Institutional Equities This page has been intentionally left blank Institutional Equities Indian Film Exhibition Sector 5 October 2016 Oligopolistic Business In Its Infancy; GST To Lift Margins And RoIC View: Positive We initiate coverage on Indian film exhibition sector (multiplexes) with a positive view and market capitalisation-weighted return expectation of 21% till September 2017. We believe PVR and Inox Leisure (the two largest players) can deliver in the next 10 years at least 5%-10% volume/footfall Girish Pai growth (new screen-driven, attracting both single-screen and new generation customers) with rise
[email protected] in realisation of 4%-5%. This will result in revenue CAGR of 10%-15% with PAT growing a tad faster. +91-22-3926 8017 Structurally, we expect increase in relevant customer households which can afford this type of entertainment (currently at 8%-11% of total, in our view) will drive demand. Same store/screen sales growth (SSG), in our view, will be realisation-led at 4%-6%. Over FY16-FY19E, we expect PVR and Inox (in aggregate) revenue/EBITDA/PAT CAGR of 18%/25%/29%. There will be a margin kicker provided by implementation of Goods and Services Tax or GST in FY18 (we assume 22% neutral rate). This industry, a highly taxed one, will benefit if GST rate is in the 18%-22% band. GST would have raised RoIC by ~300-350bps at 22% rate had it been implemented in FY16, ceteris paribus. What excites us is that, in its infancy itself, it 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.