Initiating Coverage | 26 August 2013 Sector: Entertainment PVR First Choice Niket Shah ([email protected]); +91 22 3982 5426 Investors are advised to refer through disclosures made at the end of the Research Report. PVR PVR: First Choice Page No. Summary .......................................................................................................... 3-5 India’s largest and fastest growing multiplex chain ................................... 5-11 Profitability higher than peers; to improve further ................................ 12-19 Evolving into a lifestyle entertainment company.................................... 20-22 Expect earnings CAGR of 49% over FY13-15 .............................................. 23-24 Initiating coverage with a Buy rating........................................................ 25-26 Annexure-I: Company background ............................................................ 27-29 Annexure-II: Key industry trends ............................................................... 30-36 Financials and valuation............................................................................. 37-38 26 August 2013 2 Initiating Coverage | 26 August 2013 Sector: Entertainment PVR BSE SENSEX S&P CNX 18,519 5,472 CMP: INR368 TP: INR470 Buy First choice; aggressive expansion extending leadership Initiating coverage with a Buy rating Post the acquisition of Cinemax, PVR has become India’s largest multiplex chain with 89 Bloomberg PVR IN properties, 383 screens and 93k seats. Being the only player that is still expanding Equity Shares (m) 39.6 aggressively, it is further extending its leadership. M.Cap. (INR b)/(USD b) 14.4/0.3 With 55m footfalls annually, 23-25% Bollywood box office share and 30-35% Hollywood 52-Week Range (INR) 375/179 box office share, we expect PVR to attract greater ad spends. Post amalgamation of 1,6,12 Rel. Perf. (%) 13/18/94 Cinemax, PVR will get the benefit of economies of scale, helping to reduce costs in the F&B segment, a 70% gross margin business. Financials & Valuation (INR b) Besides film exhibition and distribution, it is expanding in lifestyle/entertainment Y/E March 2013 2014E 2015E businesses like restaurants, coffee shops, gaming zones and in-mall entertainment. Sales 8.1 14.3 17.3 We expect PVR’s revenues to grow at a CAGR of 47% and net profit at a CAGR of 49% EBITDA 1.2 2.3 2.9 over FY13-15. RoCE and RoE should improve from 7.6% and 7.8%, respectively, to NP 0.4 0.6 1.0 13.3% and 15% in FY15, aided by merger synergies and lower capex. EPS (INR) 11.2 15.4 24.2 We value PVR at 8.5x FY15E EV/EBITDA, in line with most global players. We initiate EPS Gr. (%) 14.7 36.6 57.5 coverage with a Buy rating and a target price of INR470. BV/Sh (INR) 162.2 171.2 191.9 RoE (%) 9.6 9.3 13.3 India’s largest and fastest growing multiplex chain RoCE (%) 7.8 12.2 15.1 Post the acquisition of Cinemax, PVR has become India’s largest multiplex chain, Payout (%) 10.4 15.1 14.4 with 383 screens as against INOX+Fame’s 287 screens and Big Cinemas’ 254 Valuations screens. It is also the only player that is still expanding aggressively. It intends to P/E (x) 32.4 23.7 15.1 add 140-150 screens, taking its total number of screens to over 500 by the end of P/BV (x) 2.2 2.1 1.9 FY15. With zero content differentiation and little service differentiation, pace of EV/EBITDA (x) 17.6 8.9 6.9 execution and occupying the right catchment areas are the key success Div. Yield (%) 0.4 0.9 1.3 parameters in the multiplex business. PVR has prime retail space of 3.2msf across *Prices as on 23 August 2013 36 cities in India, likely to reach 3.9msf across 44 cities by the end of FY14. We believe this is a key entry barrier and will help PVR, which has already established Shareholding pattern (%) As on Jun-13 Mar-13 Jun-12 itself as the first choice for cinema viewers in India, to protect its turf. Promoter 31.0 31.0 44.7 Profitability higher than peers; to improve further Dom. Inst 19.6 25.2 16.8 Foreign 38.2 30.0 17.8 PVR’s average ticket price (ATP) is significantly higher than peers, primarily due Others 11.1 13.7 20.7 to its prime location strategy, impeccable interiors, design and consistent viewing experience. We expect its ATP (consolidated) to increase from INR163 in FY13 to INR180 in FY15. With 55m footfalls annually, 23-25% Bollywood box office share Stock performance (1 year) and 30-35% Hollywood box office share, we expect PVR to attract greater ad spends. Post amalgamation of Cinemax, PVR will get the benefit of economies of scale, helping to reduce costs in the F&B segment, a 70% gross margin business. We expect EBITDA