PVR LTD : LIGHT CAMERA & ACTION !!!

Scrip Code: 532689/ PVR

CMP:  Rs. 668.85; Market Cap: Rs. 2,768.83 Cr; 52 Week High/Low: Rs. 750.00 / Rs. 490.0o; Total Shares: 4,13,96,888 shares; Promoters : 1,22,55,260 shares –29.60 %; Total Public holding : 2,91,41,628 shares – 70.40 %; Book Value: Rs. 94.32; Face Value: Rs. 10.00; EPS: Rs. 13.39; Dividend: 25.00% ; P/E: 49.98 times; Ind P/E: 36.93; EV/EBITDA: 15.34. Total Debt: 502.12 Cr; Enterprise Value: Rs. 3,258.38 Cr.

Priya Village Roadshow (PVR) Cinemas: PVR Limited was incorporated in 1995 and is based in Gurgaon, India. PVR LTD was incorporated in April 1995 pursuant to a joint venture agreement between Priya Exhibitors Private Limited and Village Roadshow Limited, one of the largest exhibition companies in the world. PVR Limited is an India-based company that operates movie houses in India. PVR Ltd came with an IPO on December 08, 2005 with an issue price of Rs. 225 per share and raise about Rs. 173.25 Cr with an objective to utilize the proceeds to finance the then new cinema projects in various cities across the country, to expand the film distribution business, technological up gradation and renovation of cinemas. The Company also generates revenue from in-cinema advertisements and product displays and in-cinema sale of food and beverages. It also produces and co-produces movies; and distributes movies, as well as operates 24 lane bowling centres. PVR, Currently controls 398 including 135 Screens with Cinemax India Ltd at 92 locations across 37 cities in 13 States and 1 Union Territory. Company’s subsidiaries include CR Retail Malls (India) Limited (CRR), PVR Pictures Limited (PVR Pictures) and PVR bluO Entertainment Limited (PVR bluO). The Company has diverse cinema circuit in India consisting of 35 Cinemas with 154 screens spread over 20 different cities: Delhi, Faridabad, Gurgaon, Ludhiana, Ghaziabad, Mumbai, Bangalore, Hyderabad, Chennai, Lucknow, Indore, Aurangabad, Baroda, Allahabad, Ahmedabad, Udaipur, Chandigarh, Surat, Latur and Raipur. PVR Ltd announced the opening of a multiplex on August 15, 2012, at Empress Mall, in Nagpur in the state of Maharashtra. The multiplex consists of five screens. On January 8, 2013, PVR through its wholly owned subsidiary Cine Hospitality Private Ltd purchased a controlling stake of over 69 % followed by the open offer for another 26% in the Cinemax India Limited for Rs. 395 Cr or Rs. 203.65 per share from the Rashesh Kanakia and family. PVR Ltd is locally compared with Prime Focus ltd, Reliance Broadcast Network Ltd, Balaji Telefilms ltd, Media Matrix Worldwide Ltd, Shree Ashtavinayak Cine Vision Ltd, Tips Industries Ltd, Fame India Limited, Cinemax Properties Ltd, Era E Zone (India) Ltd, Pyramid Saimira Theatre Limited and Inox Leisure Ltd and globally compared with Walt Disney Co of US California, Time Warner Inc of USA, IG Port Incorporated of Japan, Twenty First Century Fox, Inc of New York, Lions Gate Entertainment Corp of California,  UTV Media PLC of UK, Dreamworks Animation Skg Inc of California, Orange Sky Golden Har. Ente. Holdings Ltd of Hong Kong, Kinepolis Group NV of Belgium, Cinemax X AG of Germany, Digital Cinema Destination Corp of United States and Reading International Inc of United states, Geo Dinos Company Ltd of Japan, Nakanihon Kogyo Company Ltd of Japan.

