Visit us at www.sharekhan.com September 28, 2015 INOX Leisure Reco: Buy Poised to script a blockbuster CMP: Rs219 Company details Key points Making of a mega show: INOX Leisure Ltd (ILL), India’s second largest multiplex Price target: Rs307 operator with 101 properties and 393 screens across 55 cities accounting for about Market cap: Rs2,112 cr 23% of the multiplex screens in India, is scripting a blockbuster growth story through a mix of inorganic (acquisition of Satyam Cineplexes that provides it a foothold in 52-week high/low: Rs270/145 the lucrative northern market) and aggressive organic expansion plan to scale up NSE volume: 2.4 lakh the total screen count to 565-570 screens over the next 24-30 months. In addition (No of shares) to its aggressive push in the northern region (where it aims to challenge the BSE code: 532706 dominance of PVR Cinemas), ILL is leveraging on its strong brand and balance sheet to increase its presence in tier-II and tier-III towns where the multiplex phenomenon NSE code: INOXLEISUR is gradually catching the mindshare, in line with India’s inclusive growth story. Sharekhan code: INOXLEISUR Top-class casting and script in place: The ILL mega show is supported by an improving Free float: 5.0 cr content quality in the Indian mainstream and regional cinema with its movies regularly (No of shares) hitting the Rs100-crore or Rs200-crore box-office collection mark. The acceptance of Hollywood movies has also provided another source of quality saleable content for Shareholding pattern multiplexes not just in metros but across cities in the country. The economic conditions are also turning favourable to support a robust uptick in urban discretionary spending, given the sharp moderation in inflation and a steady job market. The urban leisure consumption would also get a boost from the expected 25-30% hike in salaries of the central and state government employees with the implementation of the Seventh Pay Commission’s recommendation. Recommend Buy with price target of Rs307: ILL’s revenues and net income are expected to grow at a CAGR of 19% and 35.5% respectively over FY2016-18 led by strong box-office revenues (at a 19% CAGR), higher F&B revenues (at a 23% CAGR) and advertising revenues (at a 20% CAGR) over FY2016-18. Further, a healthy balance sheet with a 0.3 debt/equity ratio and treasury shares of 4.3 crore shares provide strength to drive the inorganic growth activities in the coming years. At the current Price chart market price of Rs219, the stock trades at EV/EBITDA of 11x, 9x and 7.4x FY2016E, FY2017E and FY2018E earnings respectively. We believe ILL with its strong brand and extended reach is well poised to leverage the opportunity in India’s under-penetrated multiplex sector. We initiate coverage on ILL with a price target of Rs307, based on 9x FY2018E EV/EBITDA. Key risk: (1) ILL has accelerated its expansion plan over the next two to three years and any delay in the execution of the plan is a risk; and (2) any pause in the inflow of quality movie content will affect the earnings of the company. Valuation Particulars FY2015* FY2016E FY2017E FY2018E Total revenues (Rs cr) 1,016.8 1,374.3 1,665.2 1,947.3 EBITDA margin (%) 12.1 14.7 15.1 15.4 Price performance Net profit (Rs cr) 20.0 73.7 104.5 135.4 EPS (Rs) 2.2 8.0 11.4 14.8 (%) 1m 3m 6m 12m PER (x) 100.3 27.3 19.2 14.8 P/BV (x) 3.0 2.7 2.4 2.0 Absolute 2.1 23.8 35.7 22.0 EV/EBITDA (x) 18.7 11.3 9.0 7.4 Relative 1.5 32.1 46.2 24.4 RoE (%) 3.0 9.8 12.2 13.7 to Sensex RoCE (%) 6.9 13.3 15.7 17.6 *FY2015 includes consolidation of Satyam Cineplexes, which will affect the overall profitability Source: Company and Sharekhan Research stock idea INOX Leisure Investment arguments Making of a mega show: ILL, India’s second largest multiplex operator with 101 properties and 393 screens across 55 cities accounting for about 23% of the multiplex screens in India, is scripting a blockbuster growth story through a mix of inorganic (the acquisition of Satyam Cineplexes that provides it a foothold in the lucrative northern market) and aggressive organic expansion plan to scale up the total screen count to 565-570 screens over the next 24-30 months. In addition to its aggressive push in the northern region (where it aims to challenge the dominance of PVR Cinemas), ILL is leveraging on its strong brand and balance sheet to increase its presence in the tier-II and tier-III towns where the multiplex phenomenon is gradually catching the mindshare, in line with India’s inclusive growth story. Exhibit 1: ILL has presence across the country, the second largest multiplex operator Source: Company Exhibit 2: Accelerated screen addition over the next couple of years, to reach 557 screens by FY2018 Source: Company Sharekhan 2 September 2015 stock idea INOX Leisure Multiplex phenomenon is gradually catching the mindshare and wallet share of tier-II and tier-III towns Exhibit 3: Retail attractiveness of tier-II and tier-III cities Exhibit 4: