Result Update July 27, 2017 Rating matrix Rating : Buy Inox Leisure (INOX) | 259 Target : | 325 Target Period : 12 months Potential Upside : 25% Robust set of numbers… What’s changed? Revenues came in at | 387.4 crore, up 15.0% YoY, aided by higher Target Unchanged EPS FY18E Changed from | 6.8 to | 7.1 advertisement revenues which grew by 56.8% YoY to | 33.4 crore. EPS FY19E Changed from | 9.7 to | 10.1 While footfall at 15.8 mn (up 1.7% YoY) was muted, blockbuster slate Rating Unchanged in the form of Bahubali 2 and Tubelight enabled the company to take 10.9% YoY hike in ATP to | 193. Net box office collections came in at | Quarterly performance 239.2 crore, up 12.0% YoY. F&B revenues came in at | 88.2 crore (up Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) 9.3% YoY), aided by 6.6% YoY growth in spends per head to | 65.. Revenue 387.4 336.9 15.0 288.5 34.3 EBITDA at | 75.3 crore was higher than our expectation of | 69.1 crore EBITDA 75.3 62.1 21.2 23.8 216.1 while margins came in at 19.4% vs. estimated 18.5%. The company EBITDA(%) 19.4 18.4 100 bps 8.3 1117 bps has been able to exercise strict control on most of the cost items PAT 32.1 25.0 28.6 0.3 9335.3 PAT came in at | 32.1 crore (versus expectations of | 28.0 crore) owing to beat at the operating levels. Key financials | Crore FY16 FY17 FY18E FY19E Baahubali 2 drives the superior performance Net Sales 1,158.9 1,220.7 1,425.1 1,599.0 The quarter was marked by blockbuster in the form of Baahubali 2 and EBITDA 189.9 144.8 214.2 263.4 other decent grosser such as Tubelight, Fate of the Furious and Hindi Net Profit 77.5 30.5 68.5 96.6 Medium. While footfall at 15.8 mn (up 1.7% YoY) was muted, blockbuster EPS (|) 8.1 3.2 7.1 10.1 slate in the form of Baahubali 2 and Tubelight enabled the company to take 10.9% YoY hike in ATP to | 193. We note that content slate for Valuation summary Q2FY18 includes big releases such as Jab Harry Met Sejal, Toilet Ek Prem FY16 FY17 FY18E FY19E P/E 32.1 81.3 36.4 25.8 Katha, Baadshaho among other. In H2FY18 also, the content pipeline Target P/E 40.3 102.0 45.6 32.3 looks strong with movies such as Tiger Zinda Hai, 2.0, Secret Superstar. EV / EBITDA 14.3 19.2 12.9 10.2 Consequently, healthy footfalls growth of 9.1% FY17-19E to 64.0 million P/BV 4.8 4.5 4.0 3.5 coupled with increase in the number of screens and ATP growth (5% RoNW 15.7 5.5 11.0 13.5 CAGR over FY17-19) will lead to 15.4% FY17-19E CAGR in the net box RoCE 12.9 7.3 13.2 15.9 office revenues to | 996.7 crore. Strong ad revenues growth Stock data Particulars Amount Inox, is the second largest multiplex player with 476 screens as on Market Capitalization 2,490.1 Q1FY18 and has a 19% share of multiplex screens in India & ~8% share Total Debt (FY17) in crore 317.0 of domestic box office collections. We note that historically Inox has had Cash (FY17) in crore 13.2 a weaker ad revenues monetisation and has commanded a lower EV 2,714.6 realisations vis-à-vis PVR. However, led by the strong content pipeline 52 week H/L 309 / 213 and increased acceptance by the advertisers, ad revenues grew by 56.8% Equity capital 96.2 YoY to | 33.4 crore in Q1FY18. The management remains bullish on the Face value 10.0 improvement in the ad revenues and expects the momentum to continue with an increase in the ad revenue per screen & realization per minute. Peer Comparison We have revised our ad revenue assumptions to 18.0% CAGR over FY17- 1M 3M 6M 12M 19E to | 133.9 crore in FY19 vs. | 96.2 crore in FY17. PVR -10.2 -14.7 4.8 23.5 INOX -4.4 -11.7 11.0 6.6 Preferred pick in the multiplex space; maintain BUY Research Analyst The rebound in the advertisement revenues coupled with management Bhupendra Tiwary intent to step it up further is heartening. We highlight that Inox has [email protected] superior