Inox Leisure Transient headwind Stock Update Stock

We interacted with Mr. Kailash Gupta, Chief Financial Officer, Inox Leisure Sector: Consumer Discretionary Limited (IIL), to discuss the likely impact of COVID-19 on occupancy rate, Company Update advertising revenue, movie releases and cost-reduction strategies in the current environment. Change The multiplex industry in India has started feeling the heat of the outbreak Reco: Buy of COVID-19 (Coronavirus) as (1) some state/UT governments have declared  the shutdown of movie theatres, (2) deferment of movie releases, (3) sharp CMP: Rs. 317 drop in footfalls due to virus scare, and (4) delay in content creation owing to travel restrictions. The government in Delhi, Kerala, Odisha and Jammu & Price Target: Rs. 400 â Kashmir has already asked movie theatres to remain closed till March 31st á Upgrade  No change â Downgrade 2020, which could potentially result into the closure of movie theatres in others states (including Maharashtra, Karnataka, Uttar Pradesh and among others) and extension of closure as well, owing to delay in containment of Company details the virus. Along with Hollywood movies (No Time To Die and Peter Rabbit 2: The Runaway), the release dates of super-starrer Bollywood movies Market cap: Rs. 3,259 cr (Sooryavanshi and Marakkar Lion of the Arabian Sea) have already been rescheduled due to the outburst of Coronavirus. Though we expected there 52-week high/low: Rs. 511/249 would be pick-up in occupancy rate in March (healthy content pipeline) post muted show in February, the overall occupancy level across movie theatres NSE volume: (No of 3.0 lakh has dropped to around 20% level over the past one week due to virus scare. shares) Effectively, the current environment is likely to have an adverse impact on the earnings of ILL in Q4FY2020E. However, management highlighted BSE code: 532706 that it would invoke force majeure clause in rent/security/housekeeping agreements, which would result in 60-70% saving in fixed costs during such NSE code: INOXLEISUR tenure. With uncertainties of containment of Coronavirus, rescheduling of movie releases and temporary shutdown of movie production owing Sharekhan code: INOXLEISUR to travel restriction, we believe the adverse impact of COVID-19 on the company is likely to continue till 1HFY2021E. Free float: (No of 4.95 cr shares) Our Call Valuation: Stock remains attractive despite cut in earnings, maintain Buy: We have cut our earnings estimates by 10%/6%/5% for FY2020E/FY2021E/ Shareholding (%) FY2022E due to lower occupancy and ancillary impact on advertising revenue and have reduced our target multiple. Though we believe this issue Promoters 52 is transient in nature, the exact impact of COVID-19 is uncertain at this point of time. However, in the long term, we remain positive on the stock, given DII 22 its strong balance sheet (net debt free) and potential for healthy earnings growth considering India’s movie-goers appetite for movies. The stock of ILL FII 11 has corrected around 36% from its peak in the past one month and trades at 44% discount to one-year forward PE (five-year average), which offers an Others 15 attractive opportunity to enter for long-term investors. Hence, we maintain our Buy rating on ILL with a revised PT of Rs. 400. Key Risks Price chart Delay in screen additions and deterioration of content quality might affect 625 footfalls and advertisement revenue growth rates. 525

425

325 Valuation Rs cr 225 Particulars FY18 FY19 FY20E FY21E FY22E 125 Revenue 1,348.1 1,692.2 1,922.9 2,238.8 2,568.9 19 20 19 19 19 - - - - - OPM (%) 15.6 18.3 30.2 32.1 32.3 Jun Mar Mar Dec Sep Adjusted PAT 123.2 138.5 121.5 169.6 208.6 % y-o-y growth 302.5 12.4 -12.2 39.5 23.0 Price performance Adjusted EPS (Rs.) 12.8 14.1 12.3 17.2 21.2 P/E (x) 24.7 22.5 25.7 18.4 15.0 (%) 1m 3m 6m 12m P/B (x) 4.3 3.0 3.9 3.2 2.6 Absolute -31.9 -13.6 7.4 2.6 EV/EBITDA (x) 15.7 10.7 5.4 4.0 3.0 RoNW (%) 18.4 14.4 16.4 18.6 18.6 Relative to -13.8 6.8 21.3 16.1 RoCE (%) 13.4 20.9 19.6 14.3 15.7 Sensex Source: Company; Sharekhan estimates SharekhanSharekhan Research,Research, BloombergBloomberg *Treasury shares excluded while calculating EPS; *FY2020E/FY2021E/FY2022E numbers are based on Ind AS 116 and lower corporate tax rate for FY2021E/FY2022E.

