Institutional Equities Film Exhibition Sector 2 May 2017 ‘Baahubali 2’ Augurs Well For FY18 Girish Pai ‘Baahubali 2’, which was released on 28 April 2017, has beaten all historical records in the Indian Head of Research film industry by clocking gross box office collection (GBOC, revenue prior to entertainment tax [email protected] being deducted) globally of Rs5.2bn over three days (Friday, Saturday and Sunday) based on media +91-22-3926 8017 reports. This includes domestic GBOC of ~Rs4bn and ~Rs1.2bn in overseas markets (of which 60% came from North America). This marks a tremendous start to FY18 for the two film exhibition players, PVR and Inox Leisure, which will benefit from the very high occupancy rate, higher ATP and also higher bargaining power vis-à-vis advertisers. Unlike FY17, which was impacted by insipid content (except for a late flourish from ‘Dangal’), we believe FY18 could be a great year with the start provided by ‘Baahubali 2’ and a slate of blockbusters that are likely to be released in the rest of FY18 (Exhibit 2 provides the slate of movies in FY18). We are positive on the film exhibition sector (see sector report Indian Film Exhibition Sector- Oligopolistic Business In Its Infancy; GST To Lift Margins And RoIC). We believe that: (1) Indian multiplex industry is an oligopoly (top four players control ~70% of screens) and will remain so as entry barriers are quite formidable and there are no substitutes. This industry structure will deliver steady revenue growth, and improve margins as well as RoIC over a long period of time. (2) PVR and Inox Leisure (the two large players) can deliver in the next 10 years at least 5%-10% volume/footfall growth (new screen-driven, attracting both single- screen and new generation customers) per year, respectively, with rise in realisation of 4%-5%. This will result in revenue CAGR of 10%-15% with PAT growing a tad faster. Structurally, expectations of a rise in relevant customer households which can afford this type of entertainment (currently at 8%- 11% of total, in our view) is going to drive demand. Same store/screen sales growth (SSG), in our view, will be realisation-led at 4%-6%. We believe that: (1) These players deserve premium valuations, considering the longevity of earnings compounding and good RoICs. (2) This industry, a highly taxed one, will benefit if the Goods and Services Tax or GST is levied in a benign manner and input tax credit is allowed. (3) Expensive M&A activity in the past five years and consequent weak return ratios are a small price to pay for achieving consolidation in a nascent industry. Over the long run, as organic growth predominates, the benefits of a better industry structure will far outweigh the price paid. We believe the stranglehold over retail real estate (and slow pace of its expansion) to be the key driver of positive industry dynamics. This will lead to a steady increase in capacity, solid pricing power and a high occupancy rate. The key risk to sector earnings tends to be the volatility induced by success of content. This is a very difficult thing to predict. Some movies may look great on paper, but may turn out to be duds at the box office. But increasingly the content risk is being Event Update Event lowered as Hollywood and regional movies (both in their original and dubbed versions) are able to command a greater share of GBOC. ‘Baahubali 2’ has a great weekend: Based on media reports, ‘Baahubali 2’ was released in 6,500 screens in India (4,000 for the Hindi version) and 2,500 overseas. This should give a strong start to FY18 earnings picture for PVR and Inox Leisure as in the comparable quarter of the previous year the content was not that strong (see Exhibit 2) and the movie is likely to generate GBOC of possibly Rs10bn - a first in Indian cinematic history (see details on other big blockbusters in Indian film industry in Exhibit 1). Originally made in Telugu, it has been dubbed into other Indian languages like Hindi, Tamil and Malayalam. The Hindi version of the movie had a domestic GBOC of Rs1.28bn, beating the previous high for a weekend release ‘Dangal’ (Rs1.07bn) The largest movies from a GBOC stand point in the Indian film industry have been ‘PK’ and ‘Dangal’ (both Aamir Khan starrers, Exhibit 1). PVR/Inox Leisure stocks are up about 57%/43%, respectively, since their demonetisation lows witnessed in January 2017. This performance has been driven by market’s expectation of a strong 4QFY17 (see our note Growth Story Expected To Continue) and also expectation from a strong film slate for FY18. Inox Leisure stock still has value: After the sharp run-up, we believe the Inox Leisure stock still has some decent upside left to achieve our target price. We believe that Inox Leisure has been trading at a significant discount to PVR in EV/EBITDA terms (56% discount based on our FY19E EBITDA estimate). On operational metrics terms based on 3QFY17 numbers, Inox Leisure’s ATP/SPH and advertisement revenue per