Tuesday, October 22, 2013

PVR Cinemas sells off Anupam, South Delhi Cineplex and Leases it back - explained

PVR, one of the most popular chains of cineplexes in India has of late sold Anupam, one of it's flagship  cineplex, situated in South Delhi, to an undisclosed party for Rs. 52 cr. This news would have been noticed by all those Delhites who have seen movies at PVR Anupam. However, it is not the selling of Anupam cineplex that has evoked interest from the analyst community. The fact that the buyer has leased back the asset to PVR is what has evinced interest. So what are the financial ramifications of this transaction is the question that I try and explain the readers of the blog. 
Let us see how the financial statements are being impacted by the news. If you are not clear with your financial statements you could just read the paragraph below. If you are a pro just ignore it.
There are three financial statements that companies essentially prepare:

  1. Income Statement - Aimed at arriving at the profit the company earns in the given accounting period
  2. Balance Sheet - Aimed at calculating the solvency (long term debt paying ability) and liquidity (short term debt paying ability) position of the company as on a given date.
  3. Cash Flow Statement - Aimed at arriving at the cash balance at the end of the year. It is divided into three parts cash flow from operations (money generated from operations) , cash flow from investing (money spent on buying assets net of assets sold) and cash flow from financing (money raised for business net of money returned to investors,lenders etc.). 

When cineplex is sold  for Rs. 52 cr. in cash what happens to the financial statement?

Balance Sheet: Operating non current asset (long term asset which help earn revenues) decreases in this case  and cash (which is a part of short term asset increases) . Thus, the company's operating profit generating capacity decreases as it's operating non current asset decreases and hence if we look in isolation the company has contracted in size.  

So here is how the balance sheet would be impacted by the transaction when it comes to PVR Cinemas Ltd.

PVR Fixed Assets (A)
Impact
FY 2013
FY 2012
FY 2011
 Gross Block
493.57
545.57
385.37
353.24
  Less : Accumulated Depreciation
230.78
181.68
143.60
112.84
Depreciation (As shown in Income Statement)
49.10
42.95
31.36
24.11
  Net Block
262.79
363.89
241.77
240.40
Depreciation Rate
9%
11%
9%
9%
Cash (B)
72.63
20.63
12.55
35.12

Source: Capitaline.com, PVR Annual Report 2012,2013

Hence, as can be seen in the table the Net Block of Property, Plant and Equipment will reduce while Cash has increased.

Cash Flow Statement -

  • Cash Flow from operations would decrease/ increase depending on the lease agreement
  • Lease Expenses would appear as an operating expense; cash flow from operations would decrease.
  • Cash Flow from investment would increase as sales of asset would bring in cash.
Income Statement

Operating Profit (EBIT) would also depend on the lease agreement as in the case of 
  • Lease Expenses would appear as an operating expense
  • Depreciation expenses would decrease by approximatelty Rs. 5.1 cr. (10% of Rs. 52 cr.). Rate of depreciation is based on historic depreciation rate.


Impact on the stock price:

The markets have  reacted favourably to the news as even though technically assets have decreased, the company still reaps the benefit of assets. With decrease in assets, return on asset and asset turnover ratio has improved. The price of the stock has moved up from  Rs. 485 to Rs. Rs. 515 in 3  days of trade.

Author: Abhishek Sinha

Abhishek Sinha has approximately 8 year of experience in equity research, business research and consultancy. He has also had the privilege of managing a small portfolio of INR 3 million. However, his interest lies in teaching and "demystifying concepts." He has taught students right from the age of 3 years at PP1, to 40 years at executive courses and believes teaching is not about knowing the concepts; it is about relating the concepts to the audience. At present he is "gainfully employed" at Vignana Jyothi Institute of Management, Hyderabad; where he loves to teach finance to an enthusiastic bunch of management students. His hobbies include analyzing income statement, balance sheet and cash flow.> Google +



   

2 comments:

  1. I respect the analyst for such a mind to generate the revenue.. And u for such easy explanation for such a complicated things..Thanku Sir..

    ReplyDelete