ICICI Securities Says ‘Buy’ PVR Inox with a Target Price of ₹2250

ICICI Securities is optimistic about PVR Inox, giving it a “Buy” rating and setting a target price of ₹2250 in their report dated October 16, 2024.

Financial Performance Overview

PVR Inox reported revenues of ₹16.2 billion, a 36.2% increase from the previous quarter, but down 18.9% compared to last year. This figure was 6.3% higher than expected. Adjusted EBITDA was ₹1.8 billion, slightly above estimates. However, the company experienced a net loss of ₹121 million. Ticket sales revenue rose by 41.1% quarter-on-quarter to ₹8.4 billion, while food and beverage (F&B) revenue grew about 30.2% to ₹5.2 billion. Advertising revenue also increased by 17% to ₹1.1 billion.

Increased Attendance and Occupancy Rates

Admissions increased by 27.6% from the previous quarter, reaching 38.8 million. Occupancy rates improved by 540 bps to 25.7%. The average ticket price decreased to ₹257, a 6.9% drop year-on-year but a 9.4% rise from the previous quarter. F&B spending per person was ₹134, showing a 1.5% increase from the last quarter and remaining flat year-on-year.

Management Insights

Management highlighted that good quality content drives cinema attendance, noting the success of both new releases and re-releases of older films. They believe that the upcoming third quarter will be the best of FY25 due to a strong lineup of films and are optimistic about the second half of FY25. They expect significant growth in occupancy as more quality films are released in 2025 compared to previous years. With an occupancy rate of 25.7% in Q2FY25, they achieved an EBITDA margin of approximately 13%, which they anticipate will improve with rising occupancy levels.

Cost Control Measures

The management is actively working to control fixed costs, especially rentals. They are renegotiating rental agreements for underperforming properties in less successful malls. For FY26, they have guided a capital expenditure (capex) of ₹4-5 billion, focusing on renovating high-performing properties. Any free cash flow generated after meeting capex needs will be directed towards reducing debt.

Expansion Plans in Southern India

Management noted the growth of shopping malls in smaller cities in Southern India and is collaborating with developers to establish new theaters. Developers often cover a significant part of the capex and receive returns through rent or revenue-sharing. PVR Inox plans to open 80-120 new screens in FY26, with about 15% of these following the FOCO model (Franchise Owned Company Operated), 35-50% under an asset-light model, and the rest under structured lease agreements.

Re-Releases and Food Business Updates

The company finds profitability in re-releases as they help recover fixed costs and increase footfalls during quieter periods, accounting for around 6% of Q2FY25 admissions. Screen hire charges for these re-releases are lower than for new films, and although the average ticket price is also lower, gross margins remain high. The management plans to open a food court with Devyani International by December 2024 and is working with Zomato and Swiggy to enhance its food delivery service. They noted that spending per head remained flat due to “Cinema Lovers Day,” which concentrated 10% of the month’s total footfall on a single day, impacting overall spending. However, they are confident that spending will significantly increase next year.

Upcoming Content Pipeline for Q3FY25

Notable film releases in Q3FY25 include:

• Hindi: Bhool Bhulaiyaa 3, Singham Again, Chaava (Maddock), Baby John (Maddock)
• English: Venom, Gladiator 2, Mufasa: The Lion King, The Lord of The Rings (2024)
• Regional: Pushpa 2, Vettaiyan, Kanguva, Thandel, Devara: Part 1 (spillover)

Valuation and Risks

ICICI Securities maintains its target price of ₹2,250, valuing the company at 16 times its adjusted EBITDA for the upcoming year. Key risks include lower-than-expected performance of upcoming films and challenges in achieving merger synergies.