rupees per share (i.e. 1000/25).
This is called as equity dilution. But is it good or bad? let’s see.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

Earnings Per Share Dilution

The earnings per share (EPS) of a company in any

given year is arrived at by dividing its total earnings in
that year by the number of shares outstanding.
Therefore, when a company issues additional shares,
the result is a fall in its per-share earnings. This fall
in earnings per share is referred to as "earnings per share dilution" or "EPS dilution" or
"equity dilution." Is an earnings per share dilution a bad news for the company's
shareholders? Not always. Let’s see why.

Intrinsic ( basic) Value Dilution

What matters is not EPS dilution but "intrinsic value per share dilution." In many cases,
a dilution in EPS is accompanied by a dilution in per-share intrinsic value. This would
happen, for example, when a company's promoters allot shares to themselves at a
heavy discount to their per-share intrinsic value. But it is essential for investors to
understand that all EPS dilutions do not necessarily result in per-share intrinsic value
dilutions.

Understanding the difference between EPS dilution and intrinsic value dilution is as
important for managers as it is for investors. Managers should act in ways that
increase intrinsic value per share and avoid moves that decrease it. Moreover, their
focus should be on maximising per share intrinsic value, not per share earnings. These
two goals do not always go together. Many managerial acts may reduce EPS while
increasing per-share intrinsic value and equally many managerial acts may increase
EPS but reduce intrinsic value per share.

To understand the difference, think of a 25-year-old-first-year MBA student who is

currently earning nothing. His "earnings per share" is zero. However, a peon working in
his educational institution, who earns a salary of few thousand rupees has a positive
"earnings per share." Now, imagine that both of them agree to share their future
earnings equally as long as they live. Such an agreement would immediately increase
the EPS of the MBA student in a big way but will immediately reduce his per-share
intrinsic value.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

Many managers believe that if they can figure out a way to boost EPS for the current or
the next few years, their companies' stock prices will always go up. They are wrong.
Although EPS is useful for some situations, its simplicity allows managers to ignore
important factors that affect the value of a company. It can, therefore, lead managers
to make choices that destroy value in the long term, often without the short-term
share price improvement they hoped for. There can be many situations where a fall in
EPS may actually be accompanied by a rise in per-share intrinsic value.

Many managers forget that while they can take decisions that affect EPS, it is the
market that will determine the price earnings ratio (P/E) and, consequently, the stock
price. So, if an irrational managerial decision increases EPS but reduces per share
intrinsic value, the market will punish the company by assigning it a low P/E multiple.
In the same way, if a sensible managerial decision reduces EPS but increases per-share
intrinsic value, the market will reward the company by increasing its P/E ratio. Let’s
have a look at following examples to understand the concept of intrinsic value of
shares.

Operating Decisions

Many pharmaceutical companies such as Ranbaxy Laboratories

Limited spend huge sums of money in research and
development activities. In many cases, R & D activities account
for as much as 10% of annual sales. The economic rationale
behind such expenditure is to develop new drugs that will
become future cash cows as current drugs move out of patent
protection. Now suppose, Ranbaxy decides to stop all research and development
activities. What would be the result? There will be two consequences. One, a huge
increase in profitability of the current and the next few years. And two, an eventual
slowdown of earnings over the long term. Overall, such a move would be disastrous for
the company's shareholders and will immediately reduce its per-share intrinsic value.
That's because the intrinsic value of the business of Ranbaxy is the present value of all
its future earnings. If current and near-term earnings rise but long-term earnings
decline, it is possible that the per-share intrinsic value will fall significantly.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

Financing Decisions

Suppose there is well managed company that

earns high returns on its capital. Assume that its
product is in great demand and it wishes to
increase capacity to meet that demand. The
management is conservative and does not want
to increase its total debt. Under these
circumstances, the only other option the
company has is to raise funds through an offering of shares. As long as the additional
shares of the company are sold in the market for cash at a price that is not less than
the per-share intrinsic value, the existing shareholders will gain, and not lose from this
proposition. Even if the shares are issued to non-shareholders by way of a private
placement or GDR issue or preferential allotment, so long as the price at which the
shares are sold is at least equal to the per-share intrinsic value, the decision would be
sensible even though current EPS will fall. Put simply, this means that so long as the
returns from new capital raised are sufficiently attractive, the company's shareholders
would be better off with the prospect of owning a smaller share of a larger pie than a
larger share of a smaller pie.

