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Subdued performance; near-term outlook weak

* PVR-Inox reported a subdued quarter, with 22.6% occupancy and 0.1% EBITDA margin. Revenue declined 19% QoQ, led by weak ticketing and ad revenue, which, coupled with an increase in movie distribution and other expenses, led to EBITDA of INR12m (big miss).

* The 2024 general elections and T20 Cricket World Cup are likely to weigh on the 1QFY25 movie pipeline, which could lead to lower occupancy. Hence, we cut our EBITDA estimates by 24%/13% for FY25/FY26. Continued fluctuation in occupancy could remain a key monitorable, as the business remains highly sensitive to occupancy, and even a 200-300bp blip could derail the screen economics. Reiterate Neutral with a TP of INR1,400.

Big miss in EBITDA; occupancy remains soft

* Consolidated revenues grew 10% YoY (-19% QoQ) to INR12.6b (in line) due to a decline in ticketing and ad revenues.

* EBITDA (pre Ind-AS 116) stood at INR12m (big miss) due to an increase in movie distribution expenses, print charges and other expenses (+900bp of sales QoQ), partially offset by a decrease in movie exhibition costs (-430bp QoQ). Reported margin stood at 0.1% (vs. 0.5%/13.1% in 4QFY23/3QFY24).

* Depreciation declined 11% QoQ and interest costs remained flat QoQ.

* Accordingly, reported loss stood at INR901m (vs. est. loss of INR967m).

* FY24 revenue/EBITDA grew by 17% /37% YoY, and PAT grew to INR1.1b (vs. a loss of INR539m in FY23).

* OCF jumped 5.8x to INR9.2b due to 37% YoY growth in EBITDA to INR8b and an increase in trade payable days. Capex was flat YoY at INR6.3b and interest payout grew 24% YoY to INR1.8b. As a result, FCF grew by INR1.1b (vs. INR6.2b outflow in FY23). Net debt fell by INR1.1b to INR13.1b in FY24.

* WC days stood at -134 in FY24 (vs. -126 days in FY23), led by an increase in trade payables.

Highlights from the management commentary

* Current environment: The ongoing general election has impacted the flow of new releases in 1QFY25, which is expected to stabilize by mid-Jun’24.

* Merger synergies: The company had guided for annual EBITDA level synergies of INR2.25b during the merger, out of which around INR1.85- 2.08b have been achieved. The full impact of these synergies would be visible when occupancy improves.

* Net cash focus: The company focuses on becoming a net cash company and evaluating monetization of real estate assets (INR3-4b) owned by the company and using the proceeds to reduce leverage.

*  Capital-light model: It aims to reduce annual capex by exploring models like FOCO, where investment will be made by the property owner and PVRInox will be operating. It expects to reduce total capex in FY25 by ~25% YoY. This will improve ROCE, while margins may see a slight dip.

Valuation and view

* Occupancy moderated in 4Q as the quarter witnessed some normalcy across the releases and impact of the IPL and general elections.

* Stable occupancies, healthy recovery in advertising revenues, increased risk of rising scale, and the traction of movie releases over OTT platforms continue to be our key monitorables, as highlighted in our report.

* The 2024 general elections and T20 Cricket World Cup are likely to weigh on the 1QFY25 pipeline, which could lead to lower occupancy. Hence, we cut our EBITDA estimates by 24%/13% for FY25/FY26.

* Maintaining occupancy and traction in ad revenues amid an increasing threat from deep-pocketed OTT players would remain a key catalyst for growth. We value PVR-Inox at 13x FY26E EV/EBITDA to arrive at our TP of INR1,400. Reiterate Neutral.

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