Both the companies should benefit from continuing increase in discretionary consumer spend, changing theatre industry dynamics, and inherently strong demand for movies
We initiate PVR and Inox Leisure at buy, with PVR being our preferred pick .We consider both of them to be secular growth stories (on culturally driven strong demand for movies), with Inox/PVR’s FY15-18e EPS CAGR of 86%/142% and RoEs up 4-5x from 4%/3% in FY15 to 17%/15% in FY18E. Assuming 1-year forward EV/Ebitda remains at current levels of 11x for PVR/Inox, our fair value would rise by 95%-125% in 30 months, implying a stock price CAGR of 35-40%.
Fundamental drivers intact: Uniquely positioned to benefit
Our buy ratings on PVR/Inox are based on the following: (i) We see continued increase in discretionary consumption spend, led by lower oil prices, 7th pay commission benefits, and favourable demographics (47% of population being youth), which will likely lead to higher spending for a superior cinema experience; (ii) Theatre industry dynamics are improving with single-screens on a decline and consumers preferring multiplexes. The industry is also consolidating with the top 2 being listed companies – PVR and Inox; (iii) Inherent demand for movies remains strong given cultural inclination for movie watching and lack of other meaningful entertainment options for families.
Catalysts: Good movie pipeline, GST implementation. Catalysts for the next 12m include: (i) Strong movie pipeline – Bollywood and Hollywood. Content pipeline for the next 8-12 months is expected to be strong. This would attract more people to theatres, allowing multiplexes to raise average ticket prices (ATP) and charge more for food and beverages (F&B), as well as benefit from advertisements; and (ii) Goods and services tax (GST). PVR and Inox pay about 22% net entertainment taxes. With GST rate expected at 17-18%, these firms’ taxes would decline, but this benefit will be partially offset by an increase in VAT. Net-net, we expect about 200-300bp Ebitda margin growth for these firms at a GST rate of 17-18%.
Strong execution at PVR (29% upside)/Inox (28%)
We consider both PVR and Inox to be well-run companies and expect them to maintain at least the historical run-rate of adding 50-60 movie screens per year. We also expect both of them to be selectively open for acquisitions (like in the past and in line with their strategy) – particularly in south India. Our FY17-18e Ebitda for PVR/Inox is 4-9% higher than consensus as we expect the companies to benefit from better ticket prices, F&B and operational leverage. Our 12-month DCF-based PO for PVR/Inox implies 29%/28% upside potential from current levels. PVR/Inox trades at 8.5-8.7x FY17e EV/Ebitda, and offers FY15-18e Ebitda CAGR of 38/38%. This is at a significant discount to Indian discretionary names trading at an average 19.8x Ebitda multiple. PVR/Inox trades largely in line with the global multiple average of 8.4x but their Ebitda CAGR of 38% compares favourably with 16% Ebitda CAGR of global peers.
Risks: (i) weak content pipeline; (ii) change in consumer behaviour after over-the-top (OTT) comes online; (iii) movie piracy impacting box office collections and (iv) changes in government rules or taxes.
Increasing discretionary consumption spend led by lower oil prices, 7th pay commission benefits and favourable demographics (47% of population being youth) will likely lead to higher spending for a superior cinema experience.
We estimate people with an annual income of over R200 thousand will increase from 16% of population in 2008 to 34% of population by 2030, providing a growing stream of affluent target base for multiplex owners.
Theatre industry dynamics are improving with single-screens on a decline and people preferring to watch movies in multiplexes, even in semi-urban areas. Furthermore, the multiplex industry has consolidated with top 4 companies being PVR, Inox, Cinepolis and Carnival. We consider both PVR and Inox to be well-run companies and estimate them to record strong Ebitda and EPS growth, led by continued strong execution.
Inherent demand for movies remains strong given cultural inclination for movie watching and lack of other meaningful entertainment options for families. India has the highest number of movie releases every year and with footfalls of 2 billion, just behind China. In addition to Bollywood movies, the movie mix is changing to Hollywood movies and regional movies (particularly in regions like south India). Furthermore, the content pipeline for the next 8-12 months is also strong which would likely ensure that the footfalls continue.
Valuations:Relatively inexpensive in context of growth. PVR and Inox trade at FY17e EV/Ebitda of 8.7x and 8.5x, respectively, and offer Ebitda CAGR of 38%/38% over FY15-18E. This is at a discount to the Indian consumer discretionary names which are trading at EV/Ebitda 2017e multiples of 19.8x. The multiples of the Indian multiplex names are in line with foreign cinema exhibitionists. However, we note that Indian names offer much better growth prospects than global names.
Relative to their short trading history, PVR and Inox trade at a slight premium to their historical valuations. However, given the improving margins and return profile, we expect their multiples to improve over time. Our target FY17E multiple for PVR and Inox is 11x and 10.7x, respectively.