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Favorable risk-reward

Content pipeline to improve in CY25; remain cautious on CY24

We expect CY25 to be a strong year for content and box office (BO) for PVR Inox (PVRINOX IN), led by 1) a strong come-back of Hollywood (13 large franchise-based films slated for release so far) and 2) come-back of Hindi content (more large budget franchise films), given stability of digital rights from the OTT platform; this, in turn, may drive better ticket prices, food spend and ad revenue, thereby improving overall profitability. In CY24, the company is likely to continue to struggle, given: 1) the negative impact of Hollywood slate delay (Writer’s Association strike), 2) lower Hindi Box Office, due to fewer large budget films in the near term, 3) increased dependence on large budget films (more than 90%), as small- & mediumbudget films continue to struggle at the BO, and 4) over-the-top (OTT) platforms turning cautious about buying digital rights of movies, due to consolidation, which may negatively affect producer release slate. Hindi BO collection could decline over 20% YoY in CY24E on high base; further, the negative impact on Hollywood content too could sustain until September 2024, resulting in a sharp fall in the segment (English contributes ~18-20% of BO revenue for PVRINOX).

Concerns overdone: healthy outlook for the medium term

We expect occupancy levels of 23.5%, down 150bp YoY, in FY25E, after factoring in concerns related to Hindi and English content; these levels may improve to 27% (85% of pre COVID levels) in FY26E, led by a larger slate of big budget films across genres. However, we do not expect occupancy levels to breach 85% of pre-covid levels even in the best-case scenario for FY26E (annualised basis), as digital content and OTT have had a structural impact on audience footfalls in cinemas, which may be here to stay. We believe premiumization of screen offerings (IMAX, 4DX & luxury), and improved food offerings will continue to drive bulk of growth for multiplexes

Valuation: revise to Buy with unchanged TP of INR 1,900

PVRINOX is currently trading at a premium valuations of 16.5x FY25E EV/EBITDA (pre-IndAS) vs pre-COVID average of 14x (one-year fwd.), after factoring in a drop in occupancy and overall profitability; however, valuation appears compelling at 10x FY26E EV/EBITDA (pre-IndAS), a discount of 30% vs pre-COVID averages. Hence, we believe the risk-reward is favourable in the medium term, as we do not expect multiple to fall lower than 9x one-year forward EV/EBITDA (pre-IndAS), which is at a 35% discount to pre-COVID average. We revise our rating to Buy from Accumulate and roll over to Mar’25 TP of INR 1,900 on 13x one-year forward EV/EBITDA. We believe 1) synergies of the merged firm, 2) size & scale of the entity, and 3) acceptance of regional content would help valuation sustain at pre-COVID average in the medium term despite an unreliable content cycle post-COVID; occupancy consistently breaching pre-COVID levels may drive further rerating.

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