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Look beyond FY22E; Re-initiate with a Buy

Incorporated in 1999 and part of INOX group, INOX Leisure Ltd. (INOX) is the second-largest multiplex chain operator in India. The company’s screen additions have grown multi-fold over the past 10 years, from 91 screens in FY09 to 626 screens currently (Q1FY21 end) having a wide presence in ~68 cities with a seating capacity of 1,44,467. In terms of revenue, the net box office collection (NBOC) contributes ~58%, Food & Beverages contributes ~26%, Advertising ~9% and other operating revenue 7%.

Investment Rationale

* Government’s focus on ‘Unlock’ positive for multiplex industry: The multiplex industry has possibly been one of the most affected due to the COVID-19 pandemic which has practically shut their businesses. Not only in India but worldwide the multiplex industry had been severely impacted due to lockdown. However, with the easing of lockdown and flattening of the curve has led to re-opening of theatres globally in parts or throughout the country. (Refer Exhibit 1. current status of multiplexes worldwide). In India, notwithstanding the lockdown in certain parts, the recent trend suggests that both the central and state governments are more focused on unlocking cities and states. Therefore, our premise is based on that India would follow global suit and theatres would gradually open around Oct-Nov and see gradual pick up going forward. We expect FY21 to be a washout year for the company and expect near-normalcy in FY22 led by gradual revival in footfalls.

* Theatres will not lose its charm: The OTT (Over-the-top) platforms taking over the multiplex industry have raised concerns over the sustainability of the multiplex business. However, we believe that these concerns are largely overplayed as the recent surveys conducted (by Kantar multiplex study and Ormax media report) suggests that ~82% of the respondent missed watching movies in cinemas during the lockdown. Further, it is difficult for OTT platforms to afford big-budget films on a repeated basis. Therefore, in our view, both theatres and OTT platforms would co-exist.

* Comfortable liquidity position: The pandemic has squeezed the liquidity position of multiplex players as there was no revenue generation during this period. However, INOX is better placed as the company has managed to get down its monthly cash burn to Rs. 12 cr from earlier cash burn of Rs. 15 cr. In order to meet the cash expenses, the company has cash holdings of Rs. 36 cr. Further, it holds treasury shares worth Rs. 100 cr which can be liquidated at a short notice. Additionally, INOX is seeking board approval to consider the issuance of shares worth Rs. 250 cr. The gross debt less cash of the company also remain comfortable at 0.17x as on July 2020.

Outlook & Valuation

The multiplex industry has been severely impacted by the lockdown; however, increased focus of the government on unlocking is positive for the multiplex industry. Consequently, we expect footfall recovery to be gradual post-re-opening. The COVID-19 pandemic can aid further consolidation for the multiplex industry as small exhibitors could suffer due to stressed liquidity position.

INOX has been the front runner in the past and we expect the same trend to continue post normalization. The long term growth prospect of INOX remains healthy led by new screen addition, higher footfalls and spends per head, and in-organic growth opportunities.

Therefore, INOX remains one of our preferred picks in the sector owing to its strong past track record, low debt levels and strong balance sheet. Hence, we recommend a Buy on the stock and arrive at a 2-year target price of Rs. 376 (target EV/EBITDA multiple of 6x). Some of the key risks to our estimates include, a) further delay in re-opening of theatres and b) slower than expected revival in footfalls.

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