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Out of the woods; best ahead

PVR and Inox Leisure have withstood the worst of the pandemic and are now slated to post best ever FY23 on account of bunched up movie releases, new screen additions and higher ticketing and F&B spends. Both have already reported a very strong recovery (admits / box office collections) in the month of Mar’22 when most of the Covid-19 restrictions were removed and theatrical releases followed. Revenue growth was led by sharp increases in average ticket prices (PVR / Inox: +19% / 8% over 4QFY20) as well as spends per head on food & beverages (PVR / Inox: +27% / 10% over 4QFY20). Admits were still lower (PVR / Inox: down 27% / 14% from 4QFY20) than Mar’20 quarter but that comparison is not like for like as cinemas were impacted across many regions in Jan-Feb’22 (Omicron wave). In our view, the ongoing recovery reinforces the relevance of cinemas for Indian consumers (amidst higher levels of OTT adoption) and a strong theatrical release pipeline should help normalise footfalls to pre-pandemic levels. Moreover, PVR and Inox are also expected to aggressively add screens which are now getting delivered (Screen addition in FY23: PVR – 125; Inox - 77) thereby driving growth over the medium term. We also expect ticket price hikes and higher spends per head to drive the underlying profitability compared to pre-Covid levels. With multiplexes likely to exhibit significant consolidation, a long runway for screen penetration and higher profit pools, we assume coverage on multiplexes with a BUY rating on PVR and Inox Leisure and a Mar’23 TP of INR 2,120 and INR 595, respectively, presenting upsides of 25% and 33%, respectively.

* FY23 likely to be best ever year: For FY23, multiplexes are already off to a good start backed by K.G.F: Chapter 2 and have a strong pipeline with movies in all genres and languages. Factors like i) increased adoption of regional cinemas across languages, ii) normalisation of 8 week theatrical window and iii) bunched up pipeline of releases from previous years sets up for a healthy FY23.

* PVR and Inox extremely well placed to benefit from recovery: From the Indian consumer standpoint, multiplexes remain a major out of home entertainment option given lack of alternatives across cities. PVR and Inox both remain well poised to benefit from the imminent recovery with strong balance sheets and well established brands. They remain well placed for market share gains in a fast consolidating industry seeing a shift from single screen theatres to multiplexes. Going forward, the focus remains on driving premiumisation across screens as well as rapid growth in smaller cities which have similar return ratios as existing screens and offer a longer runway for growth. The growth in number of screens is likely to be funded from internal accruals.

* Footfalls and admits in place; profitability to follow: PVR reported highest ever quarterly ATP of INR 242 and SPH of INR 122 helping it achieve 22.5%+ EBITDA margins in March (excluding IND AS 116 and exceptional loss in Sri Lanka). For FY23, PVR intends to keep ATP at similar levels and will look to benefit from higher footfalls thereby strengthening its leadership, Inox Leisure continues to maintain a net cash balance sheet and is looking at calibrated growth in ticket prices, screen count and footfalls.

* We assume coverage on PVR and Inox Leisure with a ‘BUY’ rating: With multiplexes likely to exhibit significant consolidation, a long runway for screen penetration and higher profit pools, we assume coverage on multiplexes with a BUY rating on PVR and Inox Leisure and a Mar’23 TP of INR 2,120 and INR 595, respectively, presenting upsides of 25% and 33%, respectively. At CMP, Inox is trading at c.12% discount to PVR’s share price thereby offering a favourable risk reward ratio in case the PVR Inox merger goes through. Key risks: Covid wave and delay in merger.

* Scheme of amalgamation filed with stock exchanges: Currently, Inox and PVR are awaiting approvals for the proposed merger and have received approvals from the boards of both the companies. 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 scheme of arrangement has been filed with the stock exchanges and the management teams remain confident on a merger over the next 9 months. 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.

Background

PVR Recent Performance

* As on 31 Mar’22, PVR operated a cinema circuit comprising of 854 screens across 173 properties in 74 cities (India and Sri Lanka). In 4QFY22, ATP was at an all-time high level, increasing by 33% YoY (INR 183 in 4QFY21) to reach INR 242 (+19% compared to FY20); while SPH increased by 27% YoY (INR 95 in 4QFY21) to stand at INR 122 (+23% compared to FY20.

Inox Recent Performance

* Inox operates 161 multiplexes and 681 screens in 72 cities. In 4QFY22, ATP declined by 3.5% QoQ (INR 226 in 3QFY22; 217 in FY22; INR 170 in FY21) to reach INR 218; while SPH declined by 11.3% (INR 97 3QFY22; INR 91 in FY22; INR 77 in FY21) to stand at INR 86. Management guides for steady increase in ATP and GSH in the coming years on the back of calibrated price hikes and higher cross selling.

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