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Muted occupancy, but as expected

Healthy metrics save the day

PVR Inox (PVRINOX IN) reported an in-line Q3. Occupancy was lower 710bps QoQ due to 1) a higher base, 2) absence of large-ticket Hollywood films, 3) Cricket World Cup (CWC) in the months of October/November and 4) mixed performance from the regional genre. We maintain our view that concerns such as: 1) a smaller slate of large-ticket Hindi films (which contributes 90% to Box Office collections) and English films and 2) no respite for small/medium budget films may continue to strain near-term occupancy in the next few quarters.

But there is ample respite, seen in metrics such as ATP/SPH, which have shown resilience with 13.9%/8.2% YoY growth and continue to positively impact overall profitability. Ad revenues have surged 19.8% YoY for 9MFY24, helped by positive impact from large-budget Hindi films and festive season. Expect this to fall per screen basis in the near term due to volatile content across genres.        

Near-term concerns prevail

As mentioned in our recent update (Favorable risk-reward dated 19 January 2024), occupancy may dip YoY in FY25, due to a high base and a mixed slate of content across genres. FY26 may see respite as occupancy may breach 27% (85% of pre COVID levels), led by: 1) a backlog of English film releases post the impact of the strike by the Writer’s Association and 2) better growth potential in the Hindi Box Office (BO) on relatively favourable base of FY25. Most synergies of the merged company have largely played out, which may lead to annualised EBITDA margin (ex IND-AS) moving to 22.1% at best (340bps higher than pre-Covid level) basis Q2FY24 occupancy at 32.3%, which was in line with pre COVID levels. Potential to drive more synergies in advertising revenues exist, as ad revenues, per screen basis, still lag 25% versus pre-Covid for the merged company in 9MFY23. Consistent content performance may be a key monitorable.    

Valuations: Reiterate BUY with TP unchanged at INR 1,900

We maintain our estimates and reiterate BUY with Mar-25E TP of INR 1,900 on 13x one-year forward EV/EBITDA. We believe: 1) synergies of the merged firm, 2) size and scale of the entity, and 3) acceptance of regional content may help valuation sustain at pre-COVID average of 14x in the medium term despite an unreliable content cycle post-COVID. Occupancy consistently breaching pre-COVID level may drive further rerating.

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