Suppose, this company's managers got worried about EPS dilution and dropped the
plans for expanding capacity. Such a decision would actually hurt the shareholders, not
help them. That's because another competing company will expand its capacity and
grab market share from this company. While near-term EPS may not get diluted, the
market will respond by reducing the P/E multiple. EPS dilution is a price well worth
paying for an increase in per-share intrinsic value.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

BULLSbook Corner

In this section we will keep you updating about latest sector updates, market updates,
interviews & thoughts of investing legends, significant events & much more.

Here are the excerpts from Rakesh Jhunjhunwala’s latest Interview given to a Business
Channel on 14th June 2011.

Golden Period For Indian Stocks Has Not Even Started -

Rakesh Jhunjhunwala

What is your view on the markets?

The next three months are going to be a very

difficult period for the markets. The chances to
break down to me seem to be greater than the
chances to break up, at least in the next three
months.

Do you see 5000 acting as a base for this market?

That is difficult to say, but I would think so, 4800-5000 is a level where markets will
surely find a base, strong support which goes there.

:So what is the biggest risk for Indian markets currently?

The headwinds are on Indian markets, the most important thing is inflation. Because
inflation controls everything, interest rates, growth and the second headwind is the
government inaction. Although we have very good people at the helm of government
and they know what needs to be done, but politically they are not able to give any
consensus at all.

There was hopes of some big reform after the elections, but nothing has happened up
until now. And unless we get some kind of a reform in the subsidies and some kind of a
clear roadmap for the DTC and goods and sales tax, GST, the markets are waiting for
that.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

But would you bang the table and say that or predict rather that in next 3
years, Sensex will be at least 50% higher than where it is?

I am extremely bullish in the longer period. Three months unless and until we get
clarity on the monsoons which we will get by August end, and we will see what kind of
government action comes through. Until then, the markets are going to have a
downward bias. Three years, 5 years, 10 years, I am extremely bullish.

Do you think the golden period for Indian equities is not over?

It has not even started.

Let me get this right and this is one point I do not want to get it wrong for our
viewers, near term you are not bullish, but your long-term outlook is still
intact.

Absolutely and near term I mean until things clarify and it depends how events turn
out. If the monsoon is good and commodity prices ease which I personally expect, oil
prices should be at $80-85 and some government action comes through and inflation
may not have come down, but it becomes apparent that in future months, inflation is
going to come down, then the Indian markets will have a very strong ride after that.

So I am saying that the next 2 to 3 months are uncertain depending on how events
turn out. The period for the next 9 months could be very good or could be okay.

But is the rampant speculation in commodities over?

I do not think so. Speculation in commodities is at an all-time high.

But insiders tell me that you have been short commodities of late.

Yes, I am shorting some commodities. I am short.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

How come you have not made any large investments in last 6 months? Delta
Corp was only large investment you made and that was just before Diwali.

I have applied for a loan to my father-in-law. When he sanctions it, I will disburse it. I
will make it. I am fully invested and all that I have done in my life is investing. So now
even though I have some money, let me buy something else.

But if you had enough capital, do you see currently enough opportunities
which are available?

I am always capital short. If I see the opportunity, I will get the money. So if I see an
opportunity, I will surely invest.

Are you excited that Titan is at an all time high, your biggest investment?

I am happy that the company has proved itself to be an extremely good robust
company, very good growth prospects, now getting very aggressive. I am extremely
very happy really.

But you are still of the view that Titan potentially could be $1 billion
investment for you?

I am hopeful now it should be more than that.

More than a billion?

Why not?

Why is Titan an exciting business to own?

Because this business has the highest entry barriers. They have good growth. They
have excellent management. They are expanding very aggressively. They have good
brands. So I think the retailing is going to be one of the biggest growth stories in India
and Titan is in a sector which dominates whether watches or jewellery and now they
are coming to frames. They could enter other areas also. So with such high entry
barriers and growth and very high return on equity and good positive cash flows, Titan
surely is a very sweet spot.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

What about the PE multiple if you look at estimates and again I am looking
the consensus estimate?

By Indian measure of measurement, it is expensive. But good stocks always remain

expensive.

That is the investor Rakesh Jhunjhunwala, but what is the trader Rakesh
Jhunjhunwala thinking and doing?

Thinking and doing, I am trading. I feel the markets in the next 3 months have more
downsides than upsides.

