MANAGEMENT DISCUSSION AND ANALYSIS

The following Management Discussion and Analysis Section should be read in conjunction with the financial statements and notes to accounts for the period ended 3lst March, 20l5. This discussion contains certain forward looking statements based on current expectations, which entail various risks and uncertainties that could cause the actual results to differ materially from those reflected in them. All references to "PVR", "we", "our", "Company" in this report refers to PVR Limited and should be construed accordingly.

Industry Structure & Development

The Indian film Industry has been witnessing significant growth on the back of differentiated content, wider release across digital screens and aggressive promotions by production houses. The film industry is estimated to be worth INR l26.4 billion in 20l4. The industry is heavily dependent on domestic theatricals recording a revenue growth @ 10% of CAGR which contributes 74 % to the industry's revenues. Factors such as rapid urbanization, penetration of multiplex in tier II and tier III cities, increasing sophistication in production and marketing of films and audience's receptivity to differentiated content are together expected to help the industry sustain its growth over the next few years and be  worth INR 204 billion by 20l9.

Domestic theatricals will continue to remain the main  source of revenue for the industry. Digital technology,  apart from securely delivering films in a cost efficient  and secure manner across the country, has also helped  cut revenue losses owing to piracy. Wider reach and  coordinated release of movies has been a key revenue  driver for the industry (Source: FICCI- KPMG Indian Media and Entertainment  Report 20l5)

Opportunities Largest Industry

The Indian film industry is one of the largest globally with a history of steady growth. With films being the most popular form of mass entertainment in India, the film industry has witnessed robust double-digit growth over the past decade.

Under screened market:

India continues to be heavily under screened with 8 screens per million available, unlike in the United States, where there are ll7 screens per million. The opportunity is huge and the exhibition industry is expanding its supply.

Penetration into tier II and tier III markets

With metros and most of the tier I markets getting saturated, the focus is now shifting to the tier II and tier III cities which are experiencing rapid urbanization and greater economic growth. With lower real estate prices in smaller towns and the leeway to launch a no frills cinema, the exhibitors are able to considerably bring down the cost per screen.

Digital dominance

Digitization has changed the landscape of Indian cinema in several ways. Widesbrad release of movies across several screens, curtailment of piracy, reduced cost of prints, lower storage and maintenance expenditure and release of small budget films in a cost effective manner are some advantages offered by this technology.

Over the past few years the industry has steadily shifted from releasing films with physical prints to digital distribution. The industry achieved around 90-95 percent digitization of screens and almost all commercially viable properties have been covered. Digital distribution has enabled films to broaden their reach and most films now garner about 60-80 percent of their revenue in the first week of release.

Digital technology is now enabling reaching the unserved population which sits near the bottom of the pyramid. The key advantages of digital technology are affordability, security and timely access.

Emergence of 3D films:

3D films are slowly gaining prominence both in Hindi and Hollywood films released in India. 3D technology comes at a price but allows multiplexes to marginally increase ticket prices and provide a differentiated experience to the viewer. Moreover, this viewing experience cannot be readily replicated on the television and internet.

Transparency of ticket sales & In Cinema Advertising:

The industry has witnessed a marked improvement in transparency of ticket sales over the years. Systems and processes introduced by multiplex chains in addition to digitization of theatres, online ticket booking are the key contributor. The growing penetration of digital distribution has given rise to the growth of cinema advertising, giving the advertiser the flexibility to target a captive audience in the desired region. Currently, an exhibitor's revenue comprises 70 percent ticket sales, 20 percent food and beverage and l0 percent cinema advertising. While the proportion of each is expected to remain the same, the volume in absolute terms is expected to go up.

Distribution of Hollywood content:

20l4 was a good year for Hollywood films in India, the gross box office collections of top l0 films increased  from INR 3.2 billion (20l3) to INR 4.2 billion (20l4).

In 2014, franchise movies such as 'Amazing Spider Man 2', 'Transformers 4: Age of Extinction', 'X-Men: Days of Future Past' continued to perform well at the box office and generated close to INR 2.1 billion in gross box office collections in India.

Growth of Multiplexes

During the year, industry added approximately 200 screens with major growth coming from expansion of multiplexes in tier II and tier III cities. Growth of the  multiplex industry will be highly correlated to the level of real estate development as most players intend to grow both organically and inorganically. Organic growth of the industry will be mostly through greenfield investments as most multiplex players do not perceive value from converting single screens into multiplexes. In the short run, organic growth will be limited by the bottlenecks created due to slowing development of malls and commercial real estate.

Shortening of the movie shelf life

First week business has increased, driven by the wider release and number of prints. The first week and weekend contribute almost 60-80 percent of a film's total collection. Even within the first week, the trend is getting skewed towards the weekend. Considering this, multiplex chains are experimenting with pricing  strategies to maximize revenue. By adopting a differential pricing model for weekdays and weekends, they are able to maximize footfalls across the week.

Threats/Risks and Mitigation Measures  Piracy

Piracy has been one of the biggest thorns in the flesh for the industry. Can-cording is one of the most common ways of piracy, where pirates illegally record the movie in the theatres and release it online as well as make duplicated DVDs and sell it on the black market. The pirated versions of the movies are released within a day or two of the release of the movie and the DVDs are available the next day in the market.

20l4 also saw increased cooperation between the industry and the government to tackle the issue of piracy on a larger scale. The number of piracy cases registered in India reduced by 10 per cent this year as compared to a l6 per cent drop in the entire Asia Pacific region. Industry is now leveraging technology to track the culprits in an effort to curb piracy.