Investment Rationale: 

Priya Village Roadshow (PVR) Cinemas is a leading cinema chains in India. The company began as a joint venture agreement between Priya Exhibitors Private Limited and Village Roadshow limited in 1995 with 60:40 ratios. PVR pioneered the multiplex revolution in the country by establishing the first multiplex cinema in 1997 at Saket, New Delhi. The opening of the first multiplex opened up a new era in the Indian cinema viewing experience, which also set a role model for others to follow suit. PVR has set new benchmarks in the cinema exhibition business including establishment of the first largest 11 screen multiplex in the country, Gold Class Cinema, luxury cinema, IMAX theatres and ECX (Enhanced Cinema Experience). PVR, Currently controls 398 including 135 Screens with Cinemax India Ltd at 92 locations across 37 cities in 13 States and 1 Union Territory. It also plans to open another 500 screens by 2015. PVR has an impressive market share of around 25 % including Cinemax of the total 1600 multiplex screens in the country. The Indian Media and Entertainment (M&E) industry is around Rs. 83,000 crore (US$ 13.23 billion) and is on high growth trajectory. Proving its resilience when the global economy was going through tough times, the Indian M&E sector was on the cusp of a strong phase of growth, backed by rising consumer payments and advertising revenues across all sectors. The industry has been largely driven by increasing digitisation and higher internet usage over the last decade. In today’s times, the Indian entertainment segment is largely driven by digitisation and internet penetration. More than 22.7 Cr Indians use their mobiles, computers, tablets or other devices to access internet to listen to music, watch a film, a TV show or a cricket match. India ranks third in the world in watching videos online through a PC/laptop and fourth in the world when it comes to watching videos on the phone, according to the statistics. The CII-PwC report named 'India Entertainment & Media Outlook 2013' estimates that the Indian M&E industry would exceed Rs. 224,500 crore (US$ 35.8 billion) by 2017, growing at a CAGR of 17 per cent from 2013. The growth would be majorly driven by increasing penetration of digital platforms across the industry segments. While the print sector is expected to register a CAGR of 9 % and touch Rs 33,100 crore (US$ 5.28 billion) of revenues by 2017, sectors such as internet access, internet advertising, gaming and music are expected to continue on their high growth trajectory, said the report. The report highlighted that immense use of the internet, high penetration of smart phones; digital advertising, wireless broadband, digital content consumption and supportive regulatory eco-system have had and will continue to have a significant impact on the E&M sector. PVR has an impressive market share of 25 % including share of Cinemax and has the total of 1,600 multiplex screens in the country. After the Cinemax acquisition, PVR now has a combined revenue share of 20-22 % from Bollywood films and 30-35 % from Hollywood films as in multiplex revenues. The company has about 462 screens as on date and plans to raise its market share by rolling out 70-80 screens each year. This leadership position gives PVR the leverage to negotiate better deals with movie producers. It is expected that in FY16E the total screens of PVR can reach 525 in 114 properties and in FY17E the total number of screens could be 575 in 123 properties. The Annual maintenance capex comes at 1-2 % of revenue. Every screen requires refurbishment after 6-8 years to keep the cinema maintained and fresh. This amounts to 20-30 % of original capex. Capex required is on an average of Rs. 2.5 Cr per screen. PVR also plans to use this immense bargaining power to negotiate with the government so that there can be some minimum window before movie releases are available on other platforms. Owing to its strong competitive position after the Cinemax acquisition the company has been able to effectively pass on price hikes. The average ticket prices (ATPs) have been on an upward trajectory since FY13. As the demand for the movies are increasing so do the investments in movies are increasing. Hence, there would be an increase in ATPs. Moreover, the consolidation in the multiplex industry and with PVR being a market leader it would be in best position and be able to pass on price hikes effectively. Also, there are some major releases in the pipeline and several Hollywood releases would help PVR to take price hikes as per the heavy demands for star-studded movies. It is expected that Average Ticket Prices to grow at a CAGR of 4.2 % to Rs. 186.4 by FY17E. PVR also benefits from its strategy of following differentiation pricing based on the regions, target audience and the movie to be released. PVR has always remained quite consistent with its property roll-out guidance. The company has the first mover advantage in various smaller towns and cities where it has already cornered the best location. In Q4FY13, as the Cinemax numbers were consolidated the tally of the properties increased from 47 to 86. As on date, the company has 104 properties with 462 screens in total. The company has rolled out about 73 screens at the end of FY14. The company guided at maintaining the run rate of 70-80 screens for the coming two years. PVR has 60 million footfalls, which makes advertisers comfortable to advertise with PVR as the audience is also easily traceable. PVR is strategising to augment its advertising revenues by about 25-30 % on a YoY basis by providing advertisers various deals such as pay per eyeballs and other innovative deals. The company has earned about Rs. 141.9 crore in FY14. There is also an uptrend seen in the Spends per head in the food and beverage (F&B) segment. This gives PVR an ability to take price hikes and higher operating leverage in the coming future and this will in turn help in the margin expansion to the tune of about 17.2 % in FY16E and 18.1 % for FY17E from 16.0 % in FY14. PVR has entered into a share purchase agreement with L Capital for purchase of their entire investment in equity shares and preference shares of PVR Leisure. L Capital had bought the stake at Rs. 50 Cr in 2012. L Capital will be exiting its investment at a loss and PVR will be buying its stake at Rs. 37 Cr. Since PVR Leisure has Rs. 15 Cr to Rs. 16 Cr cash, net outflow for PVR will be Rs. 22 Cr. Apart from one property scheduled to be opened in Ludhiana in the next 2‐3 months, PVR will not be expanding further in the bowling business. L Capital will continue to be a significant shareholder in the main company. Also, PVR Cinemas has entered into a 5 year strategic partnership with BookMyshow.com to be its online ticketing partner across India. The multiplex targets to sell tickets worth of Rs. 1000 crores over these five years exclusively on BookMyshow.com besides its existing sale of tickets from its Box Office and other channels. Also with the GST coming into force by 2016 and the GST rate being fixed at 16 %, it could potentially lead to a 4.50 % to 5.50 % improvement in EBITDA margin for PVR. Given the fact that movie watching is a discretionary spend and the category has pricing power, so PVR will be in good position to absorb all benefits of GST rather than passing it on to consumers. PVR’s has good prospects with improvement in RoCE and RoE with free cash flow visibility and with the timely execution of the given aggressive roll-out plan it will maintain its leadership position.