So broadly speaking can I safely assume that the trader Rakesh Jhunjhunwala
is short or he is not bullish?

I am certainly not bullish and let's not discuss my trades.

So where do you think the new leadership in the markets could emerge from?

Titan will be one of the leaders.

Even after this run up?

Yes, why not?

It is interesting if I look at your investment portfolio. You do not own any

Nifty 50 or Sensex 30 stocks. Why is that?

I hope that some of those stocks which I own will become part of the Nifty or Sensex.

So apart from Titan, which other stock has the possibility of being part of
Nifty 50?

Lupin is a fairly large company now.

What makes you so bullish on Lupin because the Indian pharma business...?

It is growing well, they have done well. They are doing well in Japan, America.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

Stock Of The Month

Cinemax India Limited

BSE : 532807 BSE Group :B

NSE : CINEMAX ISIN : INE704H01014

Market Cap : 101 Face Value : 10

Dividend : 12% PE Ratio : 18.6

CMP : 36 52 Week H/L : 67/33

BULLSbook Target : 120

Holding Period : 18-24 Months

BUYING STRATEGY

We recommend buying the stock around current levels of 36 & on all declines to 30 if
any. The stock has fallen from its all time high of 200+ to current levels in the last
couple of years due to the rough period for the industry as a whole with rising input
costs. After a few years of consolidation & flat performance, with the expected revival
in the overall performance of the company & the sector; CINEMAX represents a great
buying opportunity for the long term investors.

To get latest updates on this stock, type BB CINEMAX on your mobile & send SMS to
56767. The status of the recommendation will be updated in case of a significant
change in the overall strategy.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

ABOUT THE COMPANY

Cinemax India (CIL) incorporated in May 2002 as Cineline Entertainment (India); is

engaged in business of building, owning, and operating multiplexes, theatres and
entertainment centres. Later in 2005, the company's name was changed to Cinemax
Cinemas (India). The company is part of Kanakia Group which also has business
interest in construction, hospitality, education and arts.

CIL has four wholly owned subsidiaries namely Vista Entertainment (VEPL), Growel
Entertainment (GEPL), Cinemax Motion Pictures (CMPL) and Nikmo Finance (NFPL).

Cinemax is one of the largest Exhibition theatre chains in India operating 33 properties
with 110 screens and 28,181 seats. It is one of the dominant players in Mumbai
operating 40 screens with seating capacity of 10,948 at 13 locations in and around
Mumbai, which is home to the Hindi Film industry ('Bollywood'). It owns multiplex
properties in India with 97 screens spread over approximately 7,70,000 sq ft area.

Business Area

Exhibition, Theatre Ticket Sale – The Company is

engaged in film exhibition and has also
conducted many premieres.

Gaming – The company is also engaged in

gaming business and operates it under the
brand name ‘Giggles- The Gaming Zone'.
Currently the company operates gaming zone in
Eternity Mall, Thane, spread over 13,000 sq ft of
area and offers around 50 state-of the art games.

The company has also opened ‘Giggles- The Gaming Zone' at Eternity Mall, Nagpur.
Several new Giggles gaming zones at some of future multiplexes at different locations
in India are being planned.

Food Court- The company also operates food court under the brand “INDULGE”.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

Mall Development- The company is also engaged in mall development. The company
has developed over 200,000 sq feet of mall area at Eternity mall in Thane and over
100,000 sq ft of area in Nagpur.

BOARD OF DIRECTORS

Sr. No Name Designation

1 Rasesh B Kanakia Chairman
2 Himanshu B Kanakia Managing Director
4 Kranti Sinha Director
5 Girish Dave Director
6 Jatin J Shah Company
Secretary
7 Utpal Sheth Independent
Director
8 Sanjay Sanghvi Non Executive
Director

FINISHED PRODUCT

Product Name Value (March 2011)

Theatrical Exhibition & 185.43
Entertainment
Retail Space 4.67
Other 5.85
Windmill 1.46
Total 197.41

INDUSTRY OVERVIEW

India is the largest film producing market in the world with over 1,000 films released
every year and 3.7 billion tickets sold annually. The Indian film industry is set to top
revenues as it rides new technologies and a booming economy set to expand the
sector at the rate of 18 percent per year. It is also one of the largest employment
sectors in the country. The government of India gave the motion picture industry the
status of an industry in 2001, making it easier for film producers to obtain institutional
financing. According to PwC, the industry is projected to grow at a CAGR of 12.4 per
cent, reaching US$ 3.65 billion in 2014 from US$ 2.03 billion in 2009.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

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

Similarly, 3D films are now gaining prominence. A case in point was Avatar, James
Cameron’s epic 3D film which opened to packed theatres in India and abroad.
Encouraged by the response that Avatar received in India, many Indian producers
are also planning their own 3D films targeted to the Indian audiences.

