INDIA DAILY September 13, 2017 India 12-Sep 1-day 1-mo 3-mo Sensex 32,159 0.9 3.0 3.4 Nifty 10,093 0.9 3.9 5.1 Contents Global/Regional indices Dow Jones 22,119 0.3 1.2 3.7 Special Reports Nasdaq Composite 6,454 0.3 3.2 3.8 Theme Report FTSE 7,401 (0.2) 1.2 (1.3) Nikkei 19,875 0.5 0.7 (0.1) Media: Box office trends - behemoths command BO, rest divide scraps Hang Seng 27,846 (0.4) 3.6 7.7 Key trends: Bollywood growth lopsided, regional/Hollywood strong, social KOSPI 2,368 0.1 2.1 (0.3) media impact grows Value traded – India Daily Alerts Cash (NSE+BSE) 318 297 298 Derivatives (NSE) 4,901 5,712 3,317 Company alerts Deri. open interest 3,574 3,498 3,301 Gujarat Pipavav Port: LPG the lone silver lining Pipavav well-placed to become strategic hub for LPG imports on the west Forex/money market coast Change, basis points Volatility in container trade may continue 12-Sep 1-day 1-mo 3-mo Rs/US$ 64.0 (2) (13) (39) Pricing support from improving financials of shipping lines unlikely to go to 10yr govt bond, % 6.9 1 2 2 Pipavav Net investment (US$ mn) Revise estimates to incorporate the LPG opportunity; retain REDUCE 11-Sep MTD CYTD FIIs (65) (617) 6,546 Sector alerts MFs 57 352 10,467 Energy: Weakness in industrial fuels; base affects auto fuels Top movers Petroleum demand declines 6.1% yoy in August, staying flat in 5MFY18 Change, % Best performers 12-Sep 1-day 1-mo 3-mo Subdued off-take of industrial fuels likely reflecting impact from GST JPA IN Equity 21.9 0.2 3.1 64.0 implementation RCAPT IN Equity 775.3 0.2 23.3 57.3 Auto fuels demand declines in August impacted by higher inventory-led UT IN Equity 7.6 0.0 1.3 46.6 base of last year VEDL IN Equity 330.7 0.3 18.5 38.7 JSTL IN Equity 269.7 1.4 20.7 36.4 LPG growth remains strong as kerosene declines; other petroleum products Worst performers gain pace HDIL IN Equity 65.9 1.0 12.7 (23.1) Economy alerts TTMT/A IN Equity 222.1 3.4 (0.5) (20.1) DRRD IN Equity 2165.8 0.3 7.7 (17.5) Economy: Inflation continues to inch up LPC IN Equity 981.9 0.5 4.4 (16.8) August CPI inflation accelerates as vegetable prices continue to play BOB IN Equity 141.9 3.2 (0.3) (16.4) spoilsport Core CPI inflation inches higher on the back of housing segment (7CPC HRA impact) IIP growth yet to pick up Inflation trend supports RBI staying put for rest of FY2018 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. ATTRACTIVE Media India SEPTEMBER 13, 2017 THEME BSE-30: 32,159 Box office trends—behemoths command BO, rest divide scraps. Our analysis of box office (BO) performance of 300+ movies spanning 10 years reveals several key trends—(1) lopsided growth of Bollywood BO; top 5 movies are growing at 10%+ CAGR while growth for the next 20 movies has remained broadly flat for the past five years, (2) negative impact of social media outweighs its positive influence, and (3) Hollywood and regional BO is growing steadily for multiplexes and offer promise. Content volatility is here to stay and needs to be priced into valuations of multiplex stocks. We like PVR (REDUCE) but the stock is fully priced. Key trends: Bollywood growth lopsided, regional/Hollywood strong, social media impact grows Bollywood box office—winners-take-all, belly and tail drag growth. Aggregate net domestic box office collection (NBOC) for the top-5 Bollywood (Hindi) movies is set to grow at 13%+ CAGR over CY2012-17E whereas that for the ‘belly’ (movies #6-25) and the ‘tail’ (balance 200 movies) has nearly stopped growing. This implies that footfalls of the non-top-5 Hindi movies have declined over CY2012-17E at an industry level, assuming 5% CAGR in ticket prices. We would attribute this trend to (1) moviegoers watching fewer films in theatres, partly due to shorter windows between theatrical and TV/digital releases (four weeks in a few cases) and high inflation in ticket/F&B prices, and (2) piracy. Bollywood contributes about 40% to the box office in India and accounts for 55-60% of PVR’s ticketing revenues. About 200-250 Hindi movies are released every year. Of these, the top 5/25/50 contribute about 35%/80%/95% to Hindi box office. In our view, the long-term outlook for multiplexes is contingent on broad-based growth (across top-50 movies driven by footfalls + pricing) of Bollywood box office (Exhibits 1-3). Social media a big persuader. BO collections of Salman Khan’s ‘Tubelight’ and Shahrukh Khan’s ‘Jab Harry