Initiating Coverage January 19, 2015 Rating matrix Rating : Buy Target : | 240 Inox Leisure (INOX) | 181 Target Period : 12 months Potential Upside : 33% Triple play on screens, footfalls, ATP… YoY growth (%) Inox with a 21% multiplex screen share is a formidable No. 2 player in the (YoY Growth) FY14 FY15E FY16E FY17E domestic arena and well poised to ride on the increasing discretionary Net Sales 15.0 20.7 17.3 21.5 spends led by the consumption boom. The tilting consumer preference in EBITDA 24.4 13.7 24.3 40.5 Net Profit 100.2 (43.5) 97.2 116.0 favour of multiplexes and rising investments in content will drive higher EPS 61.7 (49.7) 97.2 116.0 screen rollouts and footfalls, which are expected to grow at 17.2% and 14.3% (FY14-17E CAGR) to 499 and 57.6 million, respectively. By virtue of Valuation summary limited competition in most of its catchments area, Inox enjoys pricing FY14 FY15E FY16E FY17E power, which will help drive up ATPs from | 156 in FY14 to | 188 in P/E 37.3 74.0 37.5 17.4 FY17E. This coupled with rising footfalls is expected to aid 18.6% CAGR Target P/E 49.5 98.3 49.9 23.1 in FY14-17E in net box office revenues to | 818.1 crore. High margin F&B EV / EBITDA 15.9 15.0 12.2 8.5 P/BV 3.5 2.7 2.5 2.2 and advertisement segments, with increased management focus, may RoNW 9.4 3.7 6.8 12.8 grow at 21.5% and 35.0% CAGR in FY14-17E to | 291.0 crore and | 121.8 RoCE 11.6 5.8 8.0 13.0 crore respectively, aiding EBITDA margin expansion from 16.0% to 18.4% in FY17E. At the aggregate level, Inox is expected to post revenue, Stock data EBITDA and PAT CAGR of 19.8%, 25.7% and 34.0%, respectively, over Particulars Amount the same time period. We value the company on SOTP basis at | 240 per Market Capitalization | 1736.2 Crore share and initiate coverage with a BUY recommendation. Total Debt (FY14) | 223.7 Crore Cash and Investments (FY14) | 19.3 Crore Consumerism to drive film industry, Inox set to emerge as beneficiary EV | 1940.6 Crore The Indian film industry is expected grow at 12.3% CAGR from | 13800 52 week H/L 191 / 84 crore to | 21980 crore in FY14-18E. Increasing screen penetration and an Equity capital | 96.2 Crore exponential increase in middle class consumption spending (to $3.2 Face value | 10 trillion by 2025) may act as catalysts. Inox would emerge as a clear MF Holding (%) 5.9 beneficiary of this consumerism trend. It is expected to post a revenue FII Holding (%) 14.0 CAGR of 19.8% over FY14-17E to | 1312.2 crore from | 762.8 crore. Price movement ATP to soar to new heights; cheapest source of out of home entertainment 10,000 250 Cinema is the most preferred and cheapest source of out of home 8,000 200 entertainment in India, with ATP at $0.7, among the lowest in the world. With rising investment in content and a better movie watching 6,000 150 experience, multiplex penetration is bound to increase. Inox as the 4,000 100 second largest exhibitor is expected to see a 17.2% expansion in screens to 499 by FY17 from 310 in FY14, and 6.5% CAGR in ATP to | 188. 2,000 50 Valuations to catch up with fundamentals; initiate with BUY rating 0 0 With limited competition, rapid screen rollout, rising footfalls and Mar-12 Oct-12 May-13 Nov-13 Jun-14 Jan-15 increasing investment in content, Inox’ PAT is expected to more than Price (R.H.S) Nifty (L.H.S) double by FY17E. Though the stock has rallied ~69% in the last year, we believe there is room for a further re-rating. Using SOTP, we value the ordinary shares at 22x FY17E EPS and treasury shares at 50% discount to Research Analyst current price to arrive at a target price of | 240/share, implying an upside Karan Mittal of 33%. We initiate coverage on Inox with BUY recommendation. [email protected] Exhibit 1: Valuation Metrics Sneha Agarwal (Year-end March) FY13 FY14 FY15E FY16E FY17E [email protected] Total Operating Income (| crore) 663.2 762.8 920.8 1,080.0 1,312.2 EBITDA (| crore) 98.0 122.0 138.6 172.2 242.1 Net Profit (| crore) 18.4 36.9 20.9 41.2 88.9 EPS (|) 3.0 4.8 2.4 4.8 10.4 P/E (x) 60.3 37.3 74.0 37.5 17.4 Price / Book (x) 3.4 3.5 2.7 2.5 2.2 EV/EBITDA (x) 20.0 15.9 15.0 12.2 8.5 RoCE (%) 9.6 11.6 5.8 8.0 13.0 RoE (%) 5.7 9.4 3.7 6.8 12.8 Source: Inox, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Promoter and FIIs & DIIs holding (%) (Dec 2014) Company background Inox Leisure Ltd was incorporated