HINDUSTAN UNILEVER LTD : SMALL ACTIONS, BIG DIFFERENCE !!!

Scrip Code: 500696 / HINDUNILVR

CMP:  Rs. 863.75; Market Cap: Rs. 1,86,898.93 Cr; 52 Week High/Low: Rs. 981.00 / Rs. 553.35 

Total Shares: 216,38,08,180 shares; Promoters : 145,44,12,858 shares –67.23 %; Total Public holding : 70,93,95,322 shares – 32.78 %; Book Value: Rs. 15.15; Face Value: Rs. 1.00; EPS: Rs. 19.94; Div: 1300.00 % ; P/E: 43.31 times; Ind. P/E: 58.10; EV/EBITDA: 31.97.

Total Debt: ZERO Cr; Enterprise Value: Rs. 1,86,278.32 Cr.

HINDUSTAN UNILEVER LTD: The Company was founded in 1931 and is based in Mumbai, India. The company was formerly known as Hindustan Lever Limited and changed its name to Hindustan Unilever Limited in 2007. Unilever Ltd on November 17, 1956, offered 5,57,000 shares of Rs. 10 each to the public at par. In February 1980, in order to reduce the Non- Resident holding in the company to 51 %, Unilever Ltd offered for sale of 42,39,523 equity shares of Rs. 10 each at a premium of Rs. 9.50 per share, this was out of its shareholding in the company. Hindustan Unilever Ltd have given lucrative bonuses in the past. Company first gave bonus in the year 1979 in the ration of 1 new share for every 3 held; then in 1983 in the ratio of 3 new for 5 held; then in 1987 in the ratio of 1 new for 1 held and lastly in the year 1991 in the ratio of 1 new for every 2 held. The company had last split the face value of its shares from Rs. 10 to Re. 1 in the year 2000. Hindustan Unilever Limited, is a Fast Moving Consumer Goods (FMCG) company providing home and personal care products; foods and beverages in India and internationally. The company operates in 7 business segments. The company offers soaps and detergents, including soaps, detergent bars, detergent powders, detergent liquids, and scourers; and personal products - such as oral care, skin care, hair care, deodorant, talcum powder, and color cosmetic products, as well as Ayush services. It also provides beverages - including tea and coffee; foods, such as atta (flour), salt, and bread; culinary products comprising tomato and fruit based products, and soups; and ice creams, such as ice creams and frozen desserts. In addition, the company offers chemicals, such as glycerin and fine chemicals; agri commodities; and water purifiers, as well as exports marine and leather products. HUL has over 35 brands spanning 20 distinct categories. Its portfolio of brands includes the brand names like - 3 Roses, Annapurna, Brooke Bond, Taaza, Bru, Kissan, Knorr, Kwality Wall’s, Lipton, Modern, Red Label, and Taj Mahal brand names; personal products under the Aviance, Axe, Breeze, Clear, Clinic Plus, Closeup, Dove, Fair & Lovely, Hamam, LEVER Ayush Therapy, Lakme, Lifebuoy, Liril 2000, Lux, Pears, Pepsodent, Pond's, Rexona Soap, Sunsilk, and Vaseline brand names; and home care products under the Active Wheel, Cif, Comfort, Domex, Rin, Sunlight, Surf Excel, and Vim brand names and water purifiers under the brand name Pureit. As on March 31, 2013, Company had over 35 brands spanning 20 distinct categories. From April 01, 2013, Aquagel Chemicals Pvt Ltd becomes a subsidiary of Hindustan Unilever Ltd. On July 04, 2013, the parent company Unilever Plc raised its stake in HUL from 52.48 % to 67.28 %, by acquiring 31,95,63,398 shares representing 14.784 % in HUL via open offer priced at Rs. 600 per share. The company is locally compared with ITC, Godrej Consumer, Dabur India, Colgate, Marico, Emami, Godrej Ind, P&G, Gillette India, Bajaj Corp, Jyothy Labs, Amar Remedies, JHS Svendgaard, GKB Ophthalmics and Globally compared with Associated British Foods Plc of London, Colgate-Palmolive Co of New York, Kimberly-Clark Corp of USA, Procter & Gamble Co of USA, Nestle S.A of Europe, Pepsico Inc of USA, Coca- Cola Co of USA, Mondelez International Inc of USA (earlier known as Kraft Foods Inc which acquired Cadbury’s), Heineken Nv of Amsterdam, Starbucks Corp of USA, McDonald’s Corp of USA, Yum! Brands Inc of USA, Danone of Paris, Asahi Group Hld Ltd of Japan, and Kerry Group of Dublin.

