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A capital efficient model awaits box-office revival

A tough 4Q capped a fluctuating year for PVR Inox. Revenues, though marginally ahead of our subdued expectations, were down 19% QoQ. Occupancy, Admits and ATP were at four quarter low. Four out of past eight quarters have seen a sub-25% occupancy, something rarely seen pre-COVID. The bear argument could be that occupancy might be structurally lower now. Though possible, a soft 4Q – with a weak release calendar - was not the litmus test. Good content – of both big and small budgets – have done well in recent past. Moreover, cost discipline has ensured flat fixed cost/screen over FY20-24, allowing for similar financial performance at lower occupancy. FCF (post lease payment) in FY24 was the highest since FY19, when occupancy was 36% (vs. 25% in FY24). Company’s focus on slowing pace of net screen addition and reducing capex intensity (by 50% in couple of years) through “Franchise Owned, Company operated” (FOCO) model would further improve FCF generation. Tangible result on PnL and ROCE might track better box-office performance. But the direction seems clear. A weak 1Q outlook means triggers in the stock are not imminent. But one strong movie could change that. A healthy pipeline post mid-June give us confidence. We retain BUY with a revised DCF based TP of INR 2,070 (from INR 2,250).

* 4QFY24 – Weak as expected: Consol. revenues grew 10% YoY (-19% QoQ) to INR 12.5bn (JMFe: INR 12.2bn), net of 6%/17% Ticketing/F&B revenues. A weak release calendar and underwhelming performance by few big-budget movies impacted ticket revenues. Admits grew 7% YoY (32.6mn), aided by screen addition (+4% YoY). Occupancy improved 40bps YoY to 22.6% (JMFe: 22%). ATP declined 2.5% YoY while SPH grew 8.5% YoY, partly reflecting synergy benefits. Pre-Ind AS EBITDA margin broke even, missing estimates (0.1% vs. JMFe: 1.4%). PAT losses of INR 1.2bn were ahead of JMFe: -0.9bn. Company is evaluating monetization of real estate assets valued at INR 3-4 bn to reduce debts. Company turned FCF positive in FY24 (INR 1.16bn).

* FY25: Pivot to better FCF/ROCE: IPL and ongoing general elections have impacted new movie flow in Apr-May. This will likely stabilise by mid-June, indicating a softer 1QFY25. Pushpa-2 in August and Kalki 2898 in June are promising movies. Management’s near term focus has shifted towards lowering Opex/screen, slowing pace of net screen addition, reducing capex intensity (25% in FY25) and improving FCF to reduce debt. Company has already realised synergy benefits of INR 1.85-2.08bn (Source: PVR Inox), just shy of its INR 2.25bn target. The company is expanding its Managed Fee model. It plans to add 15-20 screens under FOCO model (out of 120), where the entire CapEx will be incurred by the development partner. Net screen addition in FY25 will be 50.

* Cut FY25-26E EPS; Maintain BUY: A weak 4Q, subdued 1Q outlook, marginally lower occupancy assumptions and lower net new screen addition guidance drive 5-15% cut to our FY25/26E EPS. Our FY25 Capex estimates are c.10% below FY24’s (in-line with lower screen addition). This is less than 25% capex reduction indicated by management as we haven’t yet built FOCO model benefits, pending limited details on revenue sharing. Better FCF limit cuts to our DCF-based TP. Retain BUY with a revised INR 2,070 TP.

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