screen were about 10%/25% and 50%, respectively, lower than that of PVR’s. Our view has been that such a large gap between the two, especially on SPH and advertisement revenue per screen, will be to some extent bridged in the coming years as the company tries to address issues connected with its location and advertisement revenue weakness (see our note Location and Advertisement Revenue Weaknesses Being Addressed). Also, based on our research of comparable properties in two cities in micro markets, we believe Inox Leisure and PVR have roughly the same Ticket prices and occupancies (see Exhibit 3) indicating that PVR’s lead is because it has more number of screens in the NCR and Mumbai territories, key consumption pockets in India. Institutional Equities Exhibit 1: Biggest blockbusters in Indian cinema and their lifetime GBOC Rank Film Worldwide gross collection (lifetime; Rsbn) Year of release 1 PK 7.92 2014 2 Dangal 7.30 2016 3 Baahubali: The Beginning 6.50 2015 4 Bajrangi Bhaijaan 6.26 2015 5 Dhoom 3 5.85 2013 6 Sultan 5.84 2016 7 Baahubali 2: The Conclusion** 5.40 2017 Source: Media, Nirmal Bang Institutional Equities Research 2 Film Exhibition Sector Institutional Equities Exhibit 2: Comparison of movie release slate of FY17 and FY18 FY17 FY18 Quarter Movie name Star cast Movie name Star Cast Ranbir Kapoor, Katrina Kaif, Sayani The Jungle Book Neel Sethi Jagga Jasoos Gupta, Adah Sharma Akshay Kumar, Abhishek Bachchan, Riteish Joe Manganiello, Demi Lovato, Housefull 3 Deshmukh, Jacqueline Fernandez, Lisa Smurfs: The lost village Jack Mc Bryer Haydon, Nargis Fakhri, Nikitin Dheer Vin Diesel, Jason Statham, Shah Rukh Khan, Waluscha de Fan Fast and Furious 8 Dwyne Johnson, Charlize Theron, Sousa, Sayani Gupta, Shriya Pilgaonkar Eva Mendes 1Q Prabhas, Rana Daggubati, Tamannaah Chris Evans, Sebastian Stan, Robert Captain America – Civil War Baahubali - The conclusion Bhatia, Anushka Shetty, Vivek Tiwari, Ramya Downey Jr. Krishnan, Nassar Sairat Akash Thosar, Rinku Rajguru Half Girlfriend Arjun Kapoor, Shraddha Kapoor Sachin -A Billion Dreams Sachin Tendulkar Toilet - Ek Prem Katha Akshay Kumar, Bhumi Pednekar Tubelight Salman Khan, Zhu Zhu, Sohail Khan Sultan Salman Khan, Anushka Sharma Mubarakan Anil & Arjun Kapoor Rustom Akshay Kumar Bhoomi Sanjay Dutt , Aditi Rao Hydari Pink Amitabh Bachchan, Tapsee Pannu Secret Superstar Aamir Khan, Zaira Wasim, Meher Vij Kabali Rajinikanth, Radhika Apte The Ring Shah Rukh Khan, Anushka Sharma 2Q Ajay Devgn, Emraan Hashmi, Vidyut Dishoom Varun Dhawan, John Abraham Baadshaho Jammwal, Ileana D'Cruz, Esha Gupta Simran Kangana Ranaut, Sohum Shah Varun Dhawan, Tapsee Pannu, Jacqueline Judwa 2 Fernandez Ajay Devgn, Parineeti Chopra, Neil Nitin Dangal Aamir Khan Golmaal Again Mukesh, Tabu, Shreyas Talpade, Tusshar Kapoor Ranbir Kapoor, Anushka Sharma, Ae Dil Hai Mushkil 2.0 Rajnikanth, Akshay Kumar, Amy Jackson Aishwarya Rai Bachchan 3Q Deepika Padukone, Shahid Kapoor, Ranveer M.S. Dhoni -The Untold Story Sushant Singh Rajput Padmavati Singh, Aditi Rao Hydari Dear Zindagi Shahrukh Khan, Alia Bhatt Tiger Zinda Hai Salman Khan, Katrina Kaif Ranbir Kapoor, Sonam Kapoor, Anushka Shivaay Ajay Devgn, Sayesha Dutt Sharma, Dia Mirza, Paresh Rawal, Manisha Koirala, Vicky Kaushal, Rohit Sharma Dangal Aamir Khan - - Shah Rukh Khan, Mahira Khan, Mohammed Raees Zeeshan Ayyub, Nawazuddin Siddiqui, Atul - - Kulkarni, Sunny Leone Hrithik Roshan, Yami Gautam, Ronit Kaabil - - Roy, Rohit Roy Narendra Jha Akshay Kumar, Huma Qureshi, Annu 4Q Jolly LLB 2 - - Kapoor Badrinath Ki dulhania Varun Dhawan, Alia Bhatt - - Amitabh Bachchan, Jackie Shroff, Manoj Sarkar 3 Bajpayee, Yami Gautam, Ronit Roy, Amit - - Sadh Anushka Sharma, Diljit Dosanjh, Suraj Phillauri - - Sharma Source: Media, Nirmal Bang Institutional Equities Research 3 Film Exhibition Sector Institutional Equities Exhibit 3: Performance of PVR and Inox Leisure screens in Mumbai and Delhi for ‘Baahubali 2’on the release date prime time show Mumbai Number of seats Ticket Price Seats Occupied Occupancy (%) WAATP Overall Occupancy 356 420 290 81% PVR Cinemas, Oberoi Mall, Goregaon (8:00) 435 84% 47 530 47 100% 234 410 174 74% INOX, Inorbit Mall, Malad (7:45) 417 82% 92 430 92 100% 80 410 30 38% PVR phoenix market city, Kurla (8:00) 427 81% 181 430 181 100% 18 850 18 100% 69 440 69 100% INOX R-City Ghatkopar (7:30) 469 67% 172 430 122 71% 53 410 0 0% Seats Delhi Number of seats Ticket Price Occupancy (%) WAATP Overall Occupancy Occupied PVR Naraina (7 PM) 335 320 335 100% 320 100% 55 350 55 100% Satyam Cineplex, Patel Nagar (7:46) 150 340 150 100% 337 100% 161 330 161 100% PVR 3CS, Delhi (7:30) 315 320 315 100% 315 100% 291 430 291 100% Satyam Nehru Place (7:45) 453 100% 12 1000 12 100% 294 350 294 100% INOX Eros One (7:15) 397 100% 23 1000 23 100% Source: Media, Nirmal Bang Institutional Equities Research 4 Film Exhibition Sector Institutional Equities Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang’s Institutional Equities Research desk.