PVR: Merge and Surge

15 Mar 2023 , 10:33 AM

Recommendation: Buy

Target Price: Rs 1,851

The company has guided to Rs 2.25 billion annual EBITDA synergy over the next 12-24 months. On a call with investors, management stated that synergies would be led by F&B and ad revenue synergies, and cost savings from supply chain efficiencies. Analysts at IIFL Capital Services have marginally tweaked their estimates to incorporate these. Seemingly strong content pipeline for 2023 makes them build in a healthy recovery in footfalls for FY24 and beyond. While analysts at IIFL Capital Services are positive on the Exhibition industry, changing content preferences have resulted in higher volatility in box office (BO) performance.

Key takeaways from investor PPT and conference call

1) PVR-Inox intends to add 180-200 screens p.a., of which 40% will be in South India.

2) It sees SPH-to-ATP rising from the current 51% (~70% average for international chains highlights the headroom). 

3) There would be revenue synergies on box office, F&B and advertisement and cost synergies led by better economies of scale. 

4) Lower capex intensity and moving to a higher variable rental cost model would also result in long-term synergies.

Content volatility has made earnings less predictable

Though the Exhibition business has always been reliant on content quality, BO performance has become more volatile after the pandemic. While a slew of Bollywood releases with established stars in the past nine months have flattered to deceive, a seemingly strong content slate for the rest of 2023 looks promising. IIFL Capital Services’ estimates are based on 27.5% occupancy (well below ~32% in FY20, but higher than 25% in FY23). Their analysis suggests that every 100 basis points change in occupancy ratio swings ex-Ind AS 116 EBITDA/PAT by 9%/14%.

Tweaking estimates marginally; new TP Rs1,851

Analysts at IIFL Capital Services are building in Rs 1.5 billion/Rs 2.2 billion EBITDA synergy in FY24/25, higher than their earlier estimates. However, FY24/25 EPS estimates see 5%/2% cut due to higher capex. After removing Ind-AS 116, PVR trades at 11.4x 1YF EV/EBITDA and 25x PER, at 15-20% discount to its historical average. IIFL Capital Services’ March 2024 TP of Rs1,851 is based on 11.5x EV/EBITDA. Analysts at IIFL Capital Services believe that a string of two-to-three quarters of strong Bollywood BO performance could drive re-rating.