Maintain buy on PVR as Cinemax deal to add muscle

Updated: Dec 2 2012, 05:15am hrs
We maintain a buy rating on PVR with a target price of R284. At the current market price, the stock is trading at 16.0 times and 13.3 times FY13e and FY14e P/E, respectively. Further, we rate PVR as a sector performer as we like the company's aggression and ability to tie up funds quickly. The ability to execute the deal without putting a significant strain on the debt level is a positive.

PVR has announced buyout of Cinemax Indias entire promoters stake of 69.27% for R395 crore, valuing the latter at R203.65 per share (~10% premium to Thursday's closing price).

PVRs board has also approved purchase of up to 26% stake of Cinemax from minority shareholders pursuant to an open offer. To fund this, the PVR board has approved raising of R260 crore via preferential issue of ~10.6 million shares of PVR at R245 per share. After this deal, PVR will be the largest multiplex operator in India with 351 screens, well ahead of peers. Inox and Fame together have 256 screens, while Big Cinemas has 254. PVR will gain access to eight new markets.

In H1FY13, Cinemax posted Ebitda margin of 22.5% vis-a-vis PVRs 19.6%. As per H1FY13 performance, Cinemax will add 69% and 48% to PVRs revenue and Ebitda, respectively. Cinemaxs average ticket price (ATP) was R139 vis-a-vis R155 for PVR (FY12 end) and is expected to increase once PVR takes over.

Of the preferential issue, PVR promoters will infuse R25 crore, L Capital R82.3 crore, while Renuka Ramnaths Multiples PE fund R153 crore. Post the deal, L Capital and Multiples PE will own ~15.8% stake each, while promoters will hold 32% stake in PVR. Currently, PVRs net debt is ~R150 crore and D/E stands at 0.6x. To fund this deal, it needs to raise ~R135 crore additional debt (D/E is likely to remain at ~0.7x).

Key negative from this deal is a ~36.7% dilution of minority shareholders. Also, we need to monitor how PVR manages the two brands PVR and Cinemax and possible concentration of screens in some geographies. We will revise our numbers once we have more details, but remain positive as we expect PVRs bargaining clout to increase and operating synergies to kick in.