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As the tussle between OTT and theatres continues, for now the theatrical success of Brahmastra, one of the most expensive Indian movies of all time, has shown that good content / spectacle movies can still attract a widespread audience. We feel a combination of factors augur well for PVR-Inox, including i) tremendous scope for screen penetration (a fraction of developed markets), ii) industry consolidation (c.16% of market share across theatres for the merged entity), iii) reinstatement of 8-week theatrical windows, and iv) acceptance of regional movies in the Hindi language. With minimal leverage, PVR-Inox remains extremely comfortably placed in terms of growth plans also. While in 2QFY23, multiplexes are likely to see a QoQ dip in earnings on account of the high base of 1QFY23 we continue to maintain our positive stance on Inox / PVR with a Mar’23 TP of 665 / 2,220 (implying 33% / 26% upside).

* Brahmastra does well: Amid significant apprehension and mixed reviews, Brahmastra has worked well in theatres and already garnered over INR 2bn in the first 2 weeks and the momentum seems to be continuing. It is, therefore, likely to have INR 3-4bn of domestic collections (among top 15 in net India collections; Exhibit 4). Brahmastra’s strong collections across domestic / international circuits has brought some optimism and, more importantly, footfalls after the recent debacle of movies such as Laal Singh Chaddha, Raksha Bandhan, and Shamshera, all of which had superstars in the lead role but failed to attract audiences. In 1QFY23, a number of blockbusters did well and, as a result, 2QFY23 is likely to show a dip for PVR and Inox.

* Theatrical exhibition remains the best way to monetise movie content: During the past 2 years, several movies bypassed the theatrical window and released digitally. This has raised genuine concerns on whether there is a shift in consumer behaviour, leading to compression of revenue for multiplexes. However, most movies released digitally have largely been mid-budget ones looking to cash in opportunistically. From Aug’22, the theatrical window has been reinstated to 8 weeks, which should drive back footfalls into multiplexes. It is estimated that c.60-70% of a film’s revenue comes from a domestic theatrical release and bypassing this seems unlikely.

* Percolation of South Indian movies to Bollywood opens up new markets: A majority of the recent blockbusters have been South Indian movies (RRR, KGF 2, Pushpa and Vikram) which were also launched in Hindi and did well across the country. We believe this trend is here to stay / gaining traction and increases possibilities of higher box office collection.

* Cineworld bankruptcy unlikely in the Indian context: Recently Cineworld, the world’s second largest movie theatre company (Screens: 9,189; Sites: 751; Countries: 10), filed for bankruptcy due to weak admissions and on account of a highly leveraged balance sheet (Net debt at US$ 5.0bn) thereby limiting its scope for going through a relatively lean patch. However, the Indian multiplex industry benefits from significantly lower penetration compared to developed markets like US and UK where Cineworld used to operate coupled with lower OTT adoption. Moreover, PVR / Inox together have negligible debt (0.68x for PVR and net cash for Inox) thus offering comfort on their growth ambitions.

* Inox and PVR a major beneficiary of industry consolidation: Previously, malls were only found in Metros and Tier-I cities, but now they are opening in Tier-II cities as well. The expansion of multiplexes will also be aided by this deepening footprint and Inox and PVR already have screen addition visibility over the next 5-7 years. Moreover, with c.16% of total Indian screens / 50% of the multiplex market, PVR-Inox would be the largest multiplex chain with substantial bargaining power (producers, landlords, and audiences).

* We remain positive on Inox and PVR as merger completion nears: We have a BUY rating on PVR / Inox with a Mar’23 TP of INR 665 / 2,220. The impending merger with PVR can potentially re-rate the Inox stock further (6% discount to swap ratio considering CMP of PVR). Key risks: higher-than anticipated OTT adoption curve and sub-par content.

* Low levels of penetration for multiplexes should still imply a reasonably strong growth trajectory despite the risk of some shift in revenue: While there exists some risk to revenue for the exhibition industry, the scope for penetration still remains huge, which would more than negate the risks from the rise of OTT, in our view. India has only seven screens per million people compared with 10 in Brazil and 37 in China. Developed countries such as South Korea/UK have 40/60 screens. We believe the inflection point for growth in theatres is still a while away and would come about as per capita income rises steadily. (Exhibit 1-3)

* Interplay of occupancy and content to decide ticket pricing: There have been concerns on PVR / Inox raising average ticket prices and food and beverage prices in recent times. However, we feel that as steady state occupancy heads to pre-Covid levels ticket pricing can possibly be tweaked (if required) to increase footfalls. PVR / Inox will exercise substantial bargaining power over producers / mall owners also to further reduce costside pressure. (Exhibit 8-9)

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