as a public limited company on November 9, 1999. It is a part of the Inox group that has a rich lineage of Non- successful businesses such as Inox Wind, Inox Air Products, etc. Inox Institutions Promoter 31% and Group Leisure operates as a subsidiary of Gujarat Fluorochemicals Ltd. It started 49% as a four screen multiplex in Pune and is now a force to reckon with in the Indian multiplex space with ~361 screens spread across 92 properties in DII 6% 50 cities. FII 14% Exhibit 2: Promoter group details Source: BSE, ICICIdirect.com Research Source: Inox, ICICIdirect.com Research The company is the second largest player in the multiplex space with a Region wise distribution multiplex screen market share of ~21%. It is behind PVR, which has North East South West about 463 screens in its portfolio and a multiplex screen market share of City 1591017about 27.2%. Apart from the organic expansion, the company has also Properties 23 18 21 32 grown inorganically by acquiring 89 Cinemas, Fame Cinemas and Satyam Screens797086130Cineplexes over the period. The Satyam acquisition has been a strategic Seats 20192 18000 20000 37000 move for the company cementing its position in the northern belt of the Source: Company, ICICIdirect.com Research country and also helping it bridge the gap with the No. 1 player. Inox has a strong presence in the southern and eastern states with about 82 and 70 screens, respectively (pre-Satyam). The management intends to add about 181 screens by FY17E end, thereby reaching a screen count of about 546 screens. Factoring in certain delays, we have incorporated addition of 134 screens over the next two years, Exhibit 3: Inox screen portfolio with timeline 400 Acquires Satyam 350 Cineplexes 300 Acquires 89 250 Cinemas 200 IPO - 1.7 Crore 150 shares @ | Number of Screens Number 120 each Acquires 100 Fame 50 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 9MFY15 Source: Company, ICICIdirect.com Research During 2006, the company came out with a public issue of 1,65,00,000 equity shares of | 10 each at a price of | 120 per share consisting of a fresh issue of 1,20,00,000 equity shares of | 10 each. Also, Gujarat Fluorochemicals made an offer for sale of 45,00,000 equity shares of | 10 each. ICICI Securities Ltd | Retail Equity Research Page 2 Exhibit 4: Inox – Presence across the country Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 3 Investment Rationale Consumption story in India to act as catalyst for multiplex industry With a revival of macroeconomic and per capita income growth, lifestyle based consumption is expected to witness a paramount change. While consumption expenditure has always been the driver of Indian economic growth, the pace and size of consumption spends is expected to multiply manifold. With favourable demographics and the largest working age population, India is set to have the largest middle class by 2050, contributing 32% of global middle class spending. On the one hand, with more people crossing the poverty line, overall consumption is expected to increase while, on the other hand, with rising income level, several households would move up the value chain resulting in premiumisation. Exhibit 5: Middle class distribution Middle class households to increase 4.7x from 31 mn in 2008 to 149 mn in 2030 22% Global >10 Lakhs 7% % 22% Strivers 5-10 Lakhs 17% % Middle Class 12% Seekers 2-5 Lakhs 29% 34% Aspirers 0.9-2 Lakhs 32% 50% Deprived <0.90 Lakhs 15% 222 million households in 2008(Household income in Rs) 323 million households in 2030 Source: GS (Working age population = share of population aged 15-60), McKinsey, ICICIdirect.com Research India is expected to witness a 4.7x increase in middle class households from 31 million in 2008 to 149 million in 2030. Owing to this, Indian middle class consumption spending is expected to cross $3.2 trillion by 2025, 3x of US$991 billion in 2010. Exhibit 6: 32% of world's middle class spending will be in India by 2050 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 China India Other Asia Japan United States EU Others Source: OECD, Bloomberg, Reuters, ICICIdirect.com Research The Indian economy has always been differentiated from other emerging markets by virtue of its unparalleled domestic demand led by a young population, rapidly growing middle class and rapid pace of urbanisation.