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Cost reduction / liquidity cushions lockdown impact

* PVR’s net loss came in at INR1.7b (in line), with operating loss at INR1.2b (est. loss of INR695m), as a recovery in occupancy levels was gradual at 8%, with 50% capacity limits. However, South Indian movies reached 50-60% of pre covid levels and overall ATPs touched 10% below pandemic levels at INR184 due to the lockdown caused by the second COVID wave, reflecting pent up demand.

* The second COVID wave has pushed back the business recovery to FY23E. We are cutting our FY22E estimates closer to FY21 nos and FY23E estimates by 11%/8% to INR38b/INR7b (13%/21% above FY20 levels), respectively. Maintain Neutral.

Operating losses rise as cinemas operate at relaxed capacity

* PVR’s 4QFY21 revenue fell 70% YoY to INR1.9b (up 3x QoQ, in line) as cinema operators were forced to shut due to the second COVID wave.

* Fixed opex is down 50% YoY, but jumped 80% QoQ to INR3b as cinemas were operational in 4QFY21.

* Rental expenses stood at INR709m (-49% YoY), post negotiations with developers, while CAM charges fell 23% to INR301m.

* Employee expenses reduced to INR596m (-22% YoY), led by temporary salary cuts and reduction in headcount. The same has increased 23% QoQ as cinemas resumed operations.

* On a pre-Ind-AS 116 basis, operating loss stood at INR1.2b v/s an EBITDA of INR428m YoY (v/s our operating loss estimate of INR695m) due to higher than anticipated operating cost.

* Net loss stood at INR1.7b (in line) v/s a net loss of INR346m in 4QFY20.

* Gross/net debt stood at INR11b/INR3.6b as the company has cash and CE worth INR7.3b (led by recent fund raise rounds of INR11b).

* PVR closed three screens in 4QFY21. Its total screen count stands at 842.

Highlights from the management commentary

* Business recovery: The management remains confident of a business recovery post COVID-19, given the strong demand witnessed in Jan-Mar’21, before the second wave, in line with global trends; strong movie content line up expected post relaxation of lockdown restrictions; and robust traction in South Indian movies (operating at 50-60% of pre-COVID levels) contributing 35-40% of PVR’s revenues.

* Cost measures: It is negotiating rental waivers and will continue to operate at lower fixed costs until the business revives. The management expects fixed cost to reduce by 10-15% on a sustainable basis.

* Capex and screen pipeline: All capex is on hold at present, but PVR has 19 screens ready for handover and a very large pipeline of WIP projects, so screen addition will be strong once the pandemic ends.

* Debt repayment is evenly spread, with INR2-3b debt due over the next few years. It will decide on repayment/refinancing depending on the situation.

Valuation and view

* PVR’s profitability and business scale are expected to remain muted over the next 1-2 years as Cinemas have again been closed until COVID-19 cases drop significantly.

* While movies released during Jan-Mar’21 witnessed decent footfalls at theatres, instability over the movie pipeline, and delayed releases remain a concern for the business in the near term.

* PVR’s negotiation in rental charges and a sharp drop in employee and other expenses have been a great relief. The management expects fixed costs to reduce 10-15% over the long term.

* With ~INR7.3b in liquidity, PVR has sufficient cash to meet its fixed expenses over the next 3-4 quarters. Further reduction in rentals/CAM would aid cost savings.

* As highlighted in our recent report (click here), the rising trend of movie releases over OTT platforms since the onset of COVID-19 and the strong growth in subscriber base raises concerns of increased competition from OTT platforms in the medium to long term.

* We expect the business to normalize by FY23E, with revenue/EBITDA touching FY20 levels of INR38b/INR7b, but the rich valuations it commanded historically may contract. We value the company at 11x FY23E EBITDA to arrive at our TP of INR1,210/share. Maintain Neutral.

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