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Lack of content drags recovery

PVR Ltd owns and operates multiplexes across 21 States and UT’s with a total of 831 screens (including 9 in Colombo). Major income segments for them are Box office, Food & Beverage (F&B) and Advertisement (Ad).

* PVR reported revenue of Rs.45.4Cr (Q2FY21-Rs.40.4Cr) from core operations as theatres were allowed to reopen from Oct 15th, 2020.

* Company has been implementing cost control measures to bring down fixed cost. As a result fixed cost was reduced by 64% YoY. However, it is expected to reach near pre-covid levels from FY22.

* Though reopened, lack of content availability is dragging the pace of recovery. Decisions on release of big budget films will determine the recovery in occupancy.

* PVR has decided to raise further equity capital of Rs.800 Cr to manage its liquidity. PVR had raised Rs.300Cr during July 2020 through right issue.

* Considering current valuation and slower pace of recovery, we remain cautious on the stock. Therefore, we downgrade our rating to REDUCE with a revised roll forward target price of Rs.1403 at 2.2x FY23E EV/Sales.

Though reopened, content availability remains a concern

Ministry of Home Affairs allowed cinemas to reopen from Oct 15th, 2020 with 50% capacity. As on date, all states except Rajasthan and Jharkhand (6-7% of total Bollywood revenue) where PVR has presence, have allowed cinemas to reopen. Though theatres are allowed to operate in majority of states, availability of content and lower footfall is dragging the recovery. However, recently released ‘Master’ had seen the second best opening day collection in Tamil Nadu even with restricted capacity. This shows a strong pent up demand for quality content. Vaccine roll out and success of ‘Master’ is expected to push more producers to release big budget movies, especially in Bollywood.

Revenue to pick up gradually

During the quarter, PVR reported total footfall of 10 lakhs and have generated revenue of Rs.13.35 Cr from sale of movie tickets, Rs.14.02Cr from sale of F&B, Rs.4.2Cr from advertisement income. The Average Ticket Price (ATP) stood at Rs.164 against Rs.210 during Q3FY20. Spend Per Head (SPH) is close to precovid levels and stands at Rs.95 against Rs.100 during Q3FY20. However, ATP of Tamil movie ‘Master’ is higher than the pre-covid levels.

Effective cost control to reduce working capital stress

During the quarter, company was able to reduce its fixed cost by 64% YoY. Improvement in cost control was on account of reduced staff cost because of manpower and cost rationalisation. Company has taken further steps to keep fixed cost under control with negotiations completed with 88% of properties for rent waiver during non-operational period and discounted rent until March 2021. Salary cut for front line staffs has been reversed once theatres reopened while pay cut for corporate and other staffs will be rolled back in staggered manner.

Plan to raise further equity capital to manage liquidity

PVR has decided to raise additional equity of Rs.800Cr over and above Rs.300Cr raised during July 2020. Though the timing of the fund raising is yet to be decided, the raised capital is expected to be used to manage the current liquidity crunch arising from possible losses in coming quarter and to spend on screen additions in order to get advantage of industry consolidation.

Valuations

Although theatres are allowed to open in most of the states, non-availability of content is dragging recovery. We expect muted occupancy at least till H1FY22 while a strong comeback can be expected in FY23. Considering the current valuation and slow pace of recovery, we take a cautious stand and therefore downgrade our rating to REDUCE with a roll forward target price of Rs.1403 at 2.2x FY23E EV/Sales.

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