levers of growth in advertisement and F&B revenues (that are at a discount to PVR), going ahead. Moreover, strong content slate ahead would lead to an overall improvement in profitability. There remains an uncertainty over the actual impact of GST and a concern over implementation of local body tax. At the present form, GST is largely likely to be a neutral affair. On valuations front, Inox, which is trading at 10.2x FY19, is at ~30% discount to PVR. Given the ad revenues rebound, we expect its discount to taper off eventually. We continue to prefer Inox over PVR. We maintain our BUY recommendation and value it at 12.6x FY19E EV/EBITDA (~10% discount to PVR) to arrive at target price of | 325/share. ICICI Securities Ltd | Retail Equity Research Variance analysis Q1FY18 Q1FY18E Q1FY17 Q4FY17 YoY (%) QoQ (%) Comments Revenue 387.4 372.1 336.9 288.5 15.0 34.3 Topline beat was led by higher advertisement revenues which grew by 56.8% YoY to | 33.4 crore. Other Income 2.3 2.2 2.5 2.3 -6.0 0.0 Employee Expenses 23.0 24.8 21.6 21.6 6.1 6.1 Exhibition Cost 107.1 109.6 95.4 79.8 12.3 34.2 Cost of F&B 20.5 21.1 18.4 15.2 11.3 34.3 Rent 52.2 50.5 59.6 48.4 -12.4 7.9 Other Expenses 109.5 97.0 79.8 99.6 37.2 9.9 EBITDA 75.3 69.1 62.1 23.8 21.2 216.1 The company has been able to exercise strict control on most of the cost items. This led to superior EBITDA EBITDA Margin (%) 19.4 18.6 18.4 8.3 100 bps 1117 bps Depreciation 21.5 22.3 20.3 21.6 6.2 -0.4 Interest 7.2 7.3 5.8 7.2 24.4 0.4 Exceptional Items 0.0 0.0 0.0 0.0 NA NA Total Tax 16.8 13.8 13.6 -3.0 23.8 -661.2 PAT 32.1 28.0 25.0 0.3 28.6 9,335.3 PAT was higher owing to beat on the operating performance Key Metrics Footfalls 15.8 16.1 15.5 13.0 1.7 21.5 Footfalls were lower as movies barring Baahubali didn’t do as expected Occupancy 31.0 31.1 31.0 27.0 0.0 14.8 SPH 65.0 64.1 61.0 59.0 6.6 10.2 ATP 193.0 187.9 174.0 174.0 10.9 10.9 A strong content slate led by Baahubali enabled the company to take a superior ATP hike Source: Company, ICICIdirect.com Research Change in estimates FY18E FY19E (| Crore) Old New % Change Old New% Change Comments Revenue 1,408.9 1,425.1 1.2 1,583.0 1,599.0 1.0 We have realigned our estimates based on Q1FY18 performance EBITDA 209.6 214.2 2.2 260.4 263.4 1.1 EBITDA Margin (%) 14.9 15.0 16 bps 16.5 16.5 2 bps PAT 65.0 68.5 5.3 92.9 96.6 4.0 EPS (|) 6.8 7.1 5.3 9.7 10.1 4.0 Source: Company, ICICIdirect.com Research Assumptions Current Earlier Comments FY16 FY17 FY18E FY19E FY18E FY19E Footfalls 53.4 53.7 59.7 64.0 59.9 64.0 We have realigned our estimates based on Q1FY18 performance Occupancy 29.0 28.0 27.8 27.0 27.7 26.7 SPH 58.0 61.9 63.9 67.0 63.5 66.4 ATP 169.5 177.6 188.4 196.0 186.6 194.1 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Company Analysis Superior content to be the driver of footfalls The quarter was marked by blockbuster in the form of Baahubali 2 and other decent grossers such as Tubelight, Fate of the Furious and Hindi Medium. While footfall at 15.8 mn (up 1.7% YoY) was muted, blockbuster slate in the form of Baahubali 2 and Tubelight enabled the company to take 10.9% YoY hike in ATP to | 193. We note that content slate for Q2FY18 includes big releases such as Jab Harry Met Sejal, Toilet Ek Prem Katha, Baadshaho among other. In H2FY18 also, the content pipeline looks strong with movies such as Tiger Zinda Hai, 2.0, Secret Superstar. We expect Inox to exhibit footfall growth of footfalls growth of 9.1% FY17-19E to 64.0 million coupled with increase in the number of screens and ATP growth (5% CAGR over FY17-19) which will lead to 15.4% FY17- 19E CAGR in the net box office revenues to | 996.7 crore. The company is continuously upgrading its menu offerings in terms of F&B, which will lead to an increase in spends per head (SPH).