Wait and watch
* Inox reported better operating performance compared to PVR, with EBITDA rising 13% yoy, above our projections. Ticket sales also declined, but still better than PVR, owing to a 7% increase in ATP.
* F&B margins contracted 346bps sequentially, partially impacted by one-time inventory write-off. Management remains confident about rent waive-off during the lockdown and lower payout in subsequent quarters or till the business normalizes.
* Management plans to open 41 screens with a capex outlay of ~Rs300mn as 85% of the work has been completed for these screens. We estimate 30 screen additions in FY21. We expects footfalls to normalize from Q4FY20, starting with big-ticket releases from Q3.
* Opening of cinemas in India and globally, with movie releases and occupancy, would be vital for the stock price. We maintain a Hold rating while ascribing 9x on FY22E EBITDA (IND-AS adj.) to arrive at a TP of Rs235. We remain EW in sector EAP.
Bottom line impacted by tax re-assessment
Net revenue of Rs3.7bn was down 28% sequentially, marginally above our estimates. The bottom line put a dampener on performance, registering a loss of Rs822mn, primarily on account of re-measurement of deferred tax assets. Advertisement revenue declined 19% yoy. The company continued to rationalize costs, with total expenditure declining 31% yoy on the back of a significant reduction in other opex. Footfalls fell 29% yoy, impacted by the closure of cinema halls in March and weak content performance, with Bollywood box office collections falling by 24% yoy.
Inox has been focusing on cost rationalization for the last few quarters, which has benefitted in such tough times. Further, the company has cut its fixed expenses substantially and now, the same tracks at Rs160-180mn per month. The company has showcased its ability to keep a tight leash on cost, which shall restrict the net loss in the near term. Although the prospects of cinema opening in the near term are high, there is uncertainty around movie releases and occupancy trends. Inox’s balance sheet provides some comfort, especially in terms of liquidity (in the process of raising Rs750mn in debt). Going forward, agreements with mall owners on rental costs and revenue sharing will be watched out for. Risks to our call include: 1) better than estimated footfalls, 2) a significant rise in Covid-19 cases leading another lockdown for public places, and 3) an adverse outcome of incremental rental agreements.
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