In this context, it is important that industries collaborate and create efficient mechanisms for content protection. With cooperation from the government and internet service providers, site-blocking measures can combat online piracy. The initiatives of Telugu film industry are a significant step in that direction. A major deterrent to piracy will come only from a change in mindset on the part of consumers.

Quality of Content:

Success in the film exhibition business is heavily dependent on the flow of the content and quality of content being released during the year. The success of a release can be highly unstable and seasonal, therefore impacts the performance of the business.

With the advent of more and more professional entities into film production, the industry is becoming better and organized and is all set to roll out quality movies on a consistent basis thus producing quality movies for cinema goers. A film that is strong on content is well cast and marketed, can earn good returns.

Slow Development of Malls

Emergence of multiplex screens in the last decade has dramatically changed the film exhibition space in India, however there is still a huge opportunity to rapidly increase the number of cinema screens in the next decade without causing oversupply.

Consolidation in the exhibition industry and a positive outlook in the economic and social conditions of the country could see investments being made to improve the infrastructure and increase screen density, but it would be important for both Central and State Governments to update and amend the regulations on priority. Currently, it would be easier to open a mall than it is to open a cinema hall, the licenses required to open a cinema hall are complex and time consuming and often discourage an investor.

Currently, there are only 4 film cities in the country, located in Mumbai, Hyderabad, Noida and Chennai. New film cities will not only help increase employment and tax revenue, but can also ease the strong brssure on the existing film cities.

Rising cost of talent

One of the unique characteristics of Indian film industry is the concentration of power in the hands of top few actors, and now directors and technicians. Until a couple of decades ago, actors did not pay much attention to the business aspect of cinema. Many actors now have their own production and mostly enter into co-production deals with studios. Industry sources continue to emphasis that the current system is unsustainable from a long term perspective as the high talent acquisition costs lead to higher risk and in certain cases impact the return.

Slow uptake of merchandising in India

Unlike other countries, India's merchandizing market is still not mature. Most Indian filmmakers have a relatively limited reach across the globe with piracy having its spillover effects on film merchandising as well. Also due to diverse audience, the 'one size fits all' approach does not hold true for India. Absence of iconic figures, compromising product quality, limited  popularity period and demand of film's merchandise are various other factors.

Ticket price controls

There is a growing demand for differential ticket pricing depending on the star cast, content and scale of the movie. Today a tent pole movie such as 'PK' can be sold out at INR 500 per ticket, however the hit is taken by smaller movies which do not get brmium screening slots due to potentially poor occupancy. While differential pricing is increasingly being used by the larger exhibitors across their networks, a broader adoption will encourage smaller movies to release at the time when larger films are in the theatres.

The industry expects the governments to relax regulations on fixed number of shows and cap on ticket pricing and let the exhibitors decide on the admission rates according to demand. Flexible pricing will also help to reduce black-marketing of tickets since theatre owners will have freedom to revise the rates according to the audience inflow.

Higher Tax Regime

High entertainment tax acts as a major impediment to the growth of exhibition industry, as the overall tax implication is as high as 40-50 percent in states like Maharashtra, Uttar Pradesh, Bihar and Karnataka. Hence, it is imperative that the entertainment tax structure across the country be rationalized by bringing down rates of entertainment taxes.

Also, it will be useful to provide tax holiday benefits for infrastructural development on setting up cineplexes in tier II and tier III cities to incentivize the sector and boost growth and development of such cities.

Cable and satellite rights

With a share of 12 per cent in 2014, Cable & Satellite (C&S) rights continued to be the second largest contributor to the overall industry's revenue. The film revenues from sale of C&S rights de-grew by 2.7 per cent to INR 1,470 million in 2014.

The television networks are now brmiering new movies back on the movie channels. They are also launching strong marketing campaigns to mark the brmiere of movies.

After multiplexes, its time for megaplexes

Continuous innovation and technology evolution have been the key drivers of the exhibition industry. Certain players are now developing megaplexes with 11-15 screens capable of showing 60-80 screenings per day. Such megaplexes would be built at an average cost of about INR 20- 25 million per screen and would have a capacity of 2000 to 2500 seats.

Product wise analysis

The Revenue Growth under various heads during the year under review is summarised as under:

Performance of the Company

The Company's financial performance is discussed under the head "Financial Highlights" in Directors Report to the Shareholders.

Operating performance

1. Footfalls & Occupancy

We entertained around 59.2 million patrons at our cinemas during FY 2014-15 as compared to 59.9 million patrons during the FY 2013-14, registering a fall of 1%. With the addition of 50 new screens in 2014-15 and the movie pipe-line in 2015-16, your Company expects a robust growth in footfalls during the current year.

2. Future Outlook

Future outlook for the FY 2015-16 is positive and barring the unforeseen circumstances the company's performance is expected to show continued growth.

Internal Control Systems and their adequacy

The Company has adequate internal control systems commensurate with its size and need. M/s KPMG  periodically review all control systems and assists in monitoring and upgrading the effectiveness of control systems. The Audit Committee also reviews this process.

Material Developments in Human Resources:

Recruitment & Selection

At PVR, we believe in hiring potential talent and develop their skills further by putting up a structured and extensive training programme to develop them of professionals who would handle patrons by providing highest level of customer services in the entertainment world.

The stern process of selection encompasses evaluating candidates based on their educational background, Skill & Industry experience. Our linkage with best education and training institutes ensures constant supply of resources that are industry trained and ready to deliver on the values that govern the organization.

Industrial Relations

With our fair management practices across the board we ensure a congenial work environment and a good quality of work life.