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Buy INOX Leisure Ltd For Target Rs.362

Strong new screens pipeline

INOX Leisure’s Q1FY22 print has little relevance on limited opening of theaters; it incurred cash EBITDA loss of Rs1.07mn. Though H1FY22 was expected to be a washout due to lockdown, restricted occupancy and fewer releases, gradual permits for reopening of theaters by states has been encouraging. Only 5 states are pending to reopen with Maharashtra and Tamil Nadu being key.

Once these states also reopen, we expect a strong movie release pipeline that should help the company report first quarterly profit in Q3FY22 or Q4FY22 after a gap of 7-8 quarters. INOX has healthy balance sheet with net cash of Rs1.2bn; strong screens pipeline increases visibility of growth on normalisation. We maintain our estimates and target price of Rs362. Reiterate BUY.

* Rental negotiations progressing well. Due to lockdown on second wave of covid, the company has started re-negotiating rentals with developers similar to previous lockdown where it has received waiver / concessions. It has settled negotiation for 65% of properties in Q1FY22, and the benefits have been booked in the quarter. The negotiation for remaining properties is under-discussion and would book if there are any benefits from other developers in coming quarters.

* Company has strong screens pipeline visibility. INOX has a pipeline of 44 screens (10 properties) for FY22 of which 19 screens are 90% complete and would require capex of Rs80-100mn for completion; remaining 45 screens would be executed based on the availability of cashflow. Capex required to complete these 25 screens is Rs650mn. It is already following the business model wherein developers are also investing in fit-outs and other capex and enjoy revenue sharing with lower minimum guarantees.

* Content pipeline continues to remain healthy. The company has no issues with content pipeline; many producers are willing to release movies once bigger states such as Maharashtra and T.N open. Maharashtra contributes 20-22% to box office revenue for Hindi movies; we believe opening of Maharashtra is critical for release of big-budget Hindi movies. Though cinema houses were closed during the lockdown, movie shooting was allowed, and it should help create movie pipeline for continuous supply post normalisation.

* Only last few states pending for opening theaters. Total 13 states and one UT have allowed to screen movies with 50% occupancy except Telangana which has permitted 100% occupancy. INOX has total 113 properties and 459 screens in these locations. It has already opened 201 screens in these locations, and would accelerate opening with availability of fresh content. Five states are yet to open accounts for 40 properties and 189 screens.

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