In South India single screens have a stronghold and the four southern states account
for nearly 60% of the single screen theatres and only 10% of the multiplexes in the
country.

Multiplexes, with lower average seating capacities and a differentiated viewing

experience, have led to producers experimenting with film content for niche audiences.
Multiplexes also offer more choices to audiences due to the flexibility in pricing and
programming.

Current revenue sharing structure between the producers & multiplexes is as above;

Movie earns < Rs. 17.5 Cr Movie earns > Rs. 17.5 Cr
Producers Multiplex Producers Multiplex

Week 1 50% 50% 52% 48%

Week 2 42% 58% 45% 55%
Week 3 35% 65% 38% 62%
Week 4 30% 70% 30% 70%

The Indian Film Industry enjoys mass appeal in India. Despite the entry of multiple
mediums, Indians have always enjoyed watching movies in the theatre. Besides, with
increasing 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 by offering snacks on the seat, fancy lounge chairs, and home delivery of
tickets even at two hours notice.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

STRENGHTS, OPPORTUNITIES AND THREATS

As Mumbai's largest theatre chain with 13 properties and 40 screens it accounts for
nearly 32% of the box office collection from Mumbai from multiplexes. (Around 40% of
the total box office collections for Hindi films in the country come from the Mumbai
territory).

CINEMAX has developed a strong brand image among cine goers.

Presence in Mumbai, Pune, Banglore, Surat, Delhi, Kochin, Baroda, Kolkata, Hyderabad
& 10 other locations as of now. The company plans to increase its presence in tier 2
cities in the upcoming years.

The company plans to invest Rs 100 crore and double its screens to 200 by 2013. In
the gaming segment, Cinemax will set up a new gaming unit under 'Versus' brand in
Delhi entailing an investment of Rs 15 crore by March this year.

CINEMAX managed to keep its average ticket price at 137 Rs during the year 2010-
2011 with an average occupancy rate of 25 to 26%. With more number of A rated star
releases during financial year 2011-12, the occupancy rates are most likely to go up.

The rising disposable incomes of the working population and increased spend on
optional items, not only in Tier-I but also Tier-II and III cities is expected to continue
impacting the Entertainment & Media industry favorably.

Risk/Threat Factors

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

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

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

Competition from other exhibition

ibition players in the industry & terrorist
errorist threats or social
unrest in particular city/region can impact the business to some extent.

SHAREHOLDING PATTERN

shareholding

Promoters 68.64%
Public 31.36%

Public Shareholding Pattern

FII’s & Mutual 5.24%

Funds/UTI/Financial
/Financial
Institutions/Banks/Insurance
Companies

Corporate Bodies 9.23%

Individual Shareholders up to 13.27%

1 Lac
Individual Shareholders more 2.59%
than 1 lac
Others ( NRI’s, Clearing 1.04%
Members)
Total 31.36%

Promoters hold majority stake in the company.

company Their stake is consistent around 68
68%
over the years. Promoters have pledged nearly 50% of their shares to raise funds.
However this leaves no impact on the operational performance.
Alpha Invesco Research Pvt Ltd www.bullsbook.com

BALANCESHEET

in Cr. Mar-11 Mar-10 Mar-09 Mar-08 Mar-07

SOURCES OF FUNDS :

Share Capital 28.17 28.17 28.17 28.17 28.17

Reserves & Surplus 143.18 137.78 124.75 119.57 109.51
Total Shareholders Funds 171.35 165.95 152.92 147.74 137.68
Secured Loans NA 86.82 72.32 92.38 62.88
Unsecured Loans NA 0.77 9.01 4.08 0.55
Total Debt 126.31 87.59 81.33 96.46 63.43
Minority Interest 0 0 0 0 0
Total Liabilities 299.11 253.54 234.25 244.2 201.11

APPLICATION OF FUNDS :

Gross Block NA 264.54 233.92 181.84 87.42

Less: Accum. Depreciation NA 56.91 39.71 21.13 13.87
Net Block NA 207.63 194.21 160.71 73.55
Capital Work in Progress NA 20.01 27.63 36.75 51.27
Investments 0.62 0.33 0.3 29.29 65.2

