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Sunday, July 3, 2016

PVR LTD: IT'S JUST THE BEGINNING !!



*As the author of this blog I disclose that I do hold PVR LTD in my investment portfolio.

Scrip Code: 532689PVR
CMP:  Rs. 1024.50; Market Cap: Rs. 2,477.92 Cr; 52 Week High/Low: Rs. 1074.00 / Rs. 632.25.
Total Shares: 4,66,86,938 shares; Promoters : 1,20,11,149 shares –25.73 %; Total Public holding : 3,46,75,789 shares – 74.27 %; Book Value: Rs. 114.10; Face Value: Rs. 10.00; EPS: Rs. 25.41; Dividend: 10.00 % ; P/E: 40.30 times; Ind P/E: 34.12; EV/EBITDA: 15.68 times.
Total Debt: Rs. 747.01 Cr; Enterprise Value: Rs. 5,512.23 Cr.

PVR LTD: 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 524 including 135 Screens with Cinemax India Ltd at 114 locations across 46 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). PVR BluO is largest bowling chain in India comprising 135 cosmic bowling lanes which spreads across 6 centers. The Company has diverse cinema circuit in India consisting of 524 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 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 Entertainment & Media sector. PVR has an impressive market share of 25 % including share of Cinemax and has the total of 2,000 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 516 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 FY17E the total screens of PVR can reach 575 in 123 properties and PVR could have 664 screens by FY18E. PVR has first mover advantage in various smaller towns and cities where it has already cornered the best location. The company has always been able to meet its property roll-out guidance. With the DT Cinemas deal, it added up another 29 operational screens to its portfolio. Apart from these 29 screens, PVR will get three additional screens, which are under process via the DT Cinemas deal. PVR has also guided at maintaining the run rate of 60 screens per year for the coming two years. Going ahead, with the mall development activity showing some signs of revival it is expect the company to meet its screen roll-out. PVR has significant pricing power to retain the benefits from a lower effective indirect tax rate, given its premium location advantage and strong brand. PVR is currently subject to multiple indirect taxes like entertainment tax of 26.9 % in FY16 on net box office collection, service tax of 14.5 % on advertising revenue and blended VAT of 8 % on F&B revenue. Service tax of Rs. 7.60 Cr paid on rent, maintenance and other expenses relating to properties was expensed out in FY16, as credit wasn’t allowed. Multiplexes largely operate through leased premises and incur significant lease rentals and infrastructure costs, on which they pay service tax. However, in the absence of significant service tax-excise liability, they are unable to set off the service tax paid by them. Once all taxes are subsumed under GST, the credit of tax paid on rentals and infrastructure services will be available even against tax collected on box office collections and F&B revenue. This will lower operational costs and drive margin expansion. If GST is implemented, then in the best case scenario of 18 % GST, PVR can have margin expansion of 4.40 % and an EBITDA upgrade of 26 %. Resultantly, RoCE shall increase from 15.4 % to 23.5 % in FY18. If the GST rate is higher at 20 %, the margin expansion will be 3.90%, leading to an EBITDA upgrade of 21 %. RoCE in this case shall be 22.0 %. It has been noted that there has been massive consolidation in the sector with PVR acquiring Cinemax and DT Cinemas, Inox acquiring Satyam, Carnival acquiring Big Cinemas, HDIL Entertainment Pvt Ltd and Stargaze Cinemas, Cinepolis acquiring Fun Cinemas, etc. This Consolidation has led the multiplex industry to comprise four major players Inox, PVR, Carnival and Cinepolis enabling them to take an average ticket prices (ATP) hike easily. For PVR, DT Cinemas is expected to add significant value, as its average ticket price (ATP) and spend per head (SPH) are higher than competitors due premium locations of its properties. Ad revenues per screen for DT stood at around Rs. 25 lakh as compared to PVR of Rs. 42 lakh per screen for PVR in FY16 thereby providing huge opportunity for scaling up ad revenues and in turn margins. PVR expects DT Cinemas to add Rs. 4.50 Cr to EBITDA which is margin of 24 %, ex-GST benefits in FY18. DT Cinema’s, Spending Per Head is likely to grow 15-20% in FY18 from the current Rs. 98 on synergies with PVR. PVR added 52 screens in FY16, taking its total number of screens to 516. It has guided 60-65 screen additions in FY17 and 65 screens in FY18, the integration with DT Cinemas adding another 32 screens. PVR has an impressive market share of 25 % of the total 2000 multiplex screens in India, with multiplex revenue share of 17-22 % in Bollywood movies and 30-35 % in Hollywood movies. After a dull FY15, FY16, PVR indeed managed to steal the show adorned with numerous blockbusters like Bajrangi Bhaijaan, Baahubali, Tanu Weds Manu Part 2, Avengers, Piku etc. The start in FY17E has been good with Jungle Book, Ki & Ka, HouseFull 3 and the pipeline remains strong with Sultan, Mohenjo Daro, Dishoom, etc. The DT Cinemas acquisition and its organic screen addition will help PVR clock 608 & 664 screens in FY17E & FY18E, respectively. PVR’s leadership in the multiplex space enables it to charge premium pricing. It is expected to report ATPs of Rs. 207 & Rs. 218 in FY17E & FY18E, respectively. The major growth in ATP would stem from DT Cinemas’ screens, which operate at a superior ATP i.e. at 15-20 % premium to that of PVR. Total footfalls are seen at 7.68 Cr & 8.43 Cr in FY17E & FY18E, respectively. This is expected to lead to 18.2 % CAGR in net ticketing revenues in FY16-18E to Rs. 1,418.0 crore. F&B revenues are expected to grow at 17.5 % CAGR in the same period aided by 4.7 % CAGR in SPH to Rs. 81.1 cr. 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. 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: 

