Rationale

 While assigning the rating, ICRA has taken a consolidated view of UFO Moviez India Limited (UMIL) (rated [ICRA]A(Negative)/[ICRA]A2+)), its 12 subsidiaries/step-subsidiaries including Scrabble Entertainment Limited (SEL)-a wholly owned subsidiary of UMIL, and seven associates, given the common management, strong business and financial linkages, within the Group. ICRA has changed its rating approach to a consolidated view for arriving at SEL ratings in view of the proposed corporate action for integration of part of of SEL, Scrabble Digital Limited (SDL) and Scrabble Entertainment (Mauritius) Limited (SEML) with UMIL in the current financial year. The rating reaffirmation and continuation of the negative outlook factors in the impact of the disruptions caused by the Covid19 pandemic, with theatre operations remaining suspended/muted for an extended period, leading to a delayed recovery in UMIL's operations and cash losses. UMIL (consolidated) recorded a net loss (excluding share of profits/loss from associates) of Rs. 116.9 crore and cash loss of Rs. 88.5 crore in FY2021, against a PAT of Rs. 34.8 crore in FY2020. While some recovery was seen in Q4FY2021, mainly in the southern markets, the resurgence of Covid-19 cases towards the end of March 2021 led to various state governments re-stating restrictive measures, including temporary closure of theatres. This led to a 16% QoQ decline in Q1FY2022 revenues to Rs. 27.2 crore from Rs. 32.4 crore in Q4FY2021. Losses also widened, with net loss of Rs. 26.7 crore and cash loss of Rs. 20.6 crore in Q1FY2022, as against Rs. 25.5 crore and Rs. 12.30 crore respectively in Q4 FY2021. Although ICRA notes that the company has undertaken several cost rationalisation measures which will help to reduce cash outflows over the near term, adequate ramp up in revenues will remain critical for improvement in the overall credit profile. Moreover, while the company has sufficient near-term liquidity to tide over the disruptions, its ability to raise funds to maintain its liquidity position and capital structure will remain a key rating monitorable. UMIL's financial flexibility also stands restricted on account of the sharp decline in share price over the past few years. The rating, however, continues to factor in the company's comfortable capital structure, with total outside liabilities / tangible net worth (TOL/TNW) of 0.7 times as on March 31, 2021 on a consolidated basis. UMIL's leading position in the digital cinema services industry, with ~55% market share (in terms of the number of digitised screens in the country) on a consolidated basis, a large installed base of its systems among exhibitors and the acceptance of UMIL as a digital partner by film producers /distributors, and its experienced management team also support the ratings. The build-up in content pipeline, with around 55 movies scheduled for theatrical release over the next few months also provides comfort, although revenue generation from the same will remain contingent on continued easing of restrictions, particularly the opening up of cinemas across India. UMIL, like film exhibitors, also remains exposed to a significant risk of movies (including big budget productions) being released directly on OTT platforms in the event of delays in opening theatres and/or in ramp up of footfalls. Over the long-term, UMIL's ability to maintain commercial terms (VPF/rentals) with its clients (film producers/distributors and exhibitors) remains the key for sustained business growth, given the limited potential for increasing the screen base in India. Risks also arise from the Group's operating lease-based revenue model, which has required high initial investments in technology and projection systems, as well as the moderate life of projection systems of 6 to 8 years, necessitating some level of maintenance/replacement capital expenditure on a continuous basis, and the vulnerability to changes in technology.  however, notes the company's attempts to diversify into new revenue streams, which, if successful, would mitigate the abovementioned risks to an extent.