PVR - If You Want To Buy Stock From Media & Entertainment

PVR Cinemas: Buy Stock report from K R Choksey stock research team. Stock analysis after Q-3 FY 2008 financial results of the company. PVR is one stock which would benefit from rising Indian middle class income and part of consumption growth story in India. More and more people in India are inclining towards multiplex experience of a movie and PVR is just providing that!

Reco price: Rs 88
Current market price: Rs Rs 88
Target price: Rs 180
Upside: 104.5%
Brokerage: KR Choksey

The current market price offers a good entry point for investors willing to hold on to the stock for a two-three year period. While the near-term outlook for earnings is likely to be dimmer than the past, amidst a sluggish period for the film industry, the long-term prospects for the company remain bright.

The Net sales for Q3 FY09 were up by 17 per cent Y-o-Y to Rs 78.4 crore driven by F&B income, revenue contribution from new properties and advertisement & royalty income. The Occupancy rates have declined by 580bps Y-o-Y but improved by 200bps q-o-q to 34.7per cent in Q3 FY09.

Q3FY09 Result Analysis
Topline not impressive, lack of quality content Overall occupancies Y-o-Y decline by 580bps to 34.7%, net operating income grew by 16.7% to Rs 76.6 crore, led by higher ticket / F & B realization from comparable properties, revenue contribution from new properties and robust growth in advertisement revenues.

Margins impacted, launch of new properties Operating margins Y-o-Y decline by 220bps to 18.8% due to increase in other expenditure by 16.1% to Rs 18.5 crore. (Promotion expenses for new properties) and rent increased by 8.1% (addition of new properties)

However, spend per head grew by 16 per cent Y-o-Y to Rs 37, out of which growth of 6 per cent was driven by existing properties and rest was driven by high average spend per head from new properties, including PVR Premiere. The average ticket price has also increased by 7.7 per cent Y-o-Y to Rs 140; the growth led by higher ATPs newly opened PVR Premiere properties.

Important Statistics
Shareholding Pattern
Total shareholding of Promoter and Promoter Group (A): 41.19%
Institutional Holding: 32.72%
Public and Non institutional: 26.08%

Mkt Cap: 206.20
P/E: 12.53
Div: 10.00
EPS: (TTM) 7.15
B/V: 85.98
Mkt: Lot 1.00
FV: 10.00

The brokerage expects PVR to post a robust growth in Q4 FY09 as occupancies at their multiplexes are higher on account of release of quality content such as Slumdog Millionaire, Victory and Raaz along with films like Delhi- 6, Billu Barber and Dev D in the pipeline. Further, in Q4 FY09, PVR would open a 24-lane Bowling Alley Center at Ambience Mall in Gurgaon, which would help them to diversify their revenue model. At Rs 88, the stock is trading at 8.1x FY09E EPS of Rs 10.9

Focus on metros
From a long-term perspective, however, PVR’s ability to maximise spends on tickets, food and advertisements augurs well for its overall profitability. PVR derives about 20 per cent of its revenues from food and beverages and, thanks to its large screen presence in metros, another 10 per cent from advertisements. Maximising revenue streams beyond the box office is key to maintaining profitability at a time when film hire costs (the cost to exhibit a film in a multiplex) are on the rise. PVR appears to have fared better than its peers on this score.

This may be partly due to PVR’s focus on metros even as its peers scout for properties in Tier-2 and Tier-3 cities. The company believes that metros remain the most profitable centers for multiplex operators, as spending habits are yet to mature in smaller towns and cities.

This view appears to be validated by its ability to command higher ticket prices in cities such as Delhi and Mumbai. Its existing properties clock superior occupancy levels of over 40 per cent, charge an average ticket price of Rs 130 and there has been an increasing trend in spends per head.

The company’s operating margins are likely to remain higher than its peers, who are now foraying into smaller towns and cities.

PVR recently launched PVR Premiere for the urban elite, with ticket prices ranging from Rs 150-750. The company also operates a low-cost multiplex model PVR Talkies in towns such as Aurangabad and Latur, where tickets are priced at Rs 40. The use of multiple formats that straddle across income segments enables the company to capitalise on both increasing footfalls and the increasing willingness to spend on entertainment.

Building on distribution
With increasing screen presence, PVR is well-placed to build on its distribution business, operated by subsidiary PVR Pictures. Although it is early days still, we expect PVR Pictures to make an increasing contribution to revenues and profits over the next couple of years.

The company’s first co-production Taare Zameen Par with Aamir Khan Productions was a runaway hit. More such projects have been lined up, including one from Aamir Khan Productions expected to release in July 2008.

PVR Pictures, which already has a track record of distributing strong English movie titles, has distributed fairly successful Hindi movies such as Bheja Fry, Omkara and Honeymoon Travels over the past year.

The distribution business appears to be closely tied with the exhibition business, considering that these films clicked particularly well with multiplex audiences. PVR’s multiplexes are present in six of the nine territories for film distribution, which makes it easier for PVR Pictures to drive distribution through its own multiplexes.

A presence in distribution will also keep a check on film hire costs for the multiplex chain.

At the CMP of Rs 88, PVR is trading at 9.9x TTM EPS of Rs 8.9 and at 8.1x FY09E EPS of Rs 10.9 We believe the slowdown in rollout plans. As guided by the company, 33 screens would be coming in FY10, which would take total number of screens to 141.

We believe company to post a robust growth in Q4FY09 inspite of slowdown because till now the occupancy at multiplex are high because release of quality content such
as SLUMDOG MILLIONAIRE, VICTORY, RAAZ, LUCK BY CHANGE and beside above release of the movies in pipeline for the quarter are-DELHI- 6, BILLU BARBER, DEV D, Mere
Khwabon Mein Jo Aaye,etc

As in Q4FY09, company would be opening its first project - a 24-lane Bowling Alley Center at Ambience Mall in Gurgaon, which would help them to diversify their revenue model.

We maintain BUY rating with downward revision in target price from Rs 220 to Rs 180 based on SOTP valuations, an upside of 104.5% from current levels.

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