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Rising COVID-19 cases to delay break even, impact FY22E earnings estimates

As COVID-related risk re-emerge, Multiplexes could be severely impacted. We believe:

* Restrictions on operations are likely to see a postponement of content, which in turn could hurt occupancies.

* PVR's cost management has been commendable during the lockdown, but resumption of cost, with restricted operations, could push breakeven and revise down our FY22E estimates.

* The recent INR8b QIP may keep the liquidity situation manageable and avoid any further dilution, though leverage at 0.8x (FY21E D/E) could rise further.

* The continued restrictions on Cinema operations is certainly fuelling the OTT market, which could put pressure on occupancies.

* At FY22E EV/EBITDA, the stock trades 10% lower to pre-COVID historical valuations, despite the risk of lower growth once normalcy returns, high leverage, and low RoCE profile. Maintain Neutral.

COVID-19 fears derail recovery in Cinemas

The Cinema industry, which was limping back to normalcy, has been once again hit by a second wave of COVID-19 cases. This has led to the curtailment of operations in multiple states. Maharashtra, the biggest contributor to the Cinema business, has shut operations till 30th Apr’21. Four to five states have allowed operations at 50% capacity. This will certainly lead to the postponement of many large budget movies as a few scheduled releases in Apr’21 have been deferred. This in turn is impacting occupancies in other regions given the lackluster content. However, the content flow may not fully dry up unlike in the last lockdown as select small ticket movies may explore exhibition revenues before selling it to digital players. Markets in South and Central India continue to do better. The management indicated earlier that it breaks even at 18-20%. This could be difficult to achieve in the current restricted operations, thus continuing to remain loss making.

How will costs behave? Is there a risk of further dilution/increase in leverage?

PVR has cut costs on a quarterly basis by 60-70% in the last one year to INR1.1- 1.2b as the management saved rent and CAM charges, which forms 35-40% of fixed cost. Most rental negotiations were till Mar’21. Now with operations in many regions resuming, real estate cost could increase, which could pinch if COVID-19 fears continue to keep occupancies low. Global references indicate that consumers will flock to Cinema halls if they remain open, but restricted operations could stretch the breakeven by a few quarters, thus putting our FY22E EBITDA expectation of INR5.6b at risk. The recent INR8b QIP may keep the liquidity situation manageable and help it avoid any further dilution, though leverage at 0.8x (FY21E D/E) could rise further.

Growing OTT market

Continued restrictions on Cinema operations are certainly fuelling the OTT market, which is gaining a steady flow of good quality content, thus helping create a steady digital market. Once normalcy returns, the audience may flock to Cinemas. However, a few industry statistics make us sit up and take notice of the growing OTT space. With just 32m paid OTT subscribers out of a 700m broadband subscriber universe, digital subscription and the advertising market is 40-50% that of domestic Cinemas. This is fuelled by a sizeable (more than 1,600 hours) original content compared to over 1,800 movies released in Cinemas. OTT players have started paying top dollar (over INR1b) for digital releases in the last one year, thus attracting good content. In such a scenario, we see risk to the current two-month exclusive window for a film’s release as OTT players may demand better terms. This, along with strong digital content flow, could put pressure on Cinema occupancies. Being highly sensitive to occupancies, Cinemas could see a sharp earnings risk.

Valuation

PVR has seen a steady 30% EBITDA growth in the last 10 years, which has led to a steady jump in its stock price. This was led by improving occupancies and steady new screen additions. With a higher base of screens, expectations of the pace of additions slowing in the near term, and pressure on occupancies, earnings growth could be significantly lower. We see limited room to play the recovery trade once COVID-19 risk diminish as the enterprise value has seen a limited fall, despite the steep stock correction, given the recent capital raise of INR14b. The stock is richly valued at 10x FY23E EV/EBITDA despite the risk of lower growth, high leverage, and lower RoCE profile over the last five years. The recent rise in COVID-19 risk should certainly impact FY22E earnings. Subsequently, we cut our multiple, valuing the company at 11x (from 12x earlier), arriving at a TP of INR1,300. Maintain Neutral.

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