PVR MILAP, Kandivali, Mumbai  

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. PVR was the pioneer in opening of the first multiplex in India and this 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 has an impressive market share of around 25 % including Cinemax of the total 1600 multiplex screens in the country. Recently on June 29, 2016, the Union Cabinet cleared the Model Shops and Establishment (Regulation of Employment and Conditions of Service) Bill, 2016. This law will allow shops, malls and cinema halls, among other establishments to run 24×7 throughout the year. It covers establishments employing 10 or more workers except manufacturing units and will provide freedom to operate 365 days with flexibility on timing to open and close. This is a very progressive move, as it would enable states to choose to keep shops and other such establishments open 24×7 all through the year. This would give substantial boost to employment generation and will also benefit the consumers in terms of more convenience and accessibility. However, approval does not mean it has become a law as the onus will be on the state governments to adopt the central government's proposed model Act for retailing. The act will also not go to the Parliament as it is just model legislation and is not binding on states. In March 2016, Maharashtra had issued a notification allowing shops and malls to remain open 365 days a year till 10 p.m. States including Karnataka and Andhra Pradesh have also come up with similar amendments to their shops and establishment rules. Modern retailers say Maharashtra, Karnataka and Andhra Pradesh have gone a step further and tried to create better working environment for modern retailing business by creating single-window clearance system for various licences required to operate stores. People in metro cities have long working hours and sometimes movie and entertainment becomes impossible and this law will enable the viewers to watch cinema whenever they like. For, PVR this would be benefited from the increased occupancies and rising Average Ticket Price (ATPs). Moreover, as disposable incomes increase, Foods & Beverages (F&B) spends are also expected to rise. In US, the ATP and SPH ratio is much higher. In India, the potential of this ratio to go higher is huge due to the unique concept of intervals. Colas and popcorns contribute 65 % of total F&B sales, which also have high margins. 
Moreover, a gradual recovery in economic activity will increase disposable incomes to keep growth buoyant. Footfalls at malls are high and Movies are still the number one format of entertainment in India. During the weekday/weekend footfalls split ratio is 50:50, and with new Shop ACT, PVR would be definitely be the winner. For PVR a 50-bp drop in the average occupancy ratio could affect the erosion in price of the stock by 5 % and similarly with this new act a 50 bps increase in occupancy ratio could result in increase in stock price by 5 %. On financial side, PVR Ltd.’s Q4FY16 consolidated revenue was better. ATP for Tier I cities were Rs. 200, Tier II cities Rs. 160 and Tier III cities Rs. 100. PVR initiated new idea like Launching organic popcorn, In house juice and coffee and merchandise for kids. As per management SPH to ATP can go as high as 80-100 %, E-commerce contribution remain in the range of 10 % to total ad revenue. PVR enjoys 30 % to 40 % ad rate premium over other operators. It plans to open up Director cut properties (premium offering) in Delhi-2, Banagalore-1, Pune-1 and Mumbai-1 Bluo- One more property to come up in Dec-16 in Jalandhar while no further expansion plans. Consolidated financials including DT cinema