Nov 16: Fitch Ratings has today assigned a National Long-term rating of 'BB-(ind)' to Stargaze Entertainment Private Limited (Stargaze). The agency has also assigned a rating of 'BB-(ind)' to the company's long-term loans aggregating INR230m. The Outlook is Stable.
Stargaze's ratings reflect the company's nascent stage of operations, and that a majority of its planned exhibition halls are not yet operational since many are still in the initial project phase. The ratings are also constrained by delays in project implementation on account of a slowdown in India's real estate sector, its relatively weak competitive position as a late entrant in the multiplex business, and expected EBITDAR losses in the short-term. These risks are, however, mitigated by the encouraging initial response from audiences to its exhibition halls in Ajmer & Kurukshetra, softening commercial real estate rentals and the sponsor group's (Network18) track record in successfully establishing start-ups in the media space.
Stargaze commenced operations in July 2008 with a single screen hall in New Delhi. The company added two additional halls recently, which are located at Ajmer with two screens in July 2009 and Kurukshetra with three screens in October 2009. As a part of its growth strategy, the company plans to add another nine halls with 33 screens, which are set to open in phases by FY11. Given the project timeline, Fitch expects that Stargaze would not be able to generate sufficient revenue in FY10 to cover corporate costs (comprising of top management salaries and brand building costs), and thus may report cash losses during FY10. Fitch notes that as per loan covenants, the company is required to fund these losses through additional equity contribution by sponsors. Credit metrics, in terms of interest and fixed charge coverage, are therefore expected to remain strained throughout FY10; it may improve from FY11 onwards when the full capacity of its 39 screens starts to generate revenues. As a late entrant, Stargaze does not plan to take on the existing larger players which have established operations and brand equity in metros and tier-I cities. Instead, it focuses on setting up new capacities in tier-II cities, which have a low multiplex penetration, and hence less competition.
The occupancy levels of the halls and the operating profits of film exhibitors are dependent upon the quality of the films, marketing strength, location of the halls, fixed expenses including lease rentals, the number of screens, seasonality, and force majeure events like swine flu and terrorist threats. These risks are mitigated by India's mature content producing industry, and an established and large market of filmgoers. Stargaze's strategy to tie up for a wider array of content through revenue sharing model, its flexible content scheduling and pricing, and lower overheads in tier-II cities, will also help the company mitigate the risks mentioned above. The ratings also take into account that Stargaze leases exhibition space through long-term lease in upcoming shopping malls, which helps keep its capex investment per screen low. On average, Stargaze's capex per screen is INR13m, which comprises of fit-out costs and security deposits for lease (three to six months rent). Although the slowdown in India's real estate sector has impacted the completion of many shopping malls in which Stargaze plans to set up screens, it has enabled it to renegotiate rental rates down by an average of 25%-30% over the initial agreements.
Positive rating actions may result from a higher than anticipated improvement in revenues brought about by the success of the new halls, timely execution of projects without cost overruns, and improvement in coverage ratios by FY11. Conversely, the inability to break even at the operating level in FY11, any cost and time overruns incurred in projects beyond Fitch estimates, and interest cover remaining under 1x beyond FY10, will impact its ratings negatively.
Stargaze is a media start-up sponsored by Network18 group which primarily sets up and operates film exhibition halls. For FY09, the company reported revenues of INR22.9m and EBITDAR of negative INR20.9m.