March 13, 2020 12 Stock Update Stock

COVID-19 scare hits multiplex business: The outbreak of COVID-19 (Coronavirus) in China and its spread out to other geographies including India has been scary and is likely to have an adverse impact on the global economy in the short to medium term. Few cities have been locked down world over, wherein the impact has been severe. Moreover, large events such as business conferences, business exhibitions, trade fairs or sporting events, wherein people gather in huge numbers are being cancelled or rescheduled. Even in India, the situation is getting worse with the government in Delhi, Kerala, Odisha and Jammu & Kashmir ordering movie theatres to remain shut till March 31, 2020. We believe other states (most likely Maharashtra, Karnataka, Uttar Pradesh and among others) may follow the same with the delay in the containment of the virus. This would have an adverse impact on Q4FY2020E performance, which we believe is likely to spill over to 1HFY2021E as well.

States having more than 5% properties and screens contribution Region State Property Screens Total Confirmed cases of COVID-19 West Maharashtra 27 129 11 North Uttar Pradesh 11 44 11 South Karnataka 12 49 5 North Rajasthan 13 47 3 South Andhra Pradesh 8 33 1 East West Bengal 15 59 0 West Gujarat 20 81 0 Source: Sharekhan Research, www.mohfw.gov.in Occupancy level takes a toll, content pipeline sees postponement: Management highlighted that occupancy level currently stands at 20% (over the past one week), which has seen a sharp decline from 28% in 9MFY2020. We believe it may go down further as various state governments (Delhi, Kerala, Odisha and Jammu & Kashmir) have ordered movie theatres to remain shut till March 31, 2020, and other states may follow soon. Ongoing films such as Thappad, Baaghi 3 and Shubh Mangal Zyada Saavdhaan have been impacted as there has been a sharp decline in footfalls. Angrezi Medium, which released today, saw a poor response as it is likely that most theatres might remain almost vacant. Owing to the closure of movie theatres in the above states (note that Maharashtra and Delhi contribute a significant portion of revenue to total multiplex revenue) and declining occupancy in others, it is likely that the release of new films might get postponed and rescheduled. The release of, Bollywood movie, Sooryavanshi has been pushed to Q1FY2021E, South Indian film Marakkar Lion of the Arabian Sea, starring Mohanlal, has also been deferred, release of a Hollywood film – A Quiet Place 2 – has also been put on hold. The ripple down impact will be seen on movies slated to be released in the upcoming months, such as Kabir Khan’s ‘83 among others, which will also get deferred and rescheduled. Box office collection in Q4FY2020 has been adversely impacted as there were no Rs. 100 crore+ movie releases during February 2020 as compared to two movies in February 2019 (see tables below). Similarly, three movies delivered Rs. 75 crore+ box office collection in March 2019 against one movie in March 2020. However, we do not see any big starrer movie release in the remaining period of March owing to COVID-19 crisis. Movie releases during Q4FY2020 Date Movies Box office collection (Rs. crore) 27-Dec-19 Good Newwz 201.1 (>100 crore during Q4FY20) 09-Jan-20 Darbar 149.9 10-Jan-20 – The Unsung Warrior 272.0 12-Jan-20 Ala Vaikunthapurramuloo 163.0 06-Mar-20 Baaghi 3 90.0 Source: Sharekhan Research

Movie releases during Q4FY2019 Date Movies Box office collection (Rs. crore) 25-Jan-19 Manikarnika The Queen Of Jhansi 100.5 11-Jan-19 URI 243.2 22-Feb-19 Total 149.7 14-Feb-19 Gully Boy 134.3 21-Mar-19 Kesari 151.5 08-Mar-19 Badla 82.4 01-Mar-19 Luka Chuppi 83.5 Source: Sharekhan Research

