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Challenged, But Unbroken, initiate coverage with BUY!

PVR INOX has displayed a noteworthy resilience and adaptability to the changing landscape of movie exhibition industry in recent times. We believe the worst is behind for the movie exhibition industry and PVR INOX is likely to be the key beneficiary, given its market leadership and pan-India presence. Further, threat of OTTs has diminished with consumer preferring theatrical experience for good content. We initiate coverage on the stock with a BUY rating owing to: (i) Expected industry-wide revival in occupancy rates (ii) various initiatives for reviving footfalls (iii) Cost rationalization to act as margin lever (iv) Improvement in ROCE. We value the stock at FY27E EV/EBITDA multiple of 14x and TP of Rs1,980. Reiterate BUY.

Occupancy on the cusp of recovery: Occupancy levels reported a decline post pandemic to 25-26% vs pre-pandemic levels of ~32% for PVR INOX. This was driven by easy access of new content on OTT platforms and shift in consumption pattern as consumers’ threshold for quality content increased. However, we believe occupancy rates have bottomed out, supported by strong content pipeline and reduced investments by OTT platforms. This is evident by the number of direct to digital releases, which almost halved from 105 in 2022 to just 57 in 2023 as platforms rationalized their direct to digital premiums. Combination of these factors suggest occupancy levels can inch up close to pre-covid levels in the coming quarters.

Multiple initiatives to revive occupancy: PVR INOX has been agile during times of volatile content pipeline, with initiatives such as re-releases of classic movies, PVR INOX Passport which allows consumers to enjoy 4 movies on weekdays at Rs349. Company is also piloting Ad-free movie experience in select premium screens and flat pricing in select locations (e.g. Lucknow). On F&B side, it has launched partnership with Easydiner, offering discounts on pre-ordering. It has also launched weekdays combos at Rs 99 and unlimited refill offer on weekends, which are receiving good response. Company has also partnered with Kotak for Co-branded credit card which offers cashback on booking of movie tickets. These are expected to drive occupancy further.

Costs rationalization to support margins: PVRINOX is moving towards capital light model which entails part of the capex for new screens to be funded by the developer. This is expected to improve ROCE for future capex deployed with shorter payback period. Company is also exploring Franchise Owned Franchise Operated (FOFO) model; wherein entire capex is done by the developer and company receives royalty at 8-10% of revenues. Mgmt plans to open 50% of the properties for the next year based on capital light or FOFO model. Merger of PVR INOX has also resulted in significant cost synergies of Rs1.85-2bn p.a. Cost synergies are expected to improve further with improvement in occupancy levels. PVR INOX is also regularly renegotiating lease rentals for existing properties and has closed number of underperforming screens over past 2 years. As a result of these factors, PVR INOX has brought down its breakeven occupancy to 18-19% levels from pre-pandemic level of 22%.

ROCE to improve: Company has done multiple acquisitions in the past resulting in higher gross fixed assets. However, focus is now shifted on debt reduction from internal accruals. Moreover, large chunk of screen additions is expected in South India, which is dominated by single screens. Thus, limiting scope for inorganic expansion. ROCE is expected to reach 9% by FY27E from ~4% in FY24 led by lower addition of fixed assets.

Valuation and outlook: We expect back-ended recovery in occupancy from FY26 onwards and expect Revenue/Pre-IndAS EBITDA CAGR of 11%/+22% over FY24- FY27E, with +400bps OPM expansion. We stay bullish on the revival of movie exhibition industry and value PVRINOX at FY27E EV/EBITDA multiple of 14x. We initiate coverage on the stock with the BUY rating and PT of Rs1,980.

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