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Confident of sustaining higher ATP; margins will continue to remain healthy

INOX’s Q1FY23 cash EBITDA was Rs1.2bn, higher than Rs1.3bn in Q1FY20. Ticket revenue and F&B were significantly higher at Rs3.5bn (Rs2.9bn in Q1FY20) and Rs1.6bn (from Rs1.3bn). Unlike PVR, gross margin for INOX held at 66.4% (vs 66.9% in Q1FY20) due to higher F&B margin and steady film hire %. The company had to take heavy lifting of three-year inflation in rental and CAM expense, while employee cost was lower, but bound to jump from next quarter. Strong occupancy at 29% with increased ATP and SPH should rest fears of an impact from OTT. This is despite reduced window for movie streaming on OTT. INOX remains confident of sustaining higher ATP and SPH which implies that despite rise in cost inflation on one-time rebasing, margins will continue to remain healthy. We have increased our revenue and EBITDA estimates for FY24E by 8% and 4% on improved realisations. Accordingly, we have raised our target price to Rs650 (from Rs577), valuing the company at 16x FY24E EBITDA (vs earlier 15x). We downgrade the stock to ADD (from Buy).

*Strong come-back on each parameter. INOX’s ATP rose 5% QoQ, on a high base, to Rs229 which benefited from higher contribution of box-office mix from blockbusters. It is expecting ATP to remain high on strong movie pipeline. Occupancy was healthy at 29%, and admit at 18.4mn. Shows per screen was 4.5 shows/day which is back to normal. This drove ticket revenue to Rs3.5bn (vs Rs2.9bn in Q1FY20). SPH was at strong Rs96 (41.9% of ATP) which aided F&B revenue to Rs1.6bn (vs Rs1.3bn in Q1FY20). Company maintained guidance of 75-80 screen addition for FY23, largely in H2FY23 (it added 17 screens in Q1FY23) which will be completely funded via internal accruals.

* Adj EBITDA margin at 21.2%; better cost control. Revenue stood at Rs5.8bn (vs Rs4.9bn in Q1FY20); however, high margin ad revenue was lower at Rs300mn (vs Rs470mn in Q1FY20). Film hire % was higher at 44% which helped gross profit margin down only to 66.4% (vs 66.9% in Q1FY20). Power cost/screen (annualised) was Rs2.9mn vs Rs2.9mn in Q1FY20 and rental/screen has increased to Rs7.1mn vs 6.2mn (accounted for three-year inflation) during the same period. EBITDA (adj for Ind AS) margin improved to 21.1%, partly on lower employee cost and EBITDA at Rs1.2bn (vs Rs891mn in Q1FY20). Net profit was Rs571mn vs Rs270mn in Q1FY20.

*Other highlights. 1) Screen addition guidance maintained at 77 screens on delivery pipeline by mall owners; 2) ATP price increase will be more calibrated, and the company has not seen it impacting the footfalls. Pricing strategy remains unchanged, and is price tickets are based on movie; 3) SPH benefited from more patron coming to concession counter, price increases have been selective. INOX has been converting more patron to consumer food while watching movie than before / after movie; 4) ad revenue should gradually grow in coming quarters; and 5) employee cost /screen should rise which was very low in Q1FY23, and other expenses should give cost benefits vs pre-covid 

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