PVR – 2QFY2011 Result Update : Angel Broking

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PVR – 2QFY2011 Result Update

Angel Broking maintains a Buy on PVR with a Target Price of Rs231.

We have revised our estimates upwards to factor in –1) revenue traction from

profitable movies (production and distribution) and improved movie pipeline, 2)

merger with Leisure World with itself, which we believe is EPS accretive by ~3–4%,

3) focus on cost optimisation undertaken by the company and 4) ammortisation

on account of home production (Aisha and Khelein Hum Jee Jaan Se). We

maintain a Buy on the stock

Strong movies aid top-line, operating leverage expands margins: PVR’s core

exhibition business of the company registered a growth of 22.7%yoy/11.6% qoq

to `105cr (`85cr/`94cr), aided by increase in the net ticket sales and average

F&B realisation. PVR registered earnings growth of 39.3% yoy/ 76.9% qoq to `9cr

(`6cr/`5cr), primarily aided by significant margin expansion (expanded 705bp

yoy/1,049bp qoq) and decrease in interest expense, despite high depreciation

cost (includes ~70% of the total cost of Aisha as ammortisation cost) and lower

other income.

Outlook and Valuation: For FY2010-12, we expect PVR to register a 45% CAGR

in top-line aided by seat additions (as we factor in only 4–5% improvements in

ATP and F&B spends) and higher contribution from PVR Pictures. The earnings is

expected to register a CAGR of 455% over the same period on a low base

(FY2010 earnings were affected due to weak movie pipeline and 1QFY2010

washout due to the strike) and margin expansion (on low base, we expect OPM of

20–21% in FY2011–12). At CMP of `174, the stock is trading at attractive

valuations of 11.3x FY2012E EPS. We maintain a Buy with a revised Target Price

of `231 (`226) based on 15x FY2012E EPS of `15.4. Downside risks to our

estimates include delayed rollout of proposed multiplexes, higher rental expense

and volatility in the movie’s box office performance.

Investment Rationale

􀂄 Diversified model ensures de-risked business: PVR is present across the movie

value chain (exhibition-production-distribution) and has forayed into retail

entertainment through PVR Blu-O. While we expect PVR Pictures to post ~144%

CAGR over FY2010–12 aided by improved movie slate, PVR Blu-O is expected

to register ~171% CAGR over FY2010–12E on incremental earnings from newly

opened properties (likely to open a new property in 4QFY2011E).

􀂄 Promising movie pipeline and rise in Hollywood movies to aid top-line: Strong

domestic movie pipeline (Robot, Dabangg, Anjaana Anjani, Action Replayy,

Golmaal 3, Guzaarish, Khelein Hum Jee Jaan Sey, Game and Dhobi Ghat),

increase in the number of Hollywood releases (14-15 3D movies to be released

over next 18-24 months), coupled with substantial screen additions (PVR has

added 34 screens and ~8,900 seats over the last six months) are expected to

help PVR sustain robust top-line growth. For FY2011E, we have modeled in

~23mn footfalls and a ~55bp yoy increase in occupancy.

􀂄 Exhibition capacity ramping up: PVR opened 19 screens in 1HFY2011 and has

an ambitious plan of opening further 38 screens by 4QFY2011. For the full

year, FY2011E, we have factored in 42 new screens and 9,938 seat additions

resulting from 7 new properties (majority expansion skewed towards

4QFY2011). The company expects to fund exhibition capex largely via internal

accruals and funds realised from unlocking of Phoenix Mills property

(management is looking at sale and lease back of the property by end of

FY2011, and expect it to rake in ~`80-100cr cash)

Outlook and Valuation

We have revised our estimates upwards to factor–1) revenue traction from profitable

movies (production and distribution) and improved movie pipeline, 2) merger with

Leisure World with itself, which we believe is EPS accretive by ~3–4%, 3) focus on

cost optimisation undertaken by the company and 4) ammortisation on account of

home production (Aisha and Khelein Hum Jee Jaan Se)

PVR has added 6screens and 1,502 seats under operation in 2QFY2011. Going

forward, we expect substantially higher footfalls in 3QFY2011 on account of festive

season and promising movie pipeline which is expected to help PVR register higher

occupancies. For FY2010-12, we expect PVR to register a 45% CAGR in top-line

aided by seat additions (as we factor in only 4-5% improvements in ATP and F&B

spends) and higher contribution from PVR Pictures. Earnings is expected to register a

CAGR of 455% over the same period on account of low base (FY2010 earnings were

affected by weak movie pipeline and 1QFY2010 was a washout due to the strike)

and margin expansion (on low base, we expect the operating margins of 20–21% in

FY2011–12). At CMP of `174, the stock is trading at attractive valuations of 11.3x

FY2012E EPS. We maintain a Buy with a revised Target Price of `231 (`226) based

on 15x FY2012E EPS of `15.4.

Downside risks to our estimates include delayed rollout of proposed multiplexes,

higher rental expense and a weak movie pipeline.