Institutional Equities PVR 10 March 2021 Reuters: PVRL.BO; Bloomberg:PVRL IN Fund infusion de-risks operations and reignites expansion plans BUY PVR raised equity worth Rs11bn in total in FY21 through a QIP (Rs8bn in Jan-Feb 2021) and rights issue (Rs3bn in July 2020). We believe that the QIP reduces its net debt significantly Sector: Film Exhibition from Rs11.3bn at the end of 3QFY21 to a likely ~Rs5bn by end of 4QFY21 (after taking into CMP: Rs1,409 account estimated loss in 4Q). This fund infusion reduces financial risk for the largest film exhibitor in the country and for a speedier screen expansion once the pandemic is put behind. Target price: Rs1,661 The pace of vaccination is picking up and we believe that a good percentage of the population would be inoculated by mid-2021. We now expect a net of 180 screens to be added by PVR Upside: 18% between 3QFY21 and FY23 compared to the 100 that we had modeled in earlier (see Exhibit 3 for more details). We have also fine-tuned our estimates for 4QFY21 where we now believe that Girish Pai revenue (more so) and EBITDA could be worse than what we had estimated immediately post Head of Research 3QFY21. We believe that occupancy levels are likely to be lower than what we had anticipated. [email protected] We were also building in some revival of advertising revenue, which we now think is not +91-22-6273 8017 happening. But, we believe that investors need to focus beyond the short term weakness on what will certainly be a better financial picture in FY22 and more so in FY23. Media interview with the top management of PVR indicates that it plans to open ~40 screens in FY22 and ~100- Key Data 120 screens in FY23 to take the total number of screens to 1000+ by FY23 end. If film consumption gets back to pre-Covid levels by the middle of FY22, we believe that screen Current Shares O/S (mn) 60.7 opening numbers will be raised further. We expect 25 gross screens to be added (net of 10 Mkt Cap (Rsbn/US$bn) 85.6/1.2 after closure of 15) in FY21 as many new screens were ready for opening up and in the fit-out 52 Wk H / L (Rs) 1,592/705 phase when the pandemic hit the industry. The target of having 1,000 operational screens has been pushed back by a year due to COVID-19. In the meantime, all states have allowed opening Daily Vol. (3M NSE Avg.) 1,919,561 up of cinema theaters. Most states have permitted operations at 100% capacity compared to 50% allowed previously. However, Maharashtra, a key state for exhibitors, does not allow 100% Price Performance (%) operating capacity as yet. States like Delhi and Haryana are operating at 100% occupancy. Despite permission to open all screens and increase capacity, the decision to keep the screen 1 M 6 M 1 Yr running is tactical and taken by the operating team on a day to day basis based on demand. PVR (6.0) 9.1 (7.8) This is mainly due to lack of fresh content. For 4QTD FY21, we believe that occupancy level Company Update Company Nifty Index (0.1) 31.9 44.5 has been in single digits for North and West India regions whereas South India is comparatively performing better. In terms of content, March is expected to be better than Source: Bloomberg February on the back of a few good Bollywood releases like Roohi on 11th March, Mumbai Saga and Sandeep Aur Pinky Faraar on 19th March, and Saina and Haathi Mere Saathi on 28th March. As per the management, April is expected to be even better than March. Sooryavanshi was set to release on 2nd April, but with the Maharashtra COVID-19 situation, it is expected to get re-scheduled. ‘83’ is scheduled for release in June’21. Please see Exhibit 4 for more details on the upcoming Hindi film schedule. In 3QFY21, fixed costs (including rent) stood at Rs550mn-Rs600mn/month. We estimate that fixed costs would increase to Rs700mn- 750mn/month in 4QFY21. Post pandemic, with normal occupancy levels of 30-35% and savings of 10-15% on fixed costs (salaries, electricity, etc.), we believe that PVR could achieve EBITDA margin higher than pre-pandemic levels. Post the QIP and management commentary on expansion, we have revised operating numbers higher, resulting in enhanced revenue and EBITDA numbers. PAT has been revised up significantly for FY22 and FY23 as we expect interest