We reiterate our positive stance on PVR owing to: (1) strategic acquisition of SPI Cinemas (SPI) – set to reap manifold benefits– and (2) limited overhang of F&B controls – till now courts have adopted favourable stance on the issue.
As SPI is the most popular screen brand in south India, PVR will draw operational synergies and scale up ad revenues, while reducing content risk. The acquisition also clears the decks for PVR to emerge as the No. 1 player in key south Indian cities as well as undertake seamless expansion (100 plus screens post FY19). We expect the deal to be earnings accretive in the first year itself. Hence, we raise our FY19/20E EPS by 2.70%/4.08% and also revise our target multiple to 30x (from 28x) FY20E EPS to arrive at a revised TP of Rs 1,608 (earlier Rs 1,442). Maintain ‘buy’.
South India remains under-penetrated in terms of number of multiplex screens (14% in S India vs. 60% in N India). SPI has 68 operational screens (8 more in Q2FY19) with another 13 screens to be opened in FY19. Post acquisition, the combined entity will have 700-plus screens with an estimated footfall of 90 m in FY19.
PVR plans to buy 71.7% equity in SPI for cash consideration of Rs 6.3 bn and the balance 28.3% via issue of 1.6 bn shares. The cash consideration will be funded partially via the Paytm- BookMyShow deal (Rs 3.8 bn) and staggered debt (Rs 1.5bn/ Rs 1bn in FY19/20). Subsequent to petitions filed at different high courts to allow outside food at the multiplex screens, pertinent judicial bodies – Madhya Pradesh and Telangana HCs – have decreed multiplex-goers to abstain from taking outside food inside the screens. Maharashtra also dismissed the issue.
We expect revenue growth to be supported by aggressive expansion (aided by entry in MENA region), strong movie lineup, synergistic scale-up in ad revenue and business from SPI screens.