PVR Inox: Why this is a stock to add gradually
The management guides to annual EBITDA level synergies of Rs 225 crore over 12-24 months in the core exhibition business.
Highlights
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- Q4FY24 performance was a washout
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- Q1FY25 box office collections look weak, likely to impact PVR Inox results
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- Cuts in capex intensity and debt are welcome moves
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- JV with Devyani to open food court, 5-6 to come up in FY25
- Valuation at FY26 EV/EBITDA of 6.5x offers value should be accumulated gradually
Multiplex business PVR Inox (CMP: Rs 1,497.80; Market Capitalisation: Rs 14,698 Crore; Rating: Equal-weight) faced headwinds in the second half of FY24 on seasonality and the weaker than-expected footfalls in back-to-back two quarters, resulting in net loss for the year. The first quarter of the current fiscal (Q1FY25) is also likely to remain soft as a weak movie line-up, general elections, and the T20 World Cup kept viewers away. Despite the softness in the last couple of quarters, PVR Inox may see improvement in FY25 on the back of restructuring and the strong content lineup.
Recent Financial Performance
PVR Inox has formed a joint venture (JV) with QSR chain Deyani International to develop and operate food courts in malls. PVR Inox’s F&B revenue has grown at a CAGR of 18 percent over FY19-24 to Rs 1,958 cror. Devayani International, a franchise of KFC, Pizzahut, and Costa Coffee, has seen its revenue growing at a CAGR of 22 percent in the same period to Rs 3,556 crore. The gross margin on PVR Inox’s F&B business is 75 percent and the SPH (spend per head) is Rs 132, which is 51 percent of the average ticket price. A large demand for F&B comes from mall visitors. This is what PVR Inox is trying to capture. Devyani’s operating margin is around 18 percent. A similar margin is likely to be targeted by the JV.
Q1FY25 to be subdued
The coming quarter is expected to be subdued as reflected in the movie collections on the back of mediocre content lineup, election impact, and the T20 World Cup. We estimate that Q1FY25 gross box office collections are around 15-16 percent lower than Q4FY24 and likely to result in losses in the quarter. Kalki was the only one which made it big to the Rs 300-crore-plus club in the quarter.
Outlook
PVR Inox’s return to quarterly profitability on the back of healthy occupancy appears to be further pushed back and will impact FY25 visibility.
The management has guided to an annual EBITDA level synergies of Rs 225 crore over 12-24 months in the core exhibition business. Cost control with debt reduction is part of the company’s plan along with a gradual shift to a low-capex model in the coming years. In FY24, the company closed around 85 underperforming screens. It aims to add 120 new screens on a gross basis and will close 70 screens (net addition of 60 screens). Customer acquisition and retention initiatives are continuing and the passport programme (A subscription program for movie goers that offers discounted price) has been seeing a good response.
The management intends to reduce capex intensity for FY25 by 25 percent and eventually by 30-35 percent over the next couple of years through joint investment with developers and the FOCO (franchise-owned company-operated cinema) model. Similarly, the company has been renegotiating existing contracts for the last 1-1.5 years to reduce spending.
For the exhibition business, OTT continues to remain a key challenge and has introduced some form of volatility in the business model. The JV with Devyani and the ongoing restructuring should offset some of the impact.
Valuation
The PVR Inox stock has underperformed in the broad market due to concerns over growth and profitability of the business. At the CMP, the stock trades at FY26 EV/EBITDA of 6.5x, which is at a discount to its long-term multiple. We mentioned in our previous notes that this de-rating is the result of the OTT penetration and the consumer’s preference shift. Nonetheless, with PVR Inox focusing on cost discipline, restructuring, and diversification to adjacencies, there is value in the business. We therefore reiterate that investors should accumulate the stock gradually.
Bymoneycontrol