Inox Leisure Ltd BUY

Inox Leisure Ltd BUY Target Price ₹340 CMP ₹ 246 Index Details Over the period FY12-16, PVR has outpaced INOX on several Sensex 28762 parameters, viz, operation and financial performance, service Nifty 8908 offering and brand recall. This has lead to a sharp re-rating of the Industry Entertainment former while INOX has been a laggard. However, we believe that this is set to change as INOX ups its ante to raise its game and play catch up with its peer. We expect revenues to grow at a Scrip Details CAGR of 20% over FY16-19 to Rs 1981cr driven by MktCap (` cr) 2362 BVPS (`) 64.3 1. Aggressive screen roll out to 600 screens (with an O/s Shares (Cr) 9.6 emphasis on premium properties) in FY19 from the current AvVol 1.6 449 screens. 52 Week H/L 292.9/184.1 Div Yield (%) 0.0 2. NBOCs to experience a brisk growth of 17.8% CAGR from Rs 731cr in FY16 to Rs 1,197 cr by FY19E. FVPS (`) 10.0 Shareholding Pattern 3. F&B revenues to grow at a faster clip of 22.3% CAGR from Shareholders % Rs 266cr in FY16 to Rs 485 cr in FY19E. Promoters 48.7 Public 51.3 4. Advertising revenues to grow at a CAGR of 25.4% to Rs 180 cr by FY19 from 91 cr clocked in FY16. Total 100.0 5. Margins are set to improve by 300bps to 19.4% in FY19 Inox vs. Sensex while profitability is expected to improve by 190bps to 8.6% POINTER STOCK 35000 300 in FY19. Albeit this is expected to dip first in FY17 before 30000 250 resuming its upward territory. 25000 200 20000 150 15000 We initiate coverage on INOX as a BUY with a price objective of 100 10000 Rs 340 representing a potential upside of ~38.2% over the next 18 5000 50 months from the CMP of Rs 246. We have used the DCF method 0 0 to value INOX. SENSEX Inox Key Financials (Rs in Cr) Net Adj EPS EPS RONW ROCE P/E EV/EBITDA Y/E Mar EBITDA Sales PAT (Rs) Growth (%) (%) (%) (x) (x) 2016 1159 190 77 8.4 281 12.2 12.8 29.1 13.7 2017E 1241 159 33 3.6 -57.6 5.4 8.8 68.7 16.8 2018E 1590 262 93 10.2 183.8 13.9 17.2 24.2 10.0 2019E 1981 384 170 18.6 82.7 21.2 26.4 13.3 6.6 st - 1 - Tuesday, 21 Feb, 2017 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Company background Incorporated in 1999, INOX Leisure Ltd is a diversification foray of the INOX Group into entertainment. Compared to its peers, INOX has established a strong presence in the cinema exhibition industry in a very short span of time. It operates 113 multiplexes and 425 screens in 57 cities making it a truly pan-Indian multiplex chain. INOX accounts for ~20% share of multiplex screens in India and 8% share of Box Office collections. Business Verticals of INOX Leisure Ltd (INOX) Source: INOX Leisure Ltd, Ventura Research INOX – 2nd largest incumbent player 600 No of screens 557 500 440 400 325 300 244 200 100 0 PVR INOX Carnival Cinepolis S Source: Ventura Research st - 2 - Tuesday,21 Feb, 2017 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Key Investment highlights Curtains down for single screens; multiplex revenues soar at the cost of the former Over the last decade, the film exhibition industry has undergone a metamorphosis since the onset of multiplexes in India. Many single screen cinemas have shut shop as they lost market share to multiplexes and the trend is only expected to accelerate given the unparalleled movie viewing experience that the latter have to offer. What went wrong with single screens No Operational Metrics Single Screen Multiplex Drawback of for single screens 1 Business model 1.a No of Screens 1 4 Lacks flexibility in showcasing different movies at a single point 1.b No of shows per day (in total) 4 20 in time Lower occupancy results in lower 2 Seating capacity per screen 500-1000 220-250 profits State-of-the- art equipment Lack of cinema viewing experience (high quality video and 3 Quality and Experience Outdated technology fails to have an impact in the audio), superior interiors, minds of customer ambience and service 4 Economics Tilted Pricing - no more a limiting factor 4.a ATP and F&B Low High due to rising disposable income & discretionary spends Low negotiating power with the Advertising & Other 4.b Low High advertisers as it lacks operating income geographical coverage Source: Ventura Research st - 3 - Tuesday,21 Feb, 2017 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Multiplexes quickly filling in for the vacancies created by single screen shut downs: 1) A whopping 3,308 single screens out of 9,308 (CY2010) have shut shop over the period CY 2010-16. CY2015 saw the largest decline of ~2,000 screens. During the same period CY2010-16, multiplex screens have more than doubled (grown at a brisk rate of 13% CAGR to 2,225 screens from 1,075 screens clocked in 2010). CY2015 saw a prolific jump in the number of screens with the highest ever 500+ screens being commissioned. 