1,127 July 31, 2018 PVR (PVRL IN) BUY [Prior:HOLD] Share Price INR 1,127 1Q beat due to F&B 12m Price Target INR 1,450 (+29%) Previous Price Target INR 1,450 Too cheap to ignore; U/G to BUY; TP/forecasts Company Description unchanged PVR Ltd. is a film entertainment and exhibition company, which operates multiplex cinema halls and 1Q EBITDA was +20% YoY and 18% above our forecast mainly due to a is engaged in film production business. +23% YoY in F&B revenue. We maintain our FY19-21 forecasts as the footfalls per screen remained flat. Hence our TP of INR1,450 remains unchanged, based on 13x FY20E EV/EBITDA; 25% and 1SD below its 5-year Statistics average of 17x. PVRL corrected 18% in the last month and it’s trading at 52w high/low (INR) 1,531/1,103 an attractive 10x FY20E EV/EBITDA on concerns the government will 3m avg turnover (USDm) 9.4 regulate F&B prices in cinemas. Catalyst could come from better content Free float (%) 52.0 Issued shares (m) 47 leading to higher footfall and dismissal of potential F&B regulations in Market capitalisation INR52.7B Consumer Discretionary cinemas. USD767M Flat ticket prices; Need more evidence on footfall Major shareholders: Multiples Alternate Asset Management Pvt 12.3% 1Q ticket sales were 55% of total revenue and the rest was from high- BIJLI AJAY 11.3% margin ads, F&B sales and others. Ticket sales increased 12% YoY due to KUMAR SANJEEV /PVR/ 8.0% an 8% rise in footfalls which was backed by new screen additions. Ticket Price Performance prices were flat YoY. We forecast +12% YoY for FY19E ticket sales backed 1,700 140 India by screen additions and an impressive film-slate, especially 3Q which has four big-budget films. 1,600 130 1,500 120 Ad and F&B drive margin expansion 1,400 110 1Q EBITDA was 28% of our FY19E. 1Q EBITDA margin was 20%, +174bps 1,300 100 YoY, supported by high-margin ad and F&B sales. F&B sales rose 26% YoY 1,200 90 on higher spend per patron (mainly more conversion) whilst ads rose 6% YoY due to higher rate. PVRL stated that it now operates ~22 ad 1,100 80 1,000 70 mins/film/screen and its ad strategy in future is to boost rates and not Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 volume. For FY19E, we factored in F&B sales growth of +29% YoY and +18% for ads supporting 18% EBITDA margin (+76bps YoY). PVR - (LHS, INR) PVR / BSE SENSEX 30 Index - (RHS, %) Court verdict on F&B is weighing on sector -1M -3M -12M Absolute (%) (18) (22) (16) In two weeks from now the Mumbai High Court will rule whether food Relative to index (%) (22) (26) (27) from outside can be consumed during movie viewings. The market is Source: FactSet nervous about any adverse impact on a very high-margin segment of multiplex businesses. We believe an unfavourable outcome is priced in. We do not factor any adverse ruling in our forecasts. FYE Mar (INR m) FY17A FY18A FY19E FY20E FY21E Revenue 21,194 23,341 27,199 31,571 36,129 EBITDA 3,136 4,018 4,888 5,913 6,985 Core net profit 1,039 1,260 1,691 2,116 2,606 Core EPS (INR) 22 27 36 45 56 Core EPS growth (%) (14.4) 21.2 34.3 25.1 23.2 Net DPS (INR) 2 2 3 3 3 Core P/E (x) 50.1 51.7 31.2 24.9 20.2 P/BV (x) 5.4 6.1 4.3 3.7 3.1 Net dividend yield (%) 0.2 0.1 0.2 0.2 0.2 ROAE (%) 10.8 12.2 14.7 15.9 16.8 ROAA (%) 5.2 5.6 6.9 7.9 8.8 EV/EBITDA (x) 24.0 15.9 12.3 10.1 8.5 Net gearing (%) (incl perps) 78.4 65.7 58.7 50.5 37.8 Consensus net profit - - 1,749 2,189 2,889 MKE vs. Consensus (%) - - (3.3) (3.3) (9.8) Jigar Shah Vikram Ramalingam [email protected] [email protected] (91) 22 6623 2632 (91) 22 6623 2609 THIS REPORT HAS BEEN PREPARED BY KIM ENG SECURITIES INDIA PVT LTD SEE PAGE 9 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS PVR Fig 1: 1QFY19 results 1Q as a % of 1QFY19 MKE Income statement (INRm) 1QFY19 4QFY18 1QFY18 YoY (%) QoQ (%) Variance (%) FY19E Est. Income from operations 6,963 5,849 6,366 9 19 26 6,483 7 Other income 43 75 164 (74) (44) 11 75 Total income 7,005 5,924 6,530 7 18 25 6,558 7 Film Exhibition cost 1,663 