Investment Rationale: 

HINDUSTAN UNILEVER LTD is a play on consumption growth in India. Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods Company with a heritage of over 75 years in India and touches the lives of two out of three Indians. HUL has over 35 brands spanning 20 distinct categories such as soaps, detergents, shampoos, skin care, toothpastes, deodorants, cosmetics, tea, coffee, packaged foods, ice cream, and water purifiers, the Company is a part of the everyday life of millions of consumers across India. Its portfolio includes leading household brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Wall’s and Pureit. HUL is a subsidiary of Unilever, one of the world’s leading suppliers of fast moving consumer goods with strong local roots in more than 100 countries across the globe with annual sales of about €49.8 billion in 2013. Unilever has about 67.23 % shareholding in HUL. The Company has over 16,000 employees and has an annual turnover of around Rs. 28,019.13 Cr (financial year 2013 – 2014). 

                             The Indian Fast Moving Consumer Goods (FMCG) sector is the fourth largest in the Indian economy and has a market size of $1,310 Cr. This industry primarily includes the production, distribution and marketing of consumer packaged goods, that is those categories of products which are consumed at regular intervals. The FMCG market is set to treble $3,340 Cr in 2016. Penetration level as well as per capita consumption in most product categories like jams, toothpaste, skin care, hair wash etc in India is low indicating the untapped market potential. The Indian FMCG industry represents nearly 2.5 % of the country’s GDP. The industry has tripled in size in past 10 years and has grown at 17 % CAGR in the last 5 years driven by rising income levels, increasing urbanization, strong rural demand and favourable demographic trends. Food products and personal care together make up two-third of the sector’s revenues. Rural India accounts for more than 70 Cr consumers or 70 % of the Indian population and accounts for 50 % of the total FMCG market. With changing lifestyle and increasing consumer demand, the Indian FMCG market is expected to cross $8,000 Cr by 2026 in towns with population of up to 10 lakh.  With significant distribution scale, a portfolio of iconic brands and leading market share in many categories, we give India’s largest consumer products firm a narrow economic moat rating. Hindustan Unilever’s (HUL) products reach about 70 lakh outlets across India, the largest distribution network among peers. 19 of its brands generate annual turnover of over Rs. 500 Cr, or $ 8 Cr, each; while a good 95 % of products hold the two leading spots in their respective categories in terms of market share. To ensure that its dominance remains intact, the company is constantly investing in product innovation and supporting brands via the media. As the company innovates to bring new-to-India products to market and gains further scale benefits it is anticipate that HUL’s operating margins will expand over the coming decade, keeping returns above its cost of capital. HUL’s ability to innovate ahead of competition is truly remarkable. HUL has impressive ability to expand margins despite mounting competition in soap and detergents, which contributes 47 % to sales. This has been possible by launching new products such as fabric softeners, liquid detergents ahead of competitors. At the same time, its rural strategy of converting local villagers to salesmen has allowed them to access the interior regions of India, and sell them one rupee sachets of its products, keeping volumes buoyant. Personal products, contributes 28 % to sales & is a big opportunity for HUL to drastically improve its margins. The under-penetration characteristics of this category will allow HUL to leverage the breadth of its brands across price points, to lead adoption across affluent as well as poor households in India. Its recent launches of TRESemme and Tony & Guy brands, is a step in that direction to explore how far up the price band can be expanded in this luxury category. 

                                      Hindustan Unilever's (HUL) narrow economic moat stems from its portfolio of iconic brands--which allows the company to continue holding the top two spots in terms of market share across 95 % of its product categories, despite new entrants. In fact, eleven of the company's brands each drive over Rs. 1,000 Cr in annual sales, while another eight generate annual revenue in excess of Rs. 500 Cr each. Furthermore, HUL’s large retail distribution network which directly touches 32 lakhs outlets of India's estimated 85 lakhs retail outlets, and this is the largest coverage of universe in all of consumer India. Not only this, the secondary distribution of HUL’s products reaches over 80 % of all retail outlets in the country, making its products easily available across the country. HUL’s products play across the price points caters to the premium-mid-and-low end of the markets, and its premium brands are enjoying pricing power compared to its local brands of Marico in the body lotion category, and Godrej in soaps. Also when we give a snap shot look at HUL's 15 year financials, it turns out that it has been consistant in its returns. HUL's 15 years average of ROCE comes at 99.85 % & 15 year average of ROE comes at 89.67 %, its returns on invested capital (ROICs) which comes to an average 53 % over the next five years, well over its 10.9 % estimated cost of capital, supporting HUL's narrow economic moat. Here is HUL's 15 years financial snap shot - 

