Saurabh Mukherjea*

Do you know which multiplex chain in the country boasts of an envious 40% share of Hollywood box office collections and 25% share of Bollywood box office collections? It goes by the name of PVR. In an industry, which is in the throes of consolidation on the back of a series of acquisitions, PVR has emerged as the king in a four-player market with Carnival, Inox and Cinepolis making up for the rest.

Given the limited competition, low screen density, and diversified content, PVR has tremendous growth potential to unleash. With 600 screens, the Bijli brothers-owned multiplex has the potential to grow revenues 7x and profits 10x over the next 15 years. This will be led by a combination of internal drivers (screen launch in high-quality catchment, pricing power, growth in ancillary revenues) and external tailwinds (closure of single screens and the introduction of the Goods and Services Tax). 

Prime time
PVR finds itself in an industry where the competitive dynamics are improving owing to increased revenue for movies via digital distribution, market share gain for multiplexes (relative to single screen cinema halls), and diversified content, with Hollywood and regional cinema growing faster. The Indian box office continues to be dominated by local content and franchises, unlike in China where Hollywood (dubbed) is dominant. While demand for local themes and content continues to be strong, the share of Hollywood content has gradually increased. Therefore, Indian players such as PVR have lower content risk.

The multiplex major has the lowest competitive intensity among other Indian discretionary companies. The inherent strength of locational advantage and high occupancy levels give it more pricing power than compared with players in the apparel and jewellery space. These competitive advantages coupled with differentiated experience drives customer willingness to pay a premium.

Limited supply of quality multiplexes in densely populated catchments means India has the lowest screen density. But a strong movie watching culture (1,200 number of movies get released in a year) translates into occupancy levels that are the highest in the country. These factors contribute to PVR having the highest asset turn among listed peers, both local and global. In fact, there is scope for improvement in asset turn, given PVR’s ability to raise average ticket prices (ATP) as well as increase the share of ancillary revenues from food and beverages (F&B). PVR’s F&B spend per head, at 41% of ATP, is at par with some of the leading global exhibitors. However, it can go up to 50% through menu innovations and meal offerings. PVR currently offers meal options such as pizza and pasta in addition to snacks. These options are meal replacements in a 150-minute-long movie and have been driving F&B spend. 

Premium locations and higher share of ancillary revenues (47% in FY17) in the form of advertising and high-end food and beverage (F&B) options have already resulted in higher asset turn of 1.4x for PVR versus 0.8x for its peers. This makes PVR well-placed to translate margin gains from better indirect tax efficiency (e.g. GST) into sustainable return on equity. We expect margins to improve by 360 bps by FY20 with higher average ticket prices (4% CAGR), and higher revenue share of F&B (31% in FY20 from 27% in FY17). 

With the highest occupancy levels in the world, PVR’s premium positioning is strong as more than 50% of its screens are in the top eight cities whose per capita GDP is 7x that of the national average. Customers willingness to pay a premium is evident from Starbucks’ success in India, where the US cafe giant clocks 5x more sales per store than that of the domestic cafe market leader. The low screen density in major cities coupled with increasing standards of living imply that ATP, as a percentage of city GDP, in major cities is on par with other major cities of the world. There is room for growth, since India’s screen density is significantly lower compared with these cities.

Unlike consumer discretionary peers that operate in a more competitive environment, PVR’s risks and earnings volatility are limited to content, which can be cyclical rather than structural. Hence, PVR’s valuation of 29x estimated FY19 earnings EPS is driven by growth prospects in a low screen density market (7 screens per million population versus 30 in China), inherent pricing power (5% CAGR over FY17-FY20) and improving revenue share of F&B.

The right climax
Expectations of GST rate of 18% and consequent margin gains of 400 bps (25% increase in FY19 operating profit) was watered down as the government imposed 28% GST on movie exhibition. This rate is similar to current taxation, but results in better tax efficiency gains of 180 bps. However, GST has also brought regional movies, which paid lower taxes, under the higher tax net.

GST will help PVR in a big way. The states could wave off their share of GST on regional films. With central government unlikely to cede its share of GST, regional cinema in some states will be taxed at a higher rate. Tamil Nadu has already raised ticket prices. Regional cinema, which enjoys preferential taxation, forms 23% of PVR’s revenues. A waiver by even two states (Andhra Pradesh and Tamil Nadu) could add 120 bps to its operating margin. 

Thus, we feel PVR’s valuation has enough room for a rerating as it is expected to clock healthy earnings growth (46% earnings CAGR over FY17-FY20) and return ratios (return on invested capital from 15% in FY17 to 25% in FY20). Hence, we expect a meaningful upside in the stock over the next 12 months.

*The article has been co-authored by Abhishek Ranganathan.  Mukherjea has not made any stock recommendations in this article and the recommendations are solely attributable to Ranganathan. The views expressed in the article are personal and cannot be attributed to that of Ambit. Neither Ambit nor the authors have any holding or other interest and proprietary dealings with and in any stocks discussed in this article