Retail attractiveness of tier-I cities Source: Industry reports Source: Industry reports Exhibit 5: Screen additions by major multiplex chains in 2014 Cinema Number of Number of properties screens Locations Inox Leisure 9 31 Udupi, Jalgaon, Bhilwara, Vizag, Faridabad, Gurgaon, Noida, Delhi, Kolkata PVR Cinemas 5 22 Hubli, Ahmedabad, Mangalore, Bhopal, Jalandhar Cinepolis 3 26 Vijayawada, Vadodara, Thane Carnival Cinemas 1 3 Delhi K Sera Sera Miniplex 3 6 Abohar, Nawanshahr, Hoshiarpur Mukta Arts 4 11 Sangli, Aurangabad, Bhopal, Hyderabad Priya Entertainment 1 3 Haldia Total 26 102 Source: Industry reports Top-class casting and script in place: ILL’s mega show is supported by an improving content quality in the Indian mainstream and regional cinema with movies regularly hitting the Rs100-crore or Rs200-crore box-office collection mark. The acceptance of Hollywood movies has also provided another source of quality saleable content for multiplexes not just in metros but across cities in the country. Growing acceptance of quality content across markets • From one movie in 2008, “Ghajini”, which crossed the Rs100-crore mark in 18 days, there were nine movies in 2014 that made it to +Rs100-crore club. • It took “Bajrangi Bhaijaan” just three days to reach the Rs100-crore mark as compared with the 18 days taken by “Ghajini” in 2008. • Even regional movies like “Baahubali” (a Telugu movie dubbed in Hindi) crossed the Rs100-crore mark in 2015. • Hollywood movie “Furious 7” garnered Rs104 crore in the domestic box office while other Hollywood movies like “Avatar” (2009; Rs145 crore), “2012” (2009; Rs94 crore) and “Life of Pi” (2012; Rs80 crore) were also widely accepted in the domestic box office. • A higher number of screen releases from 1,600 screen releases of “Dabaang” in 2010 to more than 4,500 screen releases for “Bajrangi Bhaijaan” in 2015 also helped the latter to reach the Rs100-crore mark in just three days, the fastest in Indian film history. Sharekhan 3 September 2015 stock idea INOX Leisure Exhibit 6: Rs100-crore break-up year-wise Exhibit 10: Upcoming Hollywood movies in 2015 Year No. of movies Highest (cr) Release date Film name 2008 1 114.0 25-Sep-15 The Intern 2009 1 202.5 2-Oct-15 The Martian 2-Oct-15 Legend 2010 2 138.9 9-Oct-15 Pan 2011 5 148.9 16-Oct-15 Crimson Peak 2012 9 198.8 16-Oct-15 Bridge of Spies 2013 8 284.3 23-Oct-15 The Last Witch Hunter 2014 9 340.8 6-Nov-15 Spectre 2015 4 320.3 20-Nov-15 The Hunger Games: Mockingjay - Part 2 Source: Industry reports 25-Nov-15 The Good Dinosaur A strong content pipeline 18-Dec-15 Star Wars: The Force Awakens Source: Industry reports Exhibit 7: Upcoming Bollywood movies in 2015 Release date Film name Star cast 2-Oct-15 Singh is Bling Akshay Kumar, Kareena Kapoor Khan, Amy Jackson 9-Oct-15 Jazbaa Aishwarya Rai Bachchan, Irrfan Khan 22-Oct-15 Shaandaar Shahid Kapoor, Alia Bhatt 12-Nov-15 Prem Ratan Dhan Payo Salman Khan, Sonam Kapoor, Neil Nitin Mukesh 27-Nov-15 Tamasha Ranbir Kapoor, Deepika Padukone 4-Dec-15 Wazir Amitabh Bachchan, Farhan Akhtar 18-Dec-15 Dilwale Shah Rukh Khan, Kajol, Varun Dhawan, Kriti Sanon 18-Dec-15 Bajirao Mastani Ranveer Singh, Priyanka Chopra, Deepika Padukone Source: Industry reports Exhibit 8: Upcoming Bollywood movies in 2016 Release date Film name Star cast 22-Jan-16 Airlift Akshay Kumar 5-Feb-16 Rocky Handsome John Abraham 12-Feb-16 Fitoor Katrina Kaif, Aditya Roy Kapur 4-Mar-16 Jai GangaaJal Priyanka Chopra 18-Mar-16 Kapoor & Sons Sidharth Malhotra, Alia Bhatt 15-Apr-16 Fan Shah Rukh Khan 29-Apr-16 Baaghi Tiger Shroff, Shraddha Kapoor 13-May-16 Azhar Emraan Hashmi 3-Jun-16 Jagga Jassos Ranbir Kapoor, Katrina Kaif and Govinda 3-Jun-16 Housefull 3 Akshay Kumar, Abhishek Bachchan, Riteish Deshmukh 12-Aug-16 Mohenjo Daro Hrithik Roshan 12-Aug-16 Rustom Akshay Kumar 12-Aug-16 Baadshaho Ajay Devgan Source: Industry reports Exhibit 9: Bollywood movies released in Q2FY2015 Release date Film name Star cast 3-Jul-15 Guddu Rangeela Arshad Warsi, Amit Sadh 10-Jul-15 Baahubali Prabhas, Rana Daggubati, Tamannaah 17-Jul-15 Bajrangi Bhaijaan Salman Khan, Kareena Kapoor Khan 31-Jul-15 Drishyam Ajay Devgn, Tabu, Shriya Saran 7-Aug-15 Bangistan Riteish Deshmukh, Pulkit Samrat 14-Aug-15 Brothers Akshay Kumar, Sidharth Malhotra 21-Aug-15 All Is Well Abhishek Bachchan, Asin 21-Aug-15 Manjhi The Mountain Man Nawazuddin Siddiqui, Radhika Apte 28-Aug-15 Phantom Saif Ali Khan, Katrina Kaif 28-Aug-15 Baankey Ki Crazy Baraat Sanjay Mishra, Rajpal Yadav 4-Sep-15 Welcome Back John Abraham, Shruti Haasan 11-Sep-15 Hero Sooraj Pancholi, Athiya Shetty 18-Sep-15 Katti Batti Imran Khan, Kangna Ranaut Source: Industry reports Sharekhan 4 September 2015 stock idea INOX Leisure Overall consumption capacity set to improve, led by lower inflation and Seventh Pay Commission hike: The economic conditions are also turning favourable to support a robust uptick in urban discretionary spending, given the sharp moderation in inflation and steady job market.