Buy PVR INOX for Target Rs. 2,340 - JM Financial Institutional Securities
Not just a Friday-to-Friday story
A frequent argument against PVR-Inox is a lack of revenue visibility. True, the quality and quantity of content is beyond its control. A muted Oct-Nov after a record Q2 does little to address that concern. But to evaluate a movie exhibition company that commands over a third of India’s box office collection on “Friday-to-Friday” basis is to miss the wood for the trees. To put things in context, PVR’s revenues over FY10-20 have grown at a remarkable 26% CAGR. Such consistent growth over a long period should infuse confidence, in our view. Moreover, as we argued in An encore, 2023 box office performance has, to a large extent, allayed concerns around cinema’s long term appeal. Another under-appreciated aspect is PVR-Inox’s durably better screen level economics now. Q2FY24’s intrinsic EBITDA margins were c.430bps higher than FY20’s, despite a similar occupancy level. The company’s focus on leveraging scale and technology mean screen economics should only improve. So should ROCEs. 13x EV/EBITDA (intrinsic) offers a good entry point to play these emerging positives. A strong opening for “Animal” and a slew of blockbuster releases scheduled for Dec-Jan improve “Friday-to-Friday” prospects as well. BUY.
? Q2FY24 – not a flash in the pan: India’s box office collection in Oct-Nov 23 has been a third of Jul-Aug-Sep (Source: Sacnilk, Ormax). This has supported market’s view that PVRInox’s Q2 performance – highest ever footfall, revenues – was an exception. We disagree. Cricket World Cup in Oct-Nov had pushed out most big movie releases beyond Nov. Still, Leo (BOC: c.INR 4bn) and Tiger 3 (c.INR 3.4bn) performed well. Interestingly, “12th Fail”, a small budget movie (INR 200mn) – apt for OTT viewing – did well (BOC: c.INR 580mn). These are telltale signs that cinema going habit is back. A healthy pipeline for Dec-Jan (Animal, Dunki, Fighter) should revive box-office collection.
? Operational performance – better…for good: Conversely, there should be little doubt over durability of PVR-Inox’s improved operations. A comparison between Q2FY24 and average quarterly FY20 (pro-forma) performance – periods with similar occupancy levels – clearly demonstrates this. Two things stand out. One, for a 15.5% rise in admits, increase in revenue has been c.50%, despite lower ad-revenue, reflecting PVR-Inox’s pricing power. Two, fixed cost as % of revenues declined by c.630bps – reflecting on-going cost rationalisation measures and synergy benefits. With only c.63% of proposed targeted merger-synergies realised, we see further scope to improve screen level economics. Leverage of technology – dynamic pricing, targeting marketing etc. - are additional levers.
? Unpredictably predictable; BUY: PVR’s 26% revenue CAGR over FY10-20 belies inherent volatility in BOCs. Its growth has come predominantly from market share gain. With only c.18% screen share currently, market share led growth has a long run way still, in our view. We therefore believe that market’s investment lens for PVR-Inox should shift from near-term performance to long-term structural prospects. Besides, our 28% average occupancy assumption over FY24-33 (vs. 31% pro-forma over FY18-20) leaves scope for incremental upside. Our DCF based TP of INR 2,340 implies FY25E EV/EBITDA (intrinsic) of 17x, reasonable given structural strengths and improving financials. BUY.
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