Analyst Corner: ‘Buy’ on PVR; fair value at Rs 1,800

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Published: March 19, 2020 1:00:04 AM

Cash inflow would be nil during this period and revenues would be booked at Rs 150 mn/month (amortization of BookMyShow/Paytm convenience fee deal).

Sharp 40% correction from peak presents an opportunity to buy this stock at an attractive valuation.Sharp 40% correction from peak presents an opportunity to buy this stock at an attractive valuation.

We upgrade PVR to ‘buy’ from ‘reduce’ with FV of Rs 1,800 (Rs 1,850) valuing it at 11X FY2022E EV/Ebitda (unchanged). While Covid-19 would significantly impact the business in the short term (say two months), we expect it to bounce back thereafter, led by pent-up demand and a packed line-up of movies. We cut FY2020-21E Ebitda estimates by 10-23% and retain FY2022E estimates.

Sharp 40% correction from peak presents an opportunity to buy this stock at an attractive valuation.

Almost all state governments have ordered complete shutdown of cinemas in order to contain Covid-19 outbreak. Subsequently, producers have pushed back movie releases and production studios have halted ongoing shoots. These restrictions could continue for a few weeks. We assess potential ST impact of Covid-19 on PVR’s financials assuming a complete shutdown for two months (base case). Exhibit 1 shows break-up of PVR’s cost structure. Film hire costs, F&B COGS, electricity are variable costs. Employee costs (permanent + contractual workforce) and other expenses (travel costs, repair & maintenance, advertising and other G&A expenses) are semi-variable in nature. Even as rental cost is largely fixed (fixed rent or MG + revenue share), several lease contracts have a provision
for partial/complete waiver in situations such as this.

As per our estimate, PVR would incur cost of Rs 750 mn/month in the event of a complete shutdown. Cash inflow would be nil during this period and revenues would be booked at Rs 150 mn/month (amortization of BookMyShow/Paytm convenience fee deal). We estimate Ebitda loss of Rs 600 mn/month (Rs 750 on cash basis) and cash loss (including interest expense) of Rs 850 mn/month. PVR has utilized available W-cap facility of about Rs 1.5 bn and increased cash-levels to about Rs 2-2.5 bn. Net debt as of date is about Rs 9.2 bn. We expect a strong bounce back in demand post Covid-19 led by pent-up demand, and packed line-up of movies (Q4FY20/Q1FY21 releases deferred would be scheduled during Q2-Q4FY21). Further, we believe that PVR’s performance is largely linked to content quality and weak macro has modest impact on the operating performance. Given this, we expect footfalls to largely recover post Covid-19 even in case of some incremental weakness in macro. That said, we note that advertising revenue growth could decelerate if economy slows down further. We like PVR for its thought leadership, premium location presence and branding, leadership in monetization and profitability, and execution track record. We value the stock at 11X FY2022E EV/Ebitda (excluding Ind-AS 116). We have cut our FY2020-21E Ebitda estimates by 10-23% as we model complete shutdown of about two months (base case).

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