Higher-margin businesses likely to grow faster: F&B and advertisement revenue streams deliver superior margins and are likely to outgrow net box office revenue.
Inox Leisure (INOX), India’s second-largest multiplex operator, is an attractive play owing to its aggressive expansion plans, premiumisation, and ramp-up of margin-accretive ad and F&B revenues, not to mention the closing gap with market leader PVR. With a healthy balance sheet and negative working capital, the company is well placed to expand. We estimate INOX would clock CAGRs of 19% in revenue and 35% in EPS over FY19–21, and are initiating coverage on the stock with a Buy at a PE of 20x (33% discount to PVR) December 2020e EPS (ex-IND AS 116), which yields a target price of Rs 475.
Robust expansion—We expect INOX to add 80 screens each in FY20 and FY21 (574 in FY19). Its low gearing implies ample firepower for its expansion plans.
Higher-margin businesses likely to grow faster: F&B and advertisement revenue streams deliver superior margins and are likely to outgrow net box office revenue. We estimate revenue CAGRs of 26% in F&B and 18% in ad over FY19–21e would drive margin growth.
Outlook: We estimate INOX would clock revenue, Ebitda and EPS CAGRs of about 19%, 24% and 35%, respectively, over FY19–21 underpinned by: (i) aggressive expansion; (ii) uptick in F&B and ad revenues; and (iii) ramp-up of premium formats. Key risks: (i) slower commercial real-estate development; and (ii) shrinking time windows between theatrical and digital releases. The stock trades at ~16x/13x FY20/FY21e EPS (ex-IND AS 116 adjustment).