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With the pandemic now largely behind us, PVR is slated to report its best ever year on the back of bunched up movie releases, new screen additions and higher ticketing and F&B spends. In 1QFY23, PVR reported its best ever quarter both operationally and financially and the outlook remains extremely positive. Revenue came in at INR 9.8bn (+11% over 1QFY20; pre-Covid) on the back of INR 5.36bn of box office collections (+16%). Operationally, average ticket prices (INR 250: +23%) as well as spends per head on food & beverages (INR 134; +32% over 1QFY20) have increased significantly compared to pre-Covid levels while admits are recovering (25mn: still down 7% from 1QFY20). A strong multi-lingual theatrical release pipeline should further help increase admits to higher than pre-covid levels. Moreover, a recovery in advertising revenues and aggressive screen addition plans (FY23 target – 125) would drive growth over the medium term. We feel going forward multiplexes have a long runway for screen penetration and can enjoy higher profit pools. We tweak estimates and factor in a stronger recovery, maintain ‘BUY’ rating on PVR with a Mar’23 TP of INR 2,220 (16% upside). Key risks: Covid wave and delay in merger.

* KGF: 2 contributes 23% of box office collections; Content pipeline strong: PVR saw highest ever box office collection (INR 5.36bn; +16% over 1QFY20) led by bunching up of movies. KGF: 2, a regional move dubbed in Hindi, stole the show and contributed 23% of the collections and led to higher footfalls and thereby profitability. Moreover, RRR, which was released in the last week of March had a significant spill over revenues. Other movies which did well include Bhool Bhulaiya 2, Vikram. Doctor Strange, Top Gun: Maverick and Jurassic World Dominion. Regional cinema – non Hindi; contributed 38% of the total box office collection, while big budget Hindi movies are expected to release later this year

* Recovery trends clearly visible: Reported Revenue increased to INR 9.8bn (+11% over 1QFY20; pre-Covid) led by growth in ticketing revenues (INR 5.36bn; +16%), food and beverages (INR 3.2bn; +24%), advertising revenues (INR 0.6bn; down 31%) and convenience fees (INR 0.46bn; +13%). EBITDA (pre-IND AS 116) came in at INR 1.89bn (19.3% margin; +130bps over 1QFY20) mainly on account of lower staff expenses (10.6% of revenue; expected to inch upwards on wage inflation and increments; 12% in 1QFY20). Adjusted PAT came in at INR 683mn (loss of INR 956mn in 4QFY22).

* Ticket prices and spends healthy: PVR reported its highest ever ATP of INR 250 (+23% over 1QFY20) and SPH of INR 134 (+32%; 53.7% SPH to ATP Ratio) and management remains focussed on driving SPH to ATP ratio. (Currently at 53.7% vs 28% in Mar’13)

* Debt unlikely to increase: Net debt stood at INR 8.44bn as of Jun’22 (INR 9.26bn in Mar’22). Capex for new screens (FY23: 125) is to be financed by internal accruals.

* Maintain ‘BUY’; Mar’23 TP of 2,220 (16% upside): We tweak estimates upwards factoring in a strong recovery and maintain BUY rating with a Mar’23 TP of INR 2,220 (16 % upside). The impending merger with Inox can potentially re-rate the stock further. Key risks: Covid wave and delay in merger.

* Rental Expenses: Rental expenses have increased to INR 1.8bn (+26% over 1QFY20; 19% of the 26% coming from comparable properties). Comparable properties (which were there in 1QFY20), c.14% is on account of increase in minimum guarantee (3yr CAGR of 4.5%) under the lease contracts and 5% on incremental revenue share.

* Advertising revenue is still 32% below 1QFY20 level. It is expected to remain weak in 2QFY23, however in 3QFY23 given the festive season; this gap will reduce to 5-7%.

PVR Inox proposed merger

*Scheme of amalgamation filed with stock exchanges: Currently, Inox and PVR are awaiting approvals for the proposed merger. Under the scheme of arrangement, combined entity (Inox-PVR) will issue 3 new equity shares of the combined entity for every 10 equity shares held by the shareholders of Inox. The management teams remain confident on a merger over the next 3 quarters. If this merger goes through, it would provide significant scale to the merged entity. The revenue and cost synergies are currently being explored by the management teams.

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