to come from Q2FY17. PVR is looking to screen addition of 60-65 screens/year. Already 8 screens are opened up in Q1FY17. For PVR, 50 % of incremental screen additions will happen in Tier 1 cities. PVR’s consolidated operating income grew 38 % y-o-y, but declined 18 % q-o-q, to Rs. 412.6 Cr. FY16 operating income grew 26.5 % to Rs. 1,873.6 Cr. EBITDA margin expanded 7.67 % y-o-y, but contracted 5.79 % q-o-q, to 11.3 %, due to better absorption of fixed costs. Rent as a percentage of sales contracted 4.27 % y-o-y to 18.4 %, and other expenses contracted 3.39 % y-o-y to 30.4 %. Following sturdy EBITDA growth and higher other income adjusted net loss narrowed to Rs. 7.3 Cr from Rs. 3.43 Cr in Q4FY15. FY16 adjusted PAT grew to Rs. 125.4 Cr from Rs. 14.9 Cr in FY15. Gross debt of PVR stood at Rs. 660 Cr as compared to Rs. 750 Cr in FY15, this includes Rs. 33.00 Cr of equipment related debt which was earlier part of operating lease and now accounted as finance lease. During the quarter, the ATP and footfalls improved 8 % and 26 % yoy, respectively. ATP for comparable properties improved 9 % yoy to Rs. 183. Occupancy stood at 28.7 % vs 27 % in Q4FY15. The company rolled out new 25 new screens during Q4FY16 and FY16 screen addition stood at 52. Movie production and distribution business stood at Rs. 22.8 Cr vs Rs. 13.6 in Q4FY15. Healthy content pipeline and new screen additions are expected to drive footfalls. Factors like new Modern Shop Establishment Act, improving multiplex penetration, increase content supply (both Bollywood and Regional) and improving content quality, would continue to drive footfalls. PVR’s premium location strategy, robust growth in F&B and advertisement, favouring macro factors like improving income levels and increase supply of content would continue to drive footfalls. Volatility in footfalls will remain with content performance, however, this get normalized over a longer period. At the current market price of Rs. 1024.25, the stock P/E ratio is at 38.08 x FY15E and 23.81 x FY16E respectively. PVR can post EPS of Rs. 30.30 for FY17E and Rs. 33.80 for FY18E. 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 FINANCIALSFY15FY16EFY17EFY18E
SALES ( Crs) 1,476.901,873.602,178.602,515.50
NET PROFIT (₹ Cr)13.30125.40140.90157.10
EPS () 3.2026.9030.3033.80
PE (x)261.9031.3027.7024.90
P/BV (x)7.804.303.703.30
EV/EBITDA (x)21.5013.7011.509.80
ROE (%) 2.90 18.5014.4014.20
ROCE (%)7.2015.2016.3015.80

As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % on every purchase(Why Strict stop loss of 8 % ?) -  Click Here

*As the author of this blog I disclose that I do hold  PVR LTD in my of the portfolios. 

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Disclaimer
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.  




As a Disclosures I Confirm that : 
I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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5 comments :

  1. A very insightful article on PVR. Thanks for sharing Bhavikk!

    ReplyDelete
  2. I read all the posts by Mr. Bhavikkshah and This is very Nice stock future tips !

    ReplyDelete
  3. Posted like a boss...

    Thanks for sharing :)

    Regards
    Stock Tips

    ReplyDelete
  4. Why do i think I had read PVR post before too....well nonetheless....this is totally worth it :)

    ReplyDelete
    Replies
    1. Hii shweta
      Yeah this is the follow up post as see more value still left in PVR... those who are holding from 300 levels will rejoice as PVR has more steam left..
      I am glad you found it worthy read
      Thank you
      Have a great day ahead

      Delete

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