Outlook and Valuation:

Innovative ways to book tickets
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PVR is the largest and the most premium film entertainment Company in India and is listed as the “Most Trusted Brand” in the Category of Entertainment by the “Brand Trust Report, 2013”. PVR, a pioneer in multiplex in India and is the largest cinema exhibition player in the country today. There are about 9,000 screens in India of which multiplexes account for approximately 25 %. The screen density in India is 8 per million as in comparison with 117 per million in US. For multiplexes, it is less than 1 per million. Malls will continue to guide the future of multiplexes. Multiplexes form only tenth space at the mall. The recent KPMG report anticipates the market size of Indian Music & Entertainment sector to touch Rs. 1,45,700 Cr (US$ 25.51 billion) by 2016. The Investments inflows in the movie production space are set to multiply, several movie studios such as Virgin Produced India, Fox Star Studio plans to step up investments in Bollywood. Along with the higher investments and with higher quality content driven by heavy investments would lead to higher demand for movie related entertainment. PVR would be benefited from the increased occupancies and rising Average Ticket Price (ATPs). PVR would be benefited from the increased occupancies and rising Average Ticket Price (ATPs). PVR has offerings across the consumer segments like in Luxury Cinema Viewing it has Directors Cut with ticket prices ranging from Rs. 1,044 to Rs. 1276; in Comfortable Reclining Seats it has Gold Class with ticket prices ranging from Rs. 696 to Rs. 928; in Catering to Upper Middle Class it has PVR Premiere with ticket prices ranging from Rs. 174 to Rs. 348; in Comfortable Regular Seatings it has PVR Mainstream with ticket prices ranging from Rs. 116 to Rs. 174; in Low cost Multi-screen cinemas it has PVR Talkies with ticket prices ranging from Rs. 58 to Rs. 116. Every ticket of Rs. 100 sold is divided as Rs. 20 as entertainment tax, Rs. 36 to distributors and then Rs. 44 for the multiplexs. Multiplexes enjoys margin of around 30 % on Exhibition, margin of around 65 % on food & berverages and margin of around 80 % on advertisement - translating into revenue of around Rs. 68 for exhibition, Rs. 25 for food & berverages and Rs. 7 for advertisment. It is expected that PVR’s Average Ticket Prices can register growth of 7 % at Rs. 177 by the end of FY15E and a growth of 3 % to Rs. 182 by the end of FY16E. Currently, spends per head (SPH) as % of ATP is at 36 % and it can go as high as 45‐50 %. Moreover, as disposable incomes increase, Foods & Beverages (F&B) spends are also expected to rise to Rs. 60 in FY15E and to Rs. 62 by the end of FY16E, from Rs. 53 currently. In US, this ratio is much higher. In India, the potential is high due to the concept of intervals. Colas and popcorns contribute 65 % of total F&B sales, which also have high margins. PVR is strategizing to augment its advertising revenues by about 25 to 30 % YoY by providing advertisers various deals such as pay per eyeballs and other innovative deals. For multiplexes, in cinema advertising and food sales are bigger businesses. These two businesses have now grown to account for more than a third of the income for multiplex operators. And these segments have grown profitability as they offer bigger margins than its core business of selling movie tickets. Non Ticket segments contributes on an average of 35 % to the revenue of the multiplexes. For PVR revenue from in cinema advertising has been growing in the range of 35-40 % every year in last five to six years. PVR