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* The market correction and Covid-19 led shutdowns have led to a notable correction in the stock prices of both PVR and Inox due to a lack of clarity on the extent of the shutdown. However, we believe that current prices factor in a potential wash out in Q1FY21 as well.
* We have cut footfall assumption for Q4FY20 and Q1FY21 to bake in the impact of cinema shutdown until 15 May 2020 in our base case. In the worst-case scenario, we assume the entire Q1FY21 to be washed out and screen additions to also get impacted significantly.
* We expect normalcy from Q2FY21, with a rebound in footfalls and a gradual recovery in ad revenues, assuming Covid-19 related issues get resolved by then. We have not assumed delayed content supply due to the postponement of shooting schedules.
* We have cut FY21/22E EBITDA by 8%-28% for PVR and Inox, with a notable reduction in FY21 estimates. The target EV/EBITDA stand lower at 10x and 8x for PVR and Inox, respectively, to arrive at Rs1582 and Rs357 TPs with Buy rating. We are OW in EAP.
Covid-19 shut downs- factoring in limited visibility in Q1FY21 as well
Q4FY20 will see 18 days of wash out after government has ordered shutdowns until 31st March. In our revised estimates, we have factored in ~50% footfall decline in Q1FY21 (assuming first 45 days will be washed out), along with weakness in ad and other revenue streams. The expected revival after Q1 is also assumed to be slower as there could be a risk on future releases with delayed production activities due to the ongoing travel and other similar restrictions. However, this will be more applicable to Hollywood movies. Having said that, FY21 EBITDA (ex IND-AS) is cut by 27% and FY22 by 8%. Screen addition estimates are cut by 25- 29% for FY21, while for FY22 cut is 8% over the current estimates.
Valuations reset on revised earnings
The recent market crash and earnings reset stemming from the ongoing Covid-19 scare have resulted in a cut in the target multiples as well. We have worked out a detailed analysis in Exhibit 2 and 4 on the new target valuation, with our revised multiples being near historical lows. Our worst-case numbers and trough multiples on FY22E EBITDA suggest some more downside in PVR and Inox. However, on our base case numbers and new target multiples (15% lower than earlier) for FY22 give us 31% and 39% upside on PVR and Inox, respectively, leading to an upgrade to Buy rating (from Hold) for PVR and maintaining Buy on Inox.
Outlook: structural story intact; rebound expected soon
The multiplex industry, in the past, has not seen any impact on footfalls due to slow economic growth, as consumers have limited options outside of home entertainment. In our view, the bounce-back will be equally strong once Covid-19 issues get resolved. The revival in ad revenues might take longer with overall economic growth. Increasing penetration of multiplexes in the country beyond metros is also aiding growth in footfalls as consumers are increasingly watching Hollywood and regional alongside Bollywood content. Social media awareness has also showcased the power of content, with ‘small-star’ movies performing exceptionally well while poor content of renowned stars relatively underperforming. PVR and Inox are aggressively adding screens, while screen additions of Cinepolis and Carnival have moderated in the last two years. The stock price correction has factored in a weak Q4, while uncertainty relating to Covid-19 spread in Q1FY21 stays, and taking this into account, we recommend staggered buying in both the names. Key risks to our call: with no cinema experience for, probably, two months, consumer habits of content consumption on OTT should not lead to stickiness; sustained Covid-19 impact in the entire Q1FY21; delay in future releases due to the disruption in production activities; significant slowdown in screen openings; and weaker-than-expected content performance.
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