PVR Ltd: Buy

Multiplexes are faring well in the ongoing economic slump, with many blockbuster movie releases, rising ticket prices and audiences who are thronging the halls.

Investors can cash in on this trend by buying the stock of PVR, a large multiplex chain.

Increase in footfalls, ticket prices and enhanced spend on food and beverages by customers have helped PVR deliver healthy numbers in the last two years.

PVR’s buyout of Cinemax has added to its screens in lucrative cities such as Mumbai. It also has rationalised costs and helped PVR increase profits.

Occupancies in its theatres too are on the rise, and with a slew of mega releases featuring top movie stars set to hit the screen over the next few months, the trend may continue in the current fiscal. Advertising revenues too have improved.

In FY-13, the company’s revenues grew nearly 56 per cent over the previous fiscal to Rs 811 crore, while net profits rose by over 67 per cent to almost Rs 46 crore.

At Rs 351, the share trades at 16 times its likely per share earnings for FY-14. At this valuation level, the stock is not cheap; hence, investors can add it in phases in declines linked to the broader markets.

Combined strength

PVR and Cinemax together have a presence in 36 cities with a total screen count of 383.

While PVR is strong in the northern parts of the country, especially in the lucrative Delhi-NCR region, Cinemax is a key player in the western states, including in a large market in Mumbai. The synergies thus are quite significant.

The combined screen count is likely to go up to 437 by the year end, according to the management.

This presence across cities makes PVR the largest multiplex operator in the country.

After its acquisition of Cinemax, PVR, by capitalising on its own superior brand image, has been able to drive up the former’s ticket prices steadily.

The company has been able to enhance the pricing of its tickets substantially over the past one year.

The average ticket price (ATP) has risen over 8 per cent in the last one year to Rs 174.

The spend on food and beverages per head has increased more than 18 per cent to around Rs 57 currently.

For Cinemax too, the ATP increase has been healthy at 12 per cent to Rs 160. Similarly, spending on food and beverages rose over 16 per cent to Rs 50.

By sourcing goods as a combined entity, the company has been able to derive cost benefits due to increased scale.

Advertising , which accounts for a tenth of the total revenues, has been growing at a healthy pace, especially for PVR as a standalone entity.

For Cinemax too, the increase in advertising revenues has been good, although it is from a lower base.

Occupancies rise

For PVR, the occupancies at its screens are quite robust at 36 per cent levels. A slew of popular Hindi movies such as Yeh Jawani Hai Deewani , Jab Tak Hai Jaan and, more recently, BhaagMilkha Bhaag ensured that the audience patronised its screens in large numbers.

Over the next one year, many Hindi as well as regional language movies featuring top stars such as Rajinikanth, Shah Rukh Khan and Akshay Kumar are expected to release.

The list of films includes Chennai Express , Once Upon a time in Mumbai Again , Kochadaiyaan and Satyagraha .

These releases are expected to help PVR retain, if not enhance, occupancies in its screens.

Although the company did take on debt to complete the takeover of Cinemax, it may not be a large burden.

The interest coverage ratio for PVR is at around two times, indicating its ability to service debt comfortably.

Risks

Content risk is the biggest challenge that multiplexes such as PVR are faced with, as their fortunes tend to gyrate with the success or failure of films that are screened. This is especially so with films that the company co-produces.

The rising trend of producers pre-selling satellite rights to direct-to-home providers, thanks to this medium’s rapidly increasing penetration, to hedge themselves against content risk could turn away potential audience from cinema screens.

This phenomenon, though, is now more prevalent with the less successful movies.

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