Current Assets, Loans &

Advances
Inventories 0.8 0.58 0.38 0.26 1.04
Sundry Debtors 9.54 7.09 7.08 5.69 7.95
Cash and Bank Balance 9.14 6.36 4.25 7.99 16.76
Loans and Advances 60.52 56.18 62 43.96 29.11
Less: Current Liab. & Prov.
Current Liabilities 31.83 31.76 44.88 35.04 27.63
Provisions 6.92 12.88 16.72 5.43 16.17
Net Current Assets NA 25.57 12.11 17.43 11.06
Miscellaneous Expenses not NA 0 0 0.02 0.03
w/o
Total Assets 299.11 253.54 234.25 244.2 201.11
Contingent Liabilities NA 2.87 0 0.12 22.13

The company has maintained healthy & steady reserves. The company has not diluted
its equity but funding its expansion through debt. The debt component is high
compared to the size of the company; however we feel that the added capacity by
using this debt will provide far greater benefits in the times to come. Company is well
poised to survive in the higher interest scenario compared to its competitors.

*NA – Not Available ( The company is yet to declare latest balance sheet in detail)

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

PROFIT & LOSS ACCOUNT

in Cr. Mar-11 Mar-10 Mar-09 Mar-08 Mar-07
INCOME :
Sales Turnover 191.56 190.06 159.04 109.01 100.72
Other Income 5.85 7.95 9.42 4.65 1.87
Stock Adjustments NA 0.2 0.12 -0.79 0.04
Total Income 197.41 198.21 168.58 112.87 102.63

EXPENDITURE :
Raw Materials 10.86 9.55 7.73 4.75 4.69
Excise Duty NA 0 0 7.39 0
Power & Fuel Cost 15.64 13.49 12.22 8.3 4.76
Other Manufacturing Expenses 51.46 56.49 43.19 29.4 34.88
Employee Cost 18.78 13.31 13.39 7.98 5.55
Selling and Administration Expenses 65.38 64.21 49.72 23.32 23.81
Miscellaneous Expenses 0 9.54 1.97 1.28 1.99
Less: Preoperative Expenditure 0 0 0 0 0
Capitalised
Profit before Interest, Depreciation & Tax 35.29 31.62 40.36 30.45 26.95
Interest & Financial Charges 11.12 7.73 6.31 3.46 5.05
Profit before Depreciation & Tax 24.17 23.89 34.05 26.99 21.9
Depreciation 19.13 17.47 18.88 6.87 5.13
Minority Interest before PAT 0 0 0 0 0
Profit Before Tax 5.04 6.42 15.17 20.12 16.77
Tax -0.41 -10.54 4.12 6.39 5.3
Profit After Tax 5.45 16.96 11.05 13.73 11.47
Minority Interest after PAT NA 0 0 0 0
Profit/Loss of Associate Company NA 0 0 0 0
Profit after Minority Interest & P/L of 5.45 16.96 11.05 13.73 11.47
Assoc. Co.

Adjustment below Net Profit 0 0 0 0 0

P & L Balance brought forward NA 28.97 22.02 13.62 12.13
Appropriations NA 4.08 4.1 5.33 9.98
P & L Bal. carried down NA 41.85 28.97 22.02 13.62

Equity Dividend NA 3.36 3.36 4.2 0.61

Preference Dividend NA 0.01 0.01 0.01 0.01
Corporate Dividend Tax NA 0.56 0.57 0.71 0.11
Equity Dividend (%) NA 12 12 15 2.2

Earning Per Share (Rs.) 1.95 5.85 3.74 4.65 4.05

Book Value 61.14 59.19 54.54 52.68 48.87

Extraordinary Items NA -4.3 2.31 0.04 -0.33

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

From the P&L account we can observe;

The sales of the company have been flat in 2010-11 compared to 2009-10. Employee
cost has gone up as well. Interest cost has gone up by nearly 4 crores. Selling/Admin
cost & manufacturing cost has gone up significantly in the last two years. This is due to
increased cost of distributors share & theatre rent cost. However with increased
capacity & occupancy rate coupled with higher ticket prices, the revenues are poised to
rise significantly from the existing assets in the year 2011-2012-2013-2014. After a
couple of years of difficulties, we expect a revival in the overall performance.

