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Cinemas closed; Vaccination offers hope

PVR Ltd owns and operates multiplexes across 21 States and UT’s with 842 screens (including 9 in Colombo). Major income segments for them are Box office, Food & Beverage (F&B) and Advertisement (Ad).

* PVR reported revenue of Rs.181Cr (Q3FY21-Rs.45Cr) from core operations as theatres operated in a staggered manner.

* PVR operated with 50% capacity restrictions during the quarter till restrictions imposed on operations for the last 15 days in some states due to the resurgence of covid-19. As of date, only Maharashtra allowed reopening with various restrictions

* Management is renegotiating rental agreements to save costs and limit cash burn. The company has liquidity of Rs.750Cr to meet its fixed expenses over the next 3-4 quarters

* Management is expecting pent up demand in Indian cinema industry as seen in countries like US and China.

* We expect fair share of footfall from H2FY22 and cinema industry to bounce back in FY23. We are upgrading our recommendation to HOLD with a revised target price of Rs.1,555 at 2.9x FY23E EV/Sales.

Effective cost control

PVR reported revenue of Rs.181Cr (Q3FY21-Rs.45Cr) from core operations as theatres operated with 50% capacity restriction, as per the guidelines by the Ministry of Home Affairs (MHA). In February, MHA removed capacity restrictions even though certain key markets like Maharashtra continued to operate with those restrictions. The last 15 days of the quarter were marked by a resurgence of COVID-19 in Maharashtra, Gujarat, and Madhya Pradesh resulting in restrictions being imposed for operating in these states.

The company was able to reduce total fixed costs (rent, common area maintenance, employee expense, electricity, and other expenses) to Rs.636Cr during FY21 from Rs.1,714Cr during FY20, majorly due to the rental waivers and discounts availed through negotiations with landlords. Management has started renegotiations as the last negotiations were only valid till FY21. The management expects fixed costs to fall by 10-15% permanently. The company has raised Rs.1,600Cr in FY21, out of which Rs.1,100Cr is through equity and Rs.500Cr through debt.

Restrictions sedate recovery

During the quarter, PVR reported a total footfall of Rs.58 lakhs (-70% YoY) and has generated revenue of Rs.88Cr from the sale of movie tickets. The Average Ticket Price (ATP) touched Rs.183 from Rs.164 during Q3FY21 largely due to majority of releases in regional languages and promotional activities. QoQ growth on Spend Per Head (SPH) remained flat at Rs.95. Advertisement income reached Rs.14Cr from Rs.4Cr during Q3FY21. Management expects that advertisement revenue will reach post-pandemic levels with recovery in footfalls.

Awaiting pent up demand

Witnessing the demand for regional releases before the second wave, management continues to be confident of fast recovery post-pandemic. In FY21 PVR opened 13 new screens and shut operations in 16 screens. An additional 19 screens have been completed and ready to commence operations after normalcy. A strong movie content line up is expected post relaxation of lockdown restrictions. Management believes the release of blockbusters on OTT platforms were only experimental and they do not pose a significant threat to multiplex industry. Management expects the content production to reach above the prepandemic level once conditions normalize.

Valuations

We believe the recovery of the multiplex industry depends on the pace of vaccination drives and relaxation in government restrictions. We expect fair share of footfall from H2FY22 and full recovery in FY23. However due to continuing uncertainty we recommend a HOLD rating, valuing the stock at 2.9x FY23 EV/Sales with a target price of Rs.1,555.

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