March 13, 2020 13 Stock Update Stock

Food & beverage and advertisement revenue stream to get impacted adversely: Owing to lower footfalls, the food and beverage revenue stream is likely to get impacted adversely. This is likely to put pressure on margins as fixed overheads would largely remain under absorbed. Moreover, revenue from advertising is expected to remain soft as the advertiser will not spend on advertisement at a time when i) state governments are seeking closure of theatres, ii) footfalls are expected to be low in states where theatres are showcasing films currently and ii) release of movies is deferred or rescheduled. To sum up, performance in Q4FY2020E is likely to be impacted adversely owing to poor content pipeline in February and spread of Coronavirus and its related fear factor drying up occupancy levels in March. While the content pipeline seems to be robust going forward, the time frame till which the coronavirus factor will remain is to be monitored as the release of movies will depend on suppression of the virus. Low occupancy level: ILL has a pan-India presence with 614 screens across 146 properties in 68 cities. The company is highly concentrated in the western region, with 41% screens and 38% properties. The remaining regions, i.e. North, South and East, have a contribution of 23%, 22% and 14% in screens and 26%, 20% and 16% in properties, respectively. Out of a total 19 states, presence in nearly 7 states contributes 73% of the properties and 70% of the screens. Out of seven states, Maharashtra, Delhi and Uttar Pradesh contribute maximum revenue to the company’s total revenue. The exhibits below show lower occupancy level of ILL’s properties in the prominent places of key states.

Angrezi Medium – Inorbit Mall, Mumbai, Maharashtra – March 14, 2020, Saturday 7:55 p.m. show

Source: Company Data; Sharekhan Research

Baaghi 3 – Umrao Mall, Lucknow, Uttar Pradesh –March 14, 2020, Saturday 7:20 p.m. show

Source: Company Data; Sharekhan Research March 13, 2020 14 Stock Update Stock

Financials in charts

Revenue growing at a healthy pace Healthy margin profile (Ind AS impact from FY2020E)

3,000 30 80 2,569 66.4 66.6 67.2 67.1 66.9 66.5 66.5 70 2,500 2,239 25 60 1,923 2,000 1,692 20 50 1,500 1,348 15 40 31.1 32.7 32.9 1,161 1,238 30 1,000 10 17.0 16.7 19.2 20 14.0 7.0 9.1 8.2 6.3 7.6 8.1 500 5 10 2.5

0 0 0 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Revenue (Rs crores) Growth (%) Gross Margin (%) EBITDA Margin (%) PAT Margin (%) Source: Company Data; Sharekhan Research Source: Company Data; Sharekhan Research

RoCE to moderate due to Ind AS 116 RoE to improve marginally

25.0 18.4 18.6 18.6 20.9 20.0 16.4 15.5 20.0 14.4 16.3 15.7 15.0 13.4 14.3 15.0 13.0 10.0 10.0 7.9 5.5 5.0 5.0

- - FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY16 FY17 FY18 FY19 FY20E FY21E FY22E

RoCE (%) RoE (%) Source: Company Data; Sharekhan Research Source: Company Data; Sharekhan Research

Q1 seasonally a strong quarter Price hikes usually seen in Q1

20 40 250 206 204 199 199 198 196 195

31 31 31 193 193 189

30 30 186 183 29 182 16 26 26 27 26 27 27 32 200 174 174 25 24 25 12 24 150 81 81 79 76 74 73 73

100 70 8 16 67 65 65 65 63 61 59

4 8 50 15.5 12.7 12.5 13.0 15.8 12.8 12.1 12.6 15.6 13.7 15.3 18.0 17.3 19.0 16.9 0 0 - Q1FY17 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q1FY17 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q3FY19 Q4FY19 Q2FY20 Q3FY20 Q2FY19 Q2FY19 Q1FY20

Quarter footfalls (mn) Occupancy (%) Average Ticket Price (Rs) Spend Per Head (Rs) Source: Company Data; Sharekhan Research Source: Company Data; Sharekhan Research