met Sejal’ collapsed within 3-4 days of release. This may suggest the increasing influence of social media—adverse reviews appear to accelerate the fall in daily BO collections, notwithstanding star power. We note that the BO of a movie depends on a number of variables (release date, competition, popularity of trailer/songs, etc.). Given this, it is difficult to accurately calculate the net impact of social media. Our analysis indicates that adverse reviews on social media potentially reduce the BO collection of a movie by at least 10%, if not more (Exhibits 4-5). Word of mouth influenced movie performance even in the past. Its impact is now amplified by social media. We do note that good reviews boost the BO performance of movies. However, at present, the negative impact of adverse reviews seems to be a tad higher than the positive influence of good reviews. This trend needs to be watched. Hollywood and regional BO are bright spots. Contribution of English and regional movies to PVR’s ticket sales increased to 42% in FY2017 from 27% in FY2013. These genres are growing faster than Bollywood for PVR. We expect this trend to continue. The pace of growth depends on (1) regional—screen additions in southern markets, and (2) Hollywood— Jaykumar Doshi continued rise in consumption of English content and success of Hollywood (Exhibits 7-11). A few encouraging trends. The success of ‘Bahubali 2’ would encourage Indian film industry to produce more crossover films (movies that cut across states/regions). The industry is already attempting it with ‘Robot 2’ (January 2018E). Success of Indian films in overseas markets (e.g. ‘Dangal’ grossed ₹12.4 bn in China; about 2.7X that in India) would enable higher investments in movies in the medium-to-long term. Finally, we believe Bollywood is yet to fully exploit the potential and power of sequels. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Media India Content volatility is here to stay and needs to be priced into valuations The above trends (#1 and #2) suggest that the film/exhibition industry faces a few structural challenges that may not be addressed in the near term. Additionally, we note that Bollywood is heavily dependent on the three Khans (Salman, Aamir and Shahrukh) and Akshay Kumar all of whom are more than 50 years old. The next-gen actors have shown some promise but are yet to deliver with consistence. Hollywood and regional movies would aid BO growth of multiplexes while Bollywood can be a drag. We believe volatility in content (periodic disappointments) is a characteristic of this business and it needs to be captured in valuations. We model 7% CAGR in domestic BO revenues over FY2017-20E for the industry and 13% CAGR for PVR driven by market share gains. We like PVR but prefer to wait for a better entry point, REDUCE We like PVR for its premium location presence and branding and leadership in organic growth, monetization of footfalls (F&B/ad revenues) and profitability. However, the stock is a tad expensive. Our FY2019-20E forecast for PVR builds normalized occupancy of 32.5% to factor content volatility. We value PVR at 12X EV/EBITDA and TP of ₹1,225. Key observations and thoughts Bollywood—big-star blockbuster movies keep getting bigger NBOC of top 5, next 20 (movie # 6 to 25) and top 25 Bollywood movies grew at CAGR of 16%, 19% and 18% over CY2007-12. We note that NBOC of movie #6 to 25 has remained flat over CY2012-17E; likely 5-6% CAGR in top 25 movies will be driven by 13% CAGR of top 5 movies (Exhibit 1). Clearly, flat NBOC despite about 5% inflation in ticket price suggests that aggregate footfalls (admits) of Bollywood movies other than the top 5 has declined for the industry. We note that the number of Bollywood movies with NBOC of ₹1 bn+ has remained flattish at 8-10 per year over the past five years (Exhibit 2). Growth driven by increase in ticket prices + market share gains of multiplexes At a broader level, a bulk of the BO growth for the industry is driven by the increase in average ticket price (ATP; about 5% CAGR for PVR) and market share gain by multiplexes (ATP > ₹150) from single screens (ATP < ₹100). As per industry estimates, footfalls of the most recent Bollywood blockbuster hit, Dangal, was about 37 mn as compared to previous bests of about 50 mn for Gadar (2001) and about 48 mn of Dilwale Dulhania Le Jaayenge (1995).