YEARS	EPS(Rs.)	P/E(x)	BV(Rs.)	Div/Sh(Rs.)	ROCE(%)	ROE(%)
1999	4.86	46.29	9.55	2.90	65.00	51.00
2000	5.95	34.68	11.30	3.50	66.70	52.67
2001	7.46	29.97	13.82	5.00	61.50	50.64
2002	8.04	22.60	16.62	5.16	58.05	48.38
2003	8.05	25.42	09.71	5.50	59.13	82.87
2004	5.44	26.37	09.50	5.00	45.08	57.23
2005	6.40	30.82	10.47	5.00	67.66	61.09
2006	8.41	25.74	12.34	6.00	65.89	68.14
2007	8.73	24.50	06.61	9.00	138.72	122.97
2008	11.46	20.72	09.45	7.50	135.55	120.30
2009	11.47	21.86	09.45	7.50	118.59	121.34
2010	10.10	23.63	11.84	6.50	106.78	85.25
2011	10.58	26.89	12.19	6.50	102.66	86.70
2012	12.46	32.89	16.25	7.50	95.40	76.61
2013	17.56	30.21	12.37	18.50	163.59	141.98
2014	17.88	32.01	15.15	13.00	147.56	118.01

Looking forward, it can be expected that HUL's free cash flow will roughly equals its annual earnings in the future, as it has done in the past. And, it can be expected that its ROIC's to remain above the Cost of Capital (COC) for at least the next decade, given its strong brands with pricing power, negative working capital cycle, and low acquisition strategy in India. HUL had already given two Buybacks till now, one was in October 2007 where HUL bought back 3,02,35,772 equity shares of Re. 1 each at an average price of Rs. 207.13, spending Rs. 626.27 Cr (approved not more than Rs. 230). The second buyback came in June 2010 where HUL bought back 2,28,83,204 equity shares of Re. 1 each at an average price of Rs. 273.25 spending Rs. 625.29 Cr (approved not more than Rs. 280). So, looking at its strong cash flows and with the Free Reserves of at Rs. 3,507.76 Cr (as on 31 March 2015), another buyback can be expected at around Rs. 700 per share, and company may utilize around Rs. 930 Cr for this buyback. A buyback improves many financial metrics like ROE & EPS. Both of these metrics have number of shares as denominator & buybacks reduces number of shares, thus increasing ROE & EPS. Goods and Service Tax (GST) will replace the multiple indirect taxes levied on FMCG sector with a uniform, simplified and single-pint taxation system and this is likely to be implemented soon & the benefits are likely to come in by the end of FY’16. The rate of GST on services is likely to be 16 % and on goods is proposed to be 20 %. A swift move to the proposed GST may reduce prices, bolstering consumption for FMCG products. While the rural market certainly offers a big attraction to marketers, it would be naïve to think that any company can enter the market without facing any problems and walk away with a sizable share. Distribution is the most important variable in the marketing plans of most consumer goods manufacturers, because managing such a massive sales and distribution network is in itself a huge task. This sector will continue to see growth as it depends on an ever-increasing internal market for consumption, and demand for these goods remains more or less constant, irrespective of recession or inflation. Hence this sector will grow, though it may not be a smooth growth path, due to the present world-wide economic slowdown, rising inflation and fall of the rupee. This sector will see good growth in the long run and hiring will continue to remain robust.

Outlook and Valuation:

HUL is the largest company in the FMCG industry, with market leadership in soaps, detergents and personal care categories. The company is a subsidiary of Anglo Dutch FMCG giant Unilever. It has over 35 brand spanning 20 distinct categories; the company is a part of the everyday life of millions of consumers across India. It has strong brands, with market leadership in most of the categories it operates in. It has a large distribution network with direct reach of over 1m retail outlets. The FMCG Industry is characterized by a well-established distribution network, low penetration levels, low operating cost, lower per capita consumption and intense competition between the organized and unorganized segments. In the last decade the FMCG sector has grown at an average of 11 % a year; in the last five years, annual growth accelerated to 17 % and last year it grew 5 %. Within this, urban growth was 4 % and rural growth was 8 % as per Ac Nielson MAT numbers. The rural India accounts for 70 % of India’s population with 56 % of National Income and commands 64 % of total expenditure and one third of the total savings. The Indian FMCG sector is the fourth largest sector in the Indian economy. Indian rural markets contribute around 45 % in HUL sales. 

