VISIT NOTE PVR Box -office coffers likely to jingle again from June India Equity Research| Media EDELWEISS 4D RATINGS In our recent meeting with Mr. Nitin Sood, CFO, PVR, he was optimistic about FY15 despite mediocre show in Q3FY14 and lacklustre initial two Absolute Rating BUY months of Q4FY14. In March 2014, PVR saw ~20% YoY increase in Rating Relative to Sector Performer footfalls led by hit movies like Queen and Shaadi Ke Side Effects . With Q4 Risk Rating Relative to Sector Medium Sector Relative to Market Overweight being a seasonally weak quarter, we expect PVR to report after-tax loss for the quarter under review. Incrementally, benefits arising from Cinemax acquisition will be more in terms of robust F&B and ad revenue MARKET DATA (R: PVRL.BO, B: PVRL IN) growth. Company will benefit from huge expansion potential (in 2013, CMP : INR 536 ~5,000 multiplex screens opened in China, while India added ~300), likely Target Price : INR 589 urban revival, partial shift of IPL outside India and a relatively stronger 52-week range (INR) : 658 / 275 movie pipeline from June 2014. Also, post disappointing Q3FY14 Share in issue (mn) : 40.0 performance the stock has corrected by ~18%. Recommend ‘BUY’ on dips. M cap (INR bn/USD mn) : 21 / 358 Avg. Daily Vol.BSE/NSE(‘000) : 90.4 Margin expansion to be driven by high F&B and ad revenue growth SHARE HOLDING PATTER N (%) Company expects share of food and beverage (F&B) and ad revenues to increase by Current Q2FY14 Q1FY14 200-300bps (currently ~34% of revenues) over next few years. This should lead to Promoters * 29.8 31.0 31.0 margin expansion as these are higher-margin segments. MF's, FI's & BK’s 17.2 18.7 19.6 Consumer discretionary spends witness green offshoots in March FII's 18.4 15.2 13.5 Others 34.6 35.1 35.9 As per Shoppers Stop, there has been buoyant surge in footfalls in departmental stores * Promoters pledged shares : 1.2 (% of share in issue) in March 2014 . In another example of some recovery in consumer discretionary space, two-wheelers reported healthy double-digit growth in March. PVR management remains confident that even if there is any slowdown in consumer discretionary space, PRIC E PERFORMANCE (%) EW Media it will not hamper footfalls at multiplexes. Stock Nifty Index Outlook and valuations: Positive; recommend ‘BUY’ on dips 1 month (9.0) 6.5 4.9 3 months (23.0) 5.2 (0.1) We are enthused by PVR’s sharp expansion in exhibition business and the movie 12 months 66.4 17.7 10.6 pipeline from June 2014. However, any further signs of box-office slowdown will be a key monitorable. At CMP, the stock is trading at 30.6x and 18.3x FY15E and FY16E EPS, respectively. Maintain ‘BUY/Sector Performer’. Financials Year to March FY13 FY14E FY15E FY16E Revenues (INR mn) 8,053 13,551 15,995 19,116 Rev. growth (%) 55.5 68.3 18.0 19.5 EBITDA (INR mn) 1,169 2,144 2,702 3,622 Abneesh Roy Net profit (INR mn) 456 456 720 1,202 +91 22 6620 3141 Share outstanding (mn) 40 40 40 40 [email protected] Diluted EPS (INR) 11.5 11.1 17.5 29.2 Alankar Garude EPS growth (%) 8.5 (4.2) 58.5 66.7 +91 22 6623 3301 Diluted P/E (x) 46.4 48.5 30.6 18.3 [email protected] EV/EBITDA (x) 23.9 13.7 11.0 8.2 ROAE (%) 9.9 6.7 10.0 15.3 April 9, 2014 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited Media Management confident of better show in FY15 As per PVR, if there are three-four flop movies in succession, public sentiment towards movies is lowered. This happened in Q3FY14 when slew of movies like Besharam , Boss , R…Rajkumar and Gori Tere Pyaar Mein failed at the box office. In FY14, many mass entertaining movies were released. In FY15, as per management, the genre of movies is different as compared to FY14. Management expects PVR’s average ticket price (ATP) to increase by 4-5% YoY in FY15. Post revamp of Cinemax’s properties in Delhi, average spend per head has already increased from INR95 to INR120. In FY15, the company expects growth rate in F&B and ad revenues (both high-margin segments) to outpace box-office revenue growth, which should lead to margin expansion. Currently, ~66% of PVR’s revenue comes from box-office, with the balance flowing from F&B and ad revenues. Management targets Nitin Sood, CFO, PVR to increase share of above-mentioned high-margin segments by 200-300bps over ensuing years. However, growth potential of PVR’s ad revenues in smaller cities would be limited as price differential between cinema advertising and other media of advertising like print and radio is lower in smaller cities as compared to Tier 1 cities. Thus, in smaller cities, advertisers can choose media like print and radio which have