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PVR’s Q2FY23 adjusted EBITDA loss was at Rs22mn attributable to weak content, particularly from Bollywood, and limited release of Hollywood movies though domestic regional content continued to outperform. ATP and SPH dipped QoQ partly due to discounts on National Cinema Day, without which the growth from FY20 baseline would be healthy. Admits were hurt due to lacklustre performance of Bollywood tentpole cinemas though the start of Q3FY23 has been encouraging. Gross profit margins were low, which we believe is transitory. PVR is incrementally changing its cost structure with rental and employee costs now having variable portions, thus cushioning margin decline during weak quarters. The merger with INOX is on track and anticipated to consummate in three months. The weak print in Q2FY23 is transitory in our view and our structural thesis on PVR remains intact. We cut our EPS estimates by 29% and 7% for FY23E and FY24E on lower occupancy and weak ad revenue. Accordingly, our target price is cut to Rs2,100 (from Rs2,300) with unchanged multiple of 16x FY24E EBITDA. Maintain BUY. Key risks: Lower than expected occupancy; and higher than expected cost.

* Admits hit due to series of failed contents, particularly from Bollywood. PVR’s ATP dipped 10.4% QoQ to Rs224 due to higher admits on National Cinema Day (when ticket prices were flat at Rs75) and under-performance of blockbuster movies. Ticket prices are otherwise stable and the management expects Q1FY23-like ATP for future quarters driven by strong content. Occupancy was significantly weak at 24% (vs 33.6% in Q1FY23) as tentpole Bollywood movies failed at the box office while shows per screen remained stable at 4.6 per day. Ticketing revenue dipped 38.4% QoQ (and 33.6% below Q2FY20 levels). SPH was lower by only 3.7% QoQ at Rs129 while F&B revenue was down 28.9% QoQ at Rs2.3bn due to lower admits. PVR added 10 screens (net) in H1FY23 and has guided for addition of 110-125 screens in FY24. Ad revenue was down 8.8% QoQ to Rs572mn (61% of Q2FY20 levels).

* Adjusted EBITDA loss was at Rs22mn. Revenue stood at Rs6.9bn (vs Rs9.7bn in Q2FY20). Film hire % was higher at 45.6% and F&B COGS was at 27.3%, which dragged gross profit margin down to 69.5% (vs 72.2% in Q2FY20). Employee cost and rental cost dipped 8.9% and 6% QoQ respectively as the company has increased the variable portion in what earlier were largely fixed costs. PVR said incremental screens has significant portion of contracts with minimum rent guarantee and revenue share component. This will partly reduce margin volatility. EBITDA (adjusted for Ind-AS) was at a negative Rs22mn; however, the company said EBITDA breakeven will dip to 20-21% occupancy as ad revenue picks up. PVR reported net loss of Rs567mn for Q2FY23.

* Other highlights. 1) Merger with INOX is expected to be complete in next three months; 2) window of eight weeks for OTT release has been reinstated; 3) ad revenue is expected to be at 62% in Q3FY23 and 75% vs the FY20 baseline; and 4) occupancy and ticketing revenue has picked up in Q3FY23-TD on strong movie pipeline.

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