has a deal signed with HUL on ‘Pay for eyeballs’ basis. HUL contributes less than 2 % of overall ad revenues. However, HUL gives confidence to other FMCG advertisers to advertise in multiplexes. PVR has many national advertisers too. Management is maintaining its guidance of 15‐17 % YoY overall ad growth in FY15. The company has earned about Rs. 141.9 crore in FY14. PVR has about 59.9 million footfalls segregated on various counts, which gives advertisers unmatched opportunity to reach the target audience. It is expected that PVR can see a growth rate of 15 % and 13 % to reach or Rs. 163 and Rs. 184 crore of advertisement revenues by FY15E and FY16E, respectively and thus Advertisement revenue would be PVR’s new noticeable revenue stream. Moreover, a gradual recovery in economic activity will increase disposable incomes to keep growth buoyant. Tepid box‐office collections impacted performance as many movies fared below expectations. However, this was an aberration. Business is driven by content to a large extent. Bang Bang and Happy New Year did well in PVR’s circuit and met management expectations. Footfalls at malls were high and Movies are still the number one format of entertainment in India. During the weekday/weekend footfalls split ratio is 50:50.  PVR thoroughly checks out the two main parameters of quality of assets and value of opportunity. Also, IRR should be upwards of 15 % for the acquired company. The Company has been trying alternate content at its screens. However, it is still too premature to comment on performance, though early signals are very positive. Interest rate for the company declined from 12.0% a couple of years ago to 11.5 % due to refinancing of debt via NCDs. While gross debt stood at Rs. 720 Cr, net debt stood at Rs. 660 Cr. Ad inventory of peers is higher than PVR and PVR is planning to add 21 screens in Q4FY15. Over FY15E/FY16E, tax rate will be in single digits. PVR has earmarked capex of INR450‐500mn for next 3 years (FY14‐16) to be utilised for renovation and rebranding of Cinemax properties. Company is expected to benefit immensely with implantation of GST. Average entertainment tax is believed to reduce from 23 % currently to 16 % post the implementation of GST. Also, company will be able to avail tax credit of tax paid on input cost if the act is implemented which will reduce its tax liability. PVR has the pricing power with regards to ATP, F&B and advertising and also the company will be a key beneficiary of possible uptick in urban consumption. PVR has earmarked overall capex of Rs. 45 Cr to Rs. 50 Cr spread over next 3 years to be utilised for renovation and rebranding of Cinemax properties. The Management has no plans for equity dilution and signals that PVR is adequately funded for the future growth. A 50-bp drop in the average occupancy ratio erodes could affect the price of the stock by 5 %. At the current market price of Rs. 668.85, the stock P/E ratio is at 51.45 x FY15E and 22.67 x FY16E respectively. PVR can post EPS of Rs. 13.00 and Rs. 29.50 respectively. The content pipeline of the company is exciting and would propel the further growth of PVR. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALS	FY14	FY15E	FY16E	FY17E
SALES (₹ Crs)	1,347.50	1,541.20	1,906.30	2,236.10
NET PROFIT (₹ Cr)	50.40	51.40	119.50	137.80
EPS (₹)	12.90	13.00	29.50	34.00
PE (x)	53.10	52.50	23.10	20.10
P/BV (x)	7.00	6.30	5.00	4.10
EV/EBITDA (x)	16.30	14.40	9.90	8.10
ROE (%)	10.10	12.60	24.10	22.40
ROCE (%)	9.70	10.90	16.20	18.50

*As the author of this blog I disclose that I do not hold PVR Ltd in my any of the portfolios.

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