margin to expand from 14.5% in FY13 to 17% in FY15, primarily driven by higher growth in advertisement and F&B revenues, and lower film hire cost owing to synergies from the Cinemax acquisition. Evolving into a lifestyle entertainment company Besides film exhibition, PVR is engaged in film distribution. It has reduced its focus on film production after huge losses in Khelein Hum Jee Jaan Sey. Also, it is 26 August 2013 3 PVR expanding its lifestyle/entertainment businesses like restaurants, coffee shops, gaming zones and in-mall entertainment. It has five bowling centers so far, with a total of 110 lanes in four cities. It plans to add another 100 lanes by FY15 and expects annual revenues of INR1b from this business. It has opened its first full service restaurant, Mistral in New Delhi and expects to open another restaurant, Mr Hong in Bangalore in October 2013. Expect earnings CAGR of 49% over FY13-15 We expect PAT to grow at a CAGR of 49% over FY13-15, driven by 47% sales CAGR and 270bp margin expansion. PVR is currently in investment phase and is likely to incur capex of INR3b over the next two years, as it plans to open 140-150 new screens and 100 new bowling lanes. However, in FY15, we expect PVR to report free cash flow of INR1.3b, which will increase going forward, as operating cash flow improves due to new screen additions. Initiating coverage with a Buy rating We expect PVR’s revenues to grow at a CAGR of 47% and net profit at a CAGR of 49% over FY13-15, driven by synergies from the Cinemax acquisition and aggressive screen addition. Post the acquisition of Cinemax, PVR’s bargaining power has increased considerably. Aided by closure of the loss-making production business, merger synergies and lower capex, we expect RoCE and RoE to improve from 7.6% and 7.8%, respectively, to 13.3% and 15% in FY15. We value PVR at 8.5x FY15E EV/EBITDA, in line with most global players. We initiate coverage with a Buy rating and a target price of INR470. Key operating matrics FY10 FY11 FY12 FY13 FY14E FY15E Number of properties 30 33 39 86 102 114 Number of screens 123 142 166 360 435 485 Number of seats 32,232 36,877 42,252 89,166 108,666 121,666 Occupancy (%) 30 27 31 34 32 32 Footfalls ('000) 16,200 19,600 24,700 54,860 63,563 73,239 ATP (INR) 152 162 156 163 172 180 SPH (INR) 39.1 40.5 43.3 47.0 51.7 55.3 Source: Company, MOSL 26 August 2013 4 PVR India’s largest and fastest growing multiplex chain Prime retail space key entry barrier, to help protect turf Post the acquisition of Cinemax, PVR has become India’s largest multiplex chain, with 383 screens (INOX+Fame’s 287 screens and Big Cinemas’ 254 screens) as on June 2013. PVR becomes leader with It is also the fastest growing and the only player that is still expanding aggressively. It 383 screens, 93k seats intends to add 140-150 screens, taking its total number of screens to over 500 by the end and 3.2msf across 36 of FY15. cities post acquisition of With zero content differentiation and little service differentiation, pace of execution and Cinemax occupying the right catchment areas are the key success parameters in the multiplex business. PVR has prime retail space of 3.2msf across 36 cities in India, likely to reach 3.9msf across 44 cities by the end of FY14. We believe this is a key entry barrier. Its location strategy, impeccable interiors, design and consistent viewing experience have enabled PVR to establish itself as the first choice for cinema viewers in India. Spearheading the multiplex revolution in India Starting out as a single screen location, PVR has spearheaded the multiplex revolution in India over the past decade. It is the fastest growing multiplex player in India, with 383 screens across 89 properties in 36 cities, ~93k seats and ~55m annual patrons (as on March 2013). Having gained dominance in North India by expanding organically for the last seven years, PVR acquired Cinemax, a rival multiplex chain for INR5.3b, establishing a strong foothold in West and South India. PVR leading in terms of properties and number of screens Number of screens Revenue/screen for PVR highest amongst peers Source: Company, MOSL 26 August 2013 5 PVR Rapidly adding prime retail space – a key entry barrier With zero content differentiation and little service differentiation, pace of execution and occupying the right catchment areas are the key success parameters in the multiplex business. We believe that the acquisition of Cinemax not only provides PVR operating synergies and access to new geographies, but also helps it to add critical retail space, which we believe is a challenge for any new entrant.