1,271 1,449 15 31 26 1,574 6 Cost of F&B 508 414 413 23 23 25 447 14 Employee cost 742 653 679 9 14 24 679 9 Rent 1,159 1,061 1,085 7 9 25 1,069 8 Other expenses 1,519 1,506 1,596 (5) 1 27 1,554 (2) Total expenses 5,591 4,905 5,222 7 14 5,324 EBITDA 1,372 944 1,144 20 45 28 1,159 18 Depreciation 401 394 399 0 2 406 Finance cost 208 210 208 (0) (1) 214 PBT 805 415 700 15 94 32 614 31 Exceptional expenses - - - - Tax 283 153 258 10 85 184 Minority interest (2) (3) - 1 PAT 520 259 443 18 101 31 431 21 EPS 11 6 10 17 99 31 Revenue Break up (INRm) Net Box office collections 3,849 3,124 3,433 12 23 28 3,578 8 F&B 2,027 1,571 1,646 23 29 26 1,688 20 Advertising 718 720 674 6 (0) 21 780 (8) Others 369 434 613 (40) (15) 34 437 (16) Revenue Distribution (%) Net Box office collections 55 53 54 F&B 29 27 26 Advertising 10 12 11 Others 5 7 10 Key operational Metrics Locations 135 134 128 Screens 630 625 587 7 1 Footfalls in mn 23 19 21 8 19 26 21 8 Occupancy (%) 36% 32% 35% +80bp +440bp ATP (INR) 217 209 214 1 4 220 (2) SPH (INR) 94 87 87 8 8 88 7 Key financial Metrics EBITDA margin (%) 20 16 18 +174bps +357bps PAT margin (%) 7 4 7 +52bps +305bps Tax rate (%) 35 37 37 Source: Company, MKE estimates. ATP=Average Ticket Price, SPH=Spend Per Head on Food & beverages Top five movies in 1QFY19 were ‘Avengers: Infinity War’, ‘Raazi’, ‘Race 3’, ‘Baaghi 2’ and ‘Jurassic Park: Fallen Kingdom’. Together, they registered 9.2m footfalls – 41% of total. In 1QFY18, ‘Bahubali: The Conclusion’, a mega blockbuster alone had 7.1m footfall last year. Due to the high base in 1QFY18, footfalls per screen are flat YoY. For the same reason the ATP was flat too. F&B revenue rose mainly because of higher SPH and ad revenue increase was contributed by higher rates. On 13 Jul 2018, a minister in Maharashtra, India raised an issue asking multiplexes to reduce F&B prices and allow outside food on their premises. PVRL clarified that the High Court of India has not passed any order nor has the government passed any legislation on this. A group of multiplex operators have already met the concerned government authority and submitted their suggestions. As per the multiplexes, allowing outside food on the premises is not viable - commercially, legally, and with respect to safety and hygiene. The High Court has granted the government two weeks to present its stance and formulate July 31, 2018 2 PVR the policy. Any adverse decision by the government or the court allowing patrons to bring outside food onto the premises will be detrimental to PVRL as: a) F&B forms 25-27% of total revenue and commands 75% gross profit margin; and b) other states in India will follow suit. Currently, we do not factor any adverse ruling in our forecasts. Multiplex operators believe the verdict will be issued in their favour. According to them, a similar verdict was passed by the court in Madhya Pradesh, India stating that the government has no reason to interfere in the F&B business of multiplexes as it is a private transaction between consumers and enterprises. Fig 2: Peer valuation comparison Mcap PER (x) EV/EBITDA (x) RoE (%) CMP TP Rating Apr to Mar (INR) (USD m) FY19E FY20E FY19E FY20E FY19E FY20E PVR Limited (PVRL IN) INR 1,114 1,450 BUY 757 31 25 12 10 15 16 Inox Leisure Limited (INOL IN) INR 197 305 NUY 277 17 16 8 7 16 15 Cinemark Holdings (CNK US) USD 35.1 NR NR 4,094 16 14 7 7 17 17 Cineworld Group Plc (CINE LN) GBP 270 NR NR 4,858 13 11 10 8 12 13 Major Cineplex Group (MAJOR TB) THB 25.8 NR NR 697 23 20 12 10 16 17 Average 20 17 10 8 Source: MKE, Bloomberg. CNK, CINE and MAJOR follow the calendar year PVRL has always been expensive as it is India's No.1 multiplex chain. Its brand is the most formidable in this industry, has excellent patronage, and pricing premium. It has the best profitability and operating matrix in the sector. Due to these factors, it trades at a premium to the sector. Its 5-year average is 17x EV/EBITDA, 20-25% premium to its immediate competitor INOL.