Buy PVR Ltd For Target Rs.2,050 - Emkay Global Financial Services
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Visible improvement; content consistency remains key
* PVR’s Q3FY23 performance improved on the back of better box-office performance. Footfalls grew 21% QoQ, leading to 37% revenue growth. Operational parameters – ATP and SPH – also improved on a sequential basis, after a disappointing Q2.
* Bollywood failed to live up to expectations in this quarter too, with only one movie performing well, while Hollywood and Regional cinema aided collections. Ad revenue improved, though it remains well below pre-Covid levels.
* We revise down our FY24/25 footfalls by 8-9%, as we believe that the audience contentfiltration process has become more stringent. We also modify our synergy estimates to factor-in: i) the SPH growth for Inox; ii) the gradual increase in synergies in FY25.
* With NCLT approval now in the bag, we remove our merger uncertainty weightage, while reducing our target multiple to 11.5x (from 12.5x), to account for the inconsistent content delivery, and arrive at a revised TP of Rs2,050 (roll over to Dec-24E pro forma EBITDA).
Improved operational performance: PVR reported 37% QoQ revenue growth on the back of 21% growth in footfalls, as box-office performance improved post a disappointing Q2FY23. ATP and SPH also improved sequentially, supported by a more favorable mix of higherbudget films. QoQ, ATP increased to Rs244 from Rs224, while SPH increased to Rs133 from Rs129. Ad revenue also rose, by 38.5% QoQ, albeit still clocking below pre-Covid levels. Other operating income was higher due to distribution of some big-budget Bollywood movies. EBITDA grew 88% QoQ to Rs2.9bn, on higher revenue flow-through. Other expenses also surged, by 36% QoQ, largely owing to higher movie-distribution expenses. PVR aims to add 110 screens in FY23 (47 screens to be added in remaining Q4FY23). The NCLT has approved the PVR-Inox merger, which should see consummation in the upcoming quarter.
Outlook: Bollywood’s performance remains worrisome, with only one movie managing to break the Rs1-billion barrier in the quarter. With content quality not improving, audiences have become selective about visiting theatres. Further, with ticket and F&B prices being 15-20% higher than pre-Covid levels, the overall experience has become expensive. For subpar content, audiences now prefer to wait for movies to be telecast on OTT instead. Consequently, footfalls continue to be below pre-Covid levels. That said, for quality content, there seems to be no dearth of audience interest; this is evident from the good performance of select movies. Hence, content quality remains key. While the pipeline for the next few quarters stays strong, audience acceptance remains critical and will be the primary factor for PVR’s success. Key risks: 1) persistent poor-performance from Bollywood; 2) OTTs grabbing high-quality content; 3) delayed recovery in ad revenues; 4) delay in realizing synergies; and 5) structural increase in revenue share for producers/distributors.
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