2) However, one encouraging trend is that the decline in the total count of screens has bottomed out and we should see an upward reversal in exhibition screens going forward. 3) Multiplexes which currently account for an ~ 27% market share of the screens, account for more than 40% of box office collections. 4) The share of multiplexes in total screens is expected to get a substantial leg up. This in turn should mean an increased share of box office collections. Multiple x screens - Future of cinema exhibition business No of screens U.S. ~40,547 No of screens 35,000 10,000 9,308 31,627 9,121 9,000 8,685 8,451 8,002 30,000 8,000 7,000 25,000 6,000 6,000 22,000 6,000 20,000 18,195 5,000 4,000 15,000 13,118 3,000 2,134 2,225 9,200 1,500 1,630 10,000 2,000 1,225 1,350 1,075 6,256 1,000 4,723 5,000 - 2010 2011 2012 2013 2014 2015 Oct-16 - CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 Single Screens Multiplexes w S Source :Inox Leisure Ltd Ventura Research S S Source :Inox Leisure Ltd Ventura Research st - 4 - Tuesday,21 Feb, 2017 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Significant Upside Potential: The Indian multiplex industry is dominated by 4 incumbent players (viz PVR Cinemas, INOX Leisure, Carnival Cinemas and Cinepolis) accounting for more than 70% of the multiplex screens in the country. The multiplex industry growth story is only expected to strengthen going ahead. We are optimistic of the prospects given that: 1. Opportunities galore for the multiplex film exhibition industry Amidst the glamor of Hollywood, people often forget about the world's other movie capital – India. India tops in terms of number of films produced each year and has the highest number of movie goers. Yet the box office collections, the multiplex screen density and average ticket price have trailed that of other countries. This presents a huge latent opportunity. st - 5 - Tuesday,21 Feb, 2017 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Although India has Yet has Highest number of film releases Lowest Box office collection Avg. ATP in $ Screens / Million population 16 150 126 14 12.8 120 12 10.9 10 90 8.1 8 61 60 6 5.5 4 26 2.7 30 23 2 6 0 0 Japan UK US China India US UK Japan China India S Source :Inox Leisure Ltd Ventura Research S Source :Inox Leisure Ltd Ventura Research nd 2 highest in footfalls globally Minuscule screen density Footfalls in mn 2500 2178 1930 2000 1500 1364 1000 500 176 171 0 China India US UK Japan S Source :Inox Leisure Ltd Ventura Research S Source :Inox Leisure Ltd Ventura Research Dwarf ATP changed S Source :Inox Leisure Ltd Ventura Research st - 6 - Tuesday,21 Feb, 2017 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. 2. Increasing Screen Density to unlocking value: We believe that improving the screen density is the one variable that can trigger a boom in the fortunes of the multiplex industry. A case in point is the prolific growth of the Chinese box office collections. In CY2009, China’s box office collections were less than that of India. Over a short span of 5 years it has overtaken most countries to be the second largest market (next only to the United States) driven by an aggressive thrust on screen additions (18 screens per day compared to 3 screens per month in India). In no-time, it is expected to surpass the U.S as the world’s largest cinema market. China’s cinema building frenzy Turnaround in Box office collection Domestic Box Office collection U.S. ~10.2 (in $bn ) 8 7.2 7 6 4.7 5 4 3.5 3 2.7 2.0 2 1.5 1.4 1.6 1.6 1.6 1.10.9 1.0 1.1 1 0 No of screens U.S.

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