cost to fall. Consequent to these changes and retaining the same 12x EV/EBITDA multiple on FY23E, we get a new target price of Rs1,661. We therefore raise our rating to ‘Buy’ from an ‘Accumulate’. Between PVR and Inox (we have a Buy on both), we believe that Inox will deliver a higher upside due to lower valuation and scope for improvement in operating metrics. Foray into F&B: at a very early stage: Our view has been that the Indian Film Exhibition industry revenues are a mix of Exhibition, QSR and advertising revenues (see sector report inside). We believe that PVR is attempting to make QSR a separate and sizable business. We understand that its F&B operations are linked to screens and not to cloud kitchens. Delivery will be through Swiggy and Zomato. What plays out well for PVR is its national brand equity and nationwide presence in key cities. PVR believes that its food quality has improved significantly over the last 5-7 years. We believe the roll-out will be gradual and deliberate and would be focused on understanding food preferences, pricing, etc. Currently, it has been rolled out in select cities like NCR, Bengaluru and Chennai. As things stand currently, food items available will be Pizzas, Burgers, Sandwiches, Popcorn, etc. The company will not have an extended menu for consumers who order through Swiggy and Zomato. The products will be in line with the image of PVR. As of now, no attempt is being made to Indianise the menu and compete with other Indian food operators. PVR will report revenue from the external F&B business in the normal F&B metrics. Institutional Equities Exhibit 1: Key financials: PVR (consolidated, Pre – IndAS 116 for EBITDA margins) Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Revenue 30,856 34,144 1,688 27,448 39,803 YoY % 32.2 10.7 (95.1) 1,525.8 45.0 EBITDA 5864 5762 (4,638.6) 5,065 8,284 EBITDA (%) 19.0 16.9 (274.8) 18.5 20.8 Adj. PAT 1890 1214 (5,254.5) 1,786 3,753 YoY % 51.6 -35.8 (532.8) LP 110.1 FDEPS (Rs) 40.5 23.6 (102.3) 32.4 61.8 ROE (%) 16.3 8.9 (31.1) 9.0 16.6 ROCE (%) 19.2 13.6 (28.3) 10.0 19.8 ROIC (%) 19.6 14.7 (35.7) 13.4 24.9 P/E(x) 34.8 59.6 (13.8) 43.5 22.8 P/BV (x) 5.3 4.9 3.8 3.7 3.2 EV/EBTDA 13.3 13.9 (15.2) 15.3 9.2 Source: Company, Nirmal Bang Institutional Equities Research. Note: Estimates are ex-IndAS116. Exhibit 2: Change in estimates- PVR (consolidated, Pre – IndAS 116) New Old Deviation (%) Y/E March (Rsmn) FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E Revenue 1,688 27,448 39,803 2,603 26,331 37,524 (35.1) 4.2 6.1 EBITDA (4,639) 5,065 8,284 (4,692) 4,840 7,858 (1.1) 4.7 5.4 EBITDA Margin (%) (274.8) 18.5 20.8 (180.2) 18.4 20.9 - - - PAT (5,255) 1,786 3,753 (5,290) 1,033 2,898 (0.7) 73.0 29.5 FDEPS (Rs) (102.3) 32.4 61.8 (103.0) 18.7 52.5 (0.7) 73.0 17.7 Source: Nirmal Bang Institutional Equities Research Exhibit 3: Changes in key operational assumptions (consolidated with SPI from FY19) Actuals New Old Parameter FY16 A FY17A FY18A FY19A FY20A FY21E FY22E FY23E FY21E FY22E FY23E Number of Screens (YE) 524 579 625 771 845 850 895 1,015 835 855 935 Growth (%) 12.9 10.5 7.9 23.4 9.6 0.6 5.3 13.4 (1.2) 2.4 9.4 Number of screens added 60 55 46 146 74 5 45 120 (10) 20 80 Footfalls (mn) 70 75 76 99 102 4 81 123 7 77 116 Growth (%) 17.6 8.2 1.1 30.6 2.3 (95.8) 1,788.8 51.9 (93.0) 985.4 49.4 Occupancy Rate (%) 34.6 33.0 31.3 36.2 34.9 1.6 23.6 33.0 2.7 23.5 33.0 Gross ATP 188 196 210 207 204 162 189 193 161 189 193 Growth (%) 5.6 4.3 7.1 (1.4) (1.4) (20.8) 17.1 1.8 (21.3) 17.8 1.9 Net ATP 146 148 164 165 170 133 155 158 132 155 158 Growth (%) 5.2 1.8 10.5 0.3 3.5 (22.2) 17.1 1.8 (22.6) 17.8 1.9 Gross SPH 72 81 89 91 98 120 99 100 110 99 100 Growth (%) 12.5 12.5 9.9 2.2 7.6 22.1 (17.0) 0.7 12.1 (9.6) 0.7 Net SPH 67 73 80 85 93 114 95 95 105 95 95 Growth (%) 13.6 9.0 9.2 6.7 9.5 22.1 (17.0) 0.7 12.1 (9.6) 0.7 Advertisement Revenue per screen 4.2 4.4 4.9 5.1 4.7 0.1 3.4 4.5 0.4 3.3 4.5 Growth (%) 9.8 6.2 10.2 3.4 (8.2) (97.9) 3,310.3 31.5 (90.4) 647.9 33.1 Source: Company, Nirmal Bang Institutional Equities Research 2 PVR Institutional Equities Reiterate our bullish thesis on the sector: We reiterate our long-term thesis that we enunciated in our initiating coverage report (Oligopolistic Business In Its Infancy).