                                                HUL did its first-of-its-kind deal with the music channel MTV- a part of Viacom 18 media group for five of its best-selling brands. The deal will help HUL to showcase its brands in six 60-minute movies, one aired every month on Viacom 18's youth and music platform. Each movie is directed by a Bollywood’s young directors like Anurag Basu for Sunsilk; Nikhil Advani for Ponds; Rohan Sippy for Tresemme; Abhinay Deo for Lakme; Anurag Kashyap & Shoojit Sircar for Close up. The agreement would include not just the movies themselves but interviews with directors, on-ground and on-air promotions of the films, airtime for ads etc. The Elements of these movies such as songs and trailers of the movies are likely to give a boost to HUL. The deal size is being pegged by industry insiders around Rs. 20-25 crore, all inclusive. With the launch of MTV Movies, HUL will redefine the way in which brands tell their stories to consumers. These will focus on communicating the brand purpose and build brand love. 

                                                  On Financial side HUL’s Performance was quite satisfactory. During Q4FY15, HUL’s Revenues jumped 8.2 % YoY to Rs. 7,680 Cr. Domestic consumer business grew by 8.9 % led by 6 % volume growth and 3 % jump in price realization. The Operating profit increased 22.3 % YoY to Rs. 1,320 Cr. The operating margins grew 2.00 % YoY to 17.2 % led by 2.70 % drop in Raw Material costs and 0.50 % decrease in other expenses and 0.30 % decline in employee cost. However, this decrease was partially offset by 1.50 % increases in Advt & Promotional spends. Net profit increased by 23.4 % YoY to Rs. 1,020 Cr. Excluding exceptional gains of Rs. 180 Cr related to property sale, the Adj. PAT increased 3.0 % YoY to Rs. 900 Cr. Other segments reported satisfactory performance during the quarter – Beverages segment reported 12.3 % YoY growth in revenues to Rs. 980 Cr and 11.4 % YoY jump in EBIT to Rs. 180 Cr and Processed Food recorded 13.6 % YoY increase in revenues to Rs. 480 Cr and 10.6 % growth in EBIT to Rs. 25.4 Cr. HUL’s all three detergent brands – Surf, Rin and Wheel have crossed Rs. 2,000 Cr mark. Lifebuoy and FAL also crossed Rs. 2,000 Cr mark. Magnum Ice-cream extended to Delhi and Kolkata & now has presence in 7 cities. One of the HUL's newest products Pureit achieved its break even. The company is witnessing the momentum coming back in Close Up. The business environment for HUL continues to be challenging with slowing growth being witnessed on both the value front and volume fronts. The overall competitive intensity has stepped up in various categories while the up-trending has come to a pause. The discretionary category which was outpacing the other category over a longer term has come to a pause, but the company believes it to be a short-term phenomenon. HUL has a robust product pipeline, and has a strong and lucrative personal products portfolio, and expanding distribution network. HUL is also a good play because it has a revenue growth from a medium to long term perspective, however due to increase in royalty, steep hike in tax rate and slowdown in discretionary segments remains an overhang on this stock. Depreciation in rupee impacts price of imported raw materials. The price war in HUL’s popular segments with new entrants entering the fray could hit the company hard. HUL pay’s rich dividends and one can hold this stock from a three five year perspective and focus on new product launches and market share gains in existing categories. Also there could be another buyback at around Rs. 700 per share. At current price of Rs. 863.75 the stock is trading at P/E of 41.92x FY16E on EPS of Rs. 20.60 and 34.96x FY17E on the EPS of Rs. 24.70. 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	FY15	FY16E	FY17E
SALES (₹ Crs)	28,019.10	30,734.10	34,442.60	39,602.50
NET PROFIT (₹ Cr)	3,555.30	3,837.20	4,456.80	5,342.90
EPS (₹)	16.40	17.70	20.60	24.70
PE (x)	54.50	50.50	43.40	36.20
P/BV (x)	59.10	52.00	47.90	38.10
EV/EBITDA (x)	42.20	37.40	30.70	25.80
ROE (%)	119.50	109.60	114.70	117.00
ROCE (%)	88.20	94.40	98.10	92.30

 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 Hindustan Unilever Ltd in my investment portfolio.

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Disclaimer: 

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RETURN ON CAPITAL

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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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.

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