RATIOS
in Cr. Mar-11 Mar-10 Mar-09 Mar-08 Mar-07
Debt-Equity Ratio (x) 0.73 0.53 0.59 0.56 0.46
Operating Profit Margin (%) 18.42 18.9 23.42 27.93 26.76
Profit Before Interest And Tax Margin 8.43 9.71 11.55 21.63 21.66
(%)
Gross Profit Margin (%) 12.61 14.83 19.45 24.76 21.74
Ajdusted Net Profit Margin (%) 2.84 11.19 5.5 12.6 11.39

Debt to equity ratio is high since the company is funding its expansion via debt. The
debt to equity ratio is low compared with other players in the industry. This leaves the
company in a better shape to compete in the times to come. Operating profit margin
has decreased across the industry in the last couple of years so are CINEMAX’s. We
expect operating profit margins to remain steady around current levels in the times to
come. Net profit margins are hit severely due to flat sales & increased interest cost.
With an increase in sales during the next couple of years, the Net Profit Margins shall
claw back to the original levels of above 10%.

Low growth companies with no expansion plans or with declining business can also
have low debt to equity ratio, since they don’t need to raise debt. Investors should stay
away from such companies. Debt to Equity ratio is not the only tool to Measure
Company’s financial strength. Rather, investors should look for companies which are
growing without taking excessive debt/loans. Also, it is a bad sign if a company starts
raising lot of debt when the industry is in boom. It shows over enthusiasm & short
sightedness of the promoters.

Always look for Operating Profit Margins rather than Net Profit Margins. Since OPM
gives the actual business picture & companies profitability. NPM (Net Profit Margin) is

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

calculated after deducting taxes, duties, depreciation, interest cost etc. All of these
factors are variable, so they may not give a clear idea about company performance.
Sometimes we see sudden growth in a particular company’s net profits but not in
operating profit. This increase comes by tax refunds, depreciation effect etc. Also,
sometimes we see a sudden rise in company’s income but not in company’s net sales.
This rise in income comes through an asset sale, extraordinary gain etc. Such type of
gain is one time & not permanent. Hence investors should always find an answer to
this question, from where the income & profits are coming ?

We expect 20 to 25% growth per annum in sales for the next 3 years. Even if we
consider conservative estimates, Cinemax India should post a sales turnover / net
sales of 230 crores in financial year 2011-12, 285 crores in 2012-13 & around 350
crores in 2013-14. Company’s OPM (operating profit margin) is most likely to remain in
the range of 18%. Net profit margins are expected to remain around 9 to 10%.

By this logic, CINEMAX will post a net profit of around 18 crores in 2011-12 & around
28 crores in 2012-13 & around 35 crores in 2013-14. This will result into an EPS
(Earning per Share) of 8 in financial year 2011-12, around 12 Rs in 2012-13 & around
15 Rs in 2013-14.

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

WHY INVEST IN THIS COMPANY

CINEMAX has developed a significant brand image & brand recall among cinegoers.

Though cyclical in nature, Indian cinema is evolving & urban , semi-urban crowd
aspires to prefer experiencing cinema in multiplexes than that of single screen
theatres. With rising disposable incomes & extremely low penetration levels, the sector
represents a huge and untapped opportunity.

The company is aggressively expanding its presence across India. Especially in semi-
urban areas. These efforts are likely to fetch good returns for the business over the
coming years.

FII’s & Mutual Funds have little exposure to the stock & is yet to catch the mass
investor attention. Sooner or later the stock is poised to attract large institutional /
individual investors, which is likely to result in further acceleration of stock price.

The company will maintain its growth rate of more than 20% in the coming years. We
expect the PE to remain around 10 to 12 in the next couple of years coupled with a few
fold rise in the earning per share.

This is the approximate estimated stock price movement in the next 24 months. This is
an overall view. Short term fluctuations in the market may take the prices up or down
than our expected levels.

Financial Year Stock EPS PE Stock Price

2011 CINEMAX 8 10 80
2012 CINEMAX 12 10 120
2013 CINEMAX 15 10 150

June 2011
Alpha Invesco Research Pvt Ltd www.bullsbook.com

NOTES

DISCLAIMER:- The views/opinions expressed in this report are personal opinions. Calculations
and estimates are based on certain assumptions. It should be noted that the information
contained herein is from publicly available data or other sources believed to be reliable. The
user assumes the entire risk of any use made of this information.

June 2011