PVR Ltd l Exhibiting Steady Growth: KM Global Finance

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Rising Number of Screens to Boost Profits
We spoke to the management of PVR Ltd which is promoted by Ajay Bijli and
Sanjeev Kumar. PVR is engaged in the business of film exhibition. It currently
runs over 158 screens and is looking to add 50-60 screens every year.
PVR is also expanding its bowling alley and ice skating rink businesses housed
under PVR bluO, a JV with Thailand’s Major Cineplex Group.
We expect PVR’s earnings to jump over the next two years fueled by rising
seat capacity coupled with improving margins as operations of its recently
developed properties stabilize. We initiate coverage with a Buy rating and
have a price target of Rs 195 valuing the stock at 12 times FY14e EPS.
Key Takeaways
 To add 50-60 screens across India – In the past, PVR has opened multiplexes
at key locations by tying up with strong developers. It will continue
this strategy and add over 50 screens across India in cities like Pune, Bengaluru,
Cochin, Nagpur, Nanded and Vijaywada.
 Industry growth should help maintain margins – We expect the movie
industry to continue its growth which will lead to occupancy levels of 30%
or higher. Rising ticket prices and food & beverage (F&B) sales will boost
margins in the long run.
 Marquee locations provide lucrative advertisement income – PVR is earning
advertisement revenues which amount to 20% of net ticket sales due
to its location strategy. This strategy is boosting margins and providing a
kicker to the bottom line.
 Bowling alley business to grow manifold - The number of bowling lanes
should grow from 50 to 134 in the next couple of years. This business has
a payback period of 2.5 years and ROCE of 29%. It will help the company
become a one stop shop for retail entertainment and a leading anchor tenant
for mall developers.
 Implementation of GST would be a positive trigger as there will be a fall in
the entertainment tax (e-tax) rate. Currently the company pays an average
e-tax of over 18%. GST implementation will lead to a 1-2% fall in tax rate
which can be retained by PVR.
Industry Overview: Demographic tailwinds offset by rising competition
 Domestic theatrical industry is projected to grow at 9.6% over 2010-14 to reach INR 132 bn in
size by 2014
 The domestic office remains the largest source of revenue for the film industry as it contributes
to 71% of the industry’s revenue
 Multiplex industry is facing intense competition as large players such as Cinepolis plan to add
500 screens over the next few years


Business Model
 Diverse product portfolio — PVR has tailored its offerings according to the demographic profile
of cities and based on consumer preferences
1. Director’s Cut—This format has 4 luxury movie screens with a Café and restaurant (with a
top-class bar). It has received a good response and reviews.
2. PVR Gold—There are 7 Gold Class screens with luxurious comfortable seats and a dedicated
food menu.
3. PVR Premier—36 screens are running on this format which caters to the upper middle class
and contains recliner/premium seating.
4. PVR Mainstream—Over 102 Mainstream screens across the country provide comfortable
regular seating and cater to the middle class
5. PVR Talkies—This is a no frills concept at 9 screens for Tier 2 & Tier 3 markets
 Leader in Digital and 3D exhibition—77% of PVR’s screens have digital screens while it has the
highest number of 3D installations in India. 3D movie tickets typically command a 25-30% premium
in price.
 Strong product & location strategy— PVR’s locations are well suited to its targeted clientele and
boost the bottom line via strong advertising income.
 Higher share of Hollywood & Regional content—PVR screens have 60% dependence on Bollywood
content which is 15% lower than its peers and provides a hedge against a shift in consumer
preferences
 Should maintain occupancy levels of 30%—Our industry channel checks indicate that PVR
should be able to maintain occupancy levels of at least 30% which should help maintain margins
and enable to company to continue its expansion
Strong Corporate Governance
 Industry pioneers with extensive experience—PVR’s promoters Ajay Bijli and Sanjeev Kumar are
recognized as the pioneers of the multiplex industry in India with over 25 years of industry experience
between them
 Multiplex operators who have experience in single screen theatres—As compared to its peers,
PVR is the only firm where the promoters have run single screen theatres in the past and understand
the economics of the Indian exhibition industry
 The company has done a share buyback program which has helped the promoter hike his stake
in the company. We believe that this was a prudent use of cash and it displays the management’s
confidence in the PVR’s future.
 PVR’s JV with the Major Cineplex group, PVR bluO, has gotten off to a successful start. PVR
holds a 51% stake in this JV which manages bowling alleys and ice skating rinks. The Major
Cineplex group also holds a 10% stake in the listed company.
 PVR Pictures has been an unsuccessful film production venture for the company . Further investments
have been cancelled in this vertical.
Solid Growth Plans
 The company will add over 50 screens every year. Each screen would require an investment of
over 2 crores for fit outs.
 Properties have witnessed steady operational improvements as footfalls have risen over 16%
while F&B spend per head has risen 6%. The company earns a return on capital of greater than
20% once a new multiplex stabilizes which is usually after the 1st year of operations.
 PVR bluO will expand from 50 bowling lanes to 184 lanes by FY13. This is a lucrative business
delivering RoCE of 29% and will boost profits.


Valuations
 Market isn't factoring in upcoming growth — The market price doesn't reflect over 30% profit
growth in the next few years due to stabilization of new screen and expansion of PVR bluo
 Potential for re-rating — PVR is trading at 5.5X EV/Ebitda FY13e while global theatre chains usually
trade above 8X. Fresh institutional buying could lead to a re-rating of the stock.
 Trading below book value — The stock has historically traded at a valuation above book. It is
currently trading at 0.9X book value which provides a margin of safety.
 Conservative valuation — We arrive at a conservative price target of Rs 195 on the stock by
valuing it at 12 times our FY14 EPS estimate of Rs 16.2. The trailing PE ratio is at a similar level.
Competitive Landscape
 Topping global peers—PVR has the highest revenue per screen globally at $0.6mn as compared
to $0.47mn for AMC and other international peers
 Higher margins on diversified revenue mix—PVR has better margins than competition due to
higher average ticket prices. It is a leader in digital & 3d exhibition with 122 digital screens
where ticket prices are 25-30% higher.
 Rising advertisement income—The company is benefiting from its location strategy by garnering
the highest advertisement revenue per screen globally at $80,000. Typical global competitors
earn $19,000 per screen in advertisement revenue.
Key Risks
 Slowdown in construction activity which will lead to delay in opening of new screens
 Rising debt levels could lead to cash flow problems and a delay in screen additions
 Unexpected disputes with movie producers/distributors over revenue sharing can lead to margin
pressures
 A poor movie line-up will lead to lower than expected occupancy levels and margin pressure
 A renewed push in the movie content production business will lead to unstable revenues and a
riskier investment profile. The company has demerged this unit which minimizes chances of
allocation of capital to risky ventures.
 A rise in fit-out costs will lead to rising debt and falling margins