March 13, 2020 15 Stock Update Stock

Outlook Structural story remains intact, expect weakness to remain in the near term: We believe the impact of COVID-19 is transient in nature, though the exact impact of the same on the multiplex business is uncertain given lack of clarity on its magnitude and timeline when it would be contained. Hence, we believe the impact on the multiplex business could continue till 1HFY2021E, given the postponement of movie releases and lower advertising spending by advertisers. However, in the long term, the company’s strategies to increase footfalls (loyalty programme, non-movies content, enhancing experience of cinema goers, etc.), increasing footfall monetisation efforts and better improving operating metrics are expected to bode well for the company. Further, management has maintained its guidance on the pace of screen addition, i.e. 80 screens (4-5 properties with ~20 screens to be added in Delhi-NCR region) will be added in FY2021E as compared to expectation of 70 screens during FY2020E. Valuation Stock remains attractive despite cut in earnings, maintain Buy: We have cut our earnings estimates by 10%/6%/5% for FY2020E/FY2021E/FY2022E due to lower occupancy and ancillary impact on advertising revenue and have reduced our target multiple. Though we believe this issue is transient in nature, the exact impact of COVID-19 is uncertain at this point of time. However, in the long term, we remain Positive on the stock, given its strong balance sheet (net-debt free) and potential for healthy earnings growth, considering India’s movie-goers appetite for movies. The stock of ILL has corrected around 36% from its peak in the past one month and trades at 44% discount to one-year forward PE (five-year average), which offers an attractive opportunity to enter for long-term investors. Hence, we maintain our Buy rating on ILL with a revised PT of Rs. 400.

One-year forward P/E (x) band

70

60

50

40

P/E (x) 30

20

10

0 12 13 18 19 12 18 11 19 14 15 16 17 15 16 16 17 11 12 17 18 19 13 14 11 12 13 18 19 14 15 15 16 20 13 14 ------Jul Jul Jul Jul Jan Jan Jan Jan Jun Jun Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Feb Feb Sep Sep Feb Dec Dec Aug Aug Nov Nov Mar Mar May May

P/E (x) Avg. P/E (x)

Source: Sharekhan Research

Peer valuation CMP O/S P/E (x) EV/EBIDTA (x) P/BV (x) RoE (%) MCAP Particulars (Rs / Shares (Rs Cr) Share) (Cr) FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E Inox Leisure 317 10.3 3,259 25.7 18.4 5.4 4.0 3.9 3.2 16.4 18.6 PVR* 1306 5.1 6,707 34.9 25.3 11.2 9.7 4.4 3.8 12.8 15.4 Source: Sharekhan Research, *Bloomberg estimates

March 13, 2020 16 Stock Update Stock

About company Incorporated in 1999, ILL is one of the largest multiplex operators in India. The company currently operates 146 properties (614 screens and over 1.42 lakhs seats) located in 68 cities across India. ILL is the only multiplex operator having a diverse presence across India. The company accounts for 20% share of multiplex screens in India and ~11% share of domestic box office collections.

Investment theme ILL has aggressively scaled up through organic and inorganic expansion over the past decade, growing from two properties to 146 properties – 614 screens – at present, on an average adding eight screens every quarter since inception. The ILL mega show is supported by improving content quality in the Indian mainstream and regional cinema, with its movies regularly hitting the Rs. 100 crore or Rs. 200 crore box office collection mark. Management expects to deliver a strong performance going forward based on healthy footfalls due to property additions coupled with higher footfall monetisation efforts and a strong content pipeline.

Key Risks Delay in screen additions and a drop in the quality of content might impact footfalls and advertisement revenue growth rates. Inability to take adequate price hikes at the right time might impact margins in the F&B segment on account of rising input cost.

Additional Data

Key management personnel Pavan Jain Non-Executive - Non Independent Chairperson Vivek Jain Non-Executive - Non Independent Director Siddharth Jain Non-Executive - Non Independent Director Deepak Asher Non-Executive - Non Independent Director Alok Tandon Chief Executive Officer Kailash B Gupta Chief Financial Officer Parthasarathy Iyengar Company Secretary & Compliance Officer Source: Company Website

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 HDFC Asset Management Co Ltd 7.13 2 Sundaram Asset Management Co Ltd 4.10 3 Aditya Birla Sun Life Trustee Co P 2.62 4 DSP Investment Managers Pvt Ltd 2.03 5 Aditya Birla Sun Life Asset Manage 1.75 6 TAIYO GREATER IN FUND LTD 1.66 7 Franklin Resources Inc 1.50 8 ICICI Prudential Asset Management 1.47 9 BNP Paribas Asset Management India 1.35 10 Reliance Capital Trustee Co Ltd 1.28 Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

March 13, 2020 17 Know more about our products and services

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