higher reach than cinema advertising. Consumer discretionary spends witness green offshoots in March As per PVR, primarily due to hit movies like Queen and Shaadi Ke Side Effects , there was ~20% YoY surge in footfalls in March 2014. As per Shoppers Stop too, there has been buoyant increase in footfalls in departmental stores in March . In another example of some recovery in consumer discretionary space, two-wheelers reported healthy double-digit growth in March. PVR management remains confident that any slowdown in consumer discretionary space will not hamper footfalls at multiplexes. Unlike commentary by some retail companies that stock market performance does have adverse impact on footfalls, PVR management maintains there is no correlation between multiplex footfalls and stock market performance. 2 Edelweiss Securities Limited PVR Table 1: Movie line-up in H1FY15 Release Date Movie Title Language Cast Banner 4-Apr-14 Main Tera Hero Hindi Varun Dhawan, Nargis Fakhri Balaji Motion Pictures 4-Apr-14 Jal Hindi Purab Kohli, Tannishtha Chatterjee 4-Apr-14 Captain America: The Winter Soldier English Chris Evans, Frank Grillo, Sebastian Stan Utv Software Communication Ltd. 11-Apr-14 Kaanchi Hindi Rishi Kapoor, Mithun Chakraborty, Kartik Mukta Arts Ltd. 11-Apr-14 Bhoothnath Returns Hindi Amitabh Bachan, Boman Irani 11-Apr-14 Kochadaiiyaan (Tentative) Hindi Rajnikanth, Deepika Padukone, Shobana Eros International Media Ltd. 11-Apr-14 Rio 2 (3D) English Anne Hathaway, Jesse Eisenberg, Jake T. Fox Star Studio 18-Apr-14 2 State Hindi Arjun Kapoor, Alia Bhatt Utv Software Communication Ltd. 18-Apr-14 Transendence English Johnny Depp Pvr Pictures Ltd 25-Apr-14 Kuku Mathur Ki Jhand Ho Gayi Hindi Siddharth Gupta, Simran Kaur Mundi Bala Ji Motion Picture 25-Apr-14 Lateef Hindi Nawazuddin Siddiqui, Murli Sharma, Mukesh 2-May-14 Samrat & Co. Hindi Rajeev, Khandelwal Rajshri Productions Pvt. Ltd. 2-May-14 The Amazing Spiderman 2 (3D) English Andrew Garfield, Emma Stone, Jamie Foxx Spe Films India Pvt. Ltd. 9-May-14 Daawat -E- Ishq Hindi Aditya Roy Kapoor, Parineeti Chopra Yashraj Films 16-May-14 Heropanti Hindi Tiger Shroff, Kriti Sanon, Sandeepa Dhar Utv Software Communication Ltd. 16-May-14 Godzilla English Aaron Taylor Johnson, Elizabeth Olsen, Bryan Warner Bros. Pictures India Pvt. Ltd. 23-May-14 Ungli Hindi Sanjay Dutt, Emraan Hashmi, Kangna Ranaut Dharma Productions 23-May-14 Saat Uchhakkey Hindi Manoj Bajpayee, Vijay Raaz Wave Cinemas 23-May-14 (3D) X-Men: Days Of Future Past English Hugh Jackman, Jennifer Lawrence Fox Star Studios 6-Jun-14 Holiday- A Soldier Is Never Off Duty Hindi Akshay Kumar, Sonakshi Sinha Reliance Big Entertainment 6-Jun-14 Action Jackson Hindi Ajay Devgan, Sonakshi Sinha 13-Jun-14 (3D) Edge Of Tomorrow English Tom Cruise, Emily Blunt, Bill Paxton Warner Bros. Pictures India Pvt. Ltd. 13-Jun-14 (3D) How To Train Your Dragon 2 English Jay Baruchel, Jonah Hill, Gerard Butler Fox Star Studios 20-Jun-14 Humshakals Hindi Saif Ali Khan, Ritiesh Deshmukh, Bipasha Fox Star Studio 27-Jun-14 The Villain Hindi Siddharth Malhotra, Ritiesh Deshmukh Balaji Motion Pictures 4-Jul-14 Mary Kom Hindi Priyanka Chopra Viacom18 Media Pvt. Ltd 4-Jul-14 Finding Fanny Hinglish Arjun Kapoor, Deepika Padukone Fox Star Studio 11-Jul-14 Humpty Sharma Ki Dulhania Hindi Varun Dhawan, Alia Bhatt Dharma Productions 11-Jul-14 Fast & Furious 7 English Vin Diesal, Paul Walker, Dwayne Johnson Universal Picture India 11-Jul-14 (3D) Dawn Of The Planet Of The Apes English Gary Oldman, Keri Russell, Judy Greer , Andy Fox Star Studio 18-Jul-14 Mardaani Hindi Rani Mukharji Yashraj Films 27-Jul-14 Kick Hindi Salman Khan, Jacqueline Fernandez, Randeep Utv Software Communication Ltd. 8-Aug-14 Its Entertainment Hindi Akshay Kumar, Tamanhaa Bhatia, Prakash Tips Films 15-Aug-14 Singham 2 Hindi Ajay Devgan, Kareena Kapoor Reliance Big Entertainment 5-Sep-14 Kill Dil Hindi Ranveer Singh, Ali Zafar, Parineeti Chopra Yashraj Films 12-Sep-14 Roy Hindi Ranbir Kapoor, Jacqueline Fernandez, Arjun 12-Sep-14 Haider Hindi Shahid Kapoor, Shradhha Kapoor, Tabu Utv Software Communication Ltd. 12-Sep-14 Nh10 Hindi Sonam Kapoor Source: Company, Edelweiss research PVR enjoys edge over smaller multiplexes and single screens Due to its huge scale, content cost payout of smaller multiplexes is 75-100bps higher than that of PVR (~46% of box office revenues for PVR). Smaller multiplexes often have to sign at least a two-week contract with producers and distributors. This means that even if a movie fails at the box office, the multiplex operator is obliged to screen the movie and suffer from lower footfalls.