Is it worth buying the expensive PVR stock?

The stock of PVR, the leading movie exhibitor in the country, has gained over 21 per cent in the past year despite the overall slowdown in consumer spending. Strong movie content, brand recognition and a large screen presence aided the company’s growth. PVR has 800 screens, the highest number among peers, with 1.75 lakh seats across the country. Given that the Indian market is underpenetrated in terms of screen count, there is a huge growing opportunity for players such as PVR which continue to expand their reach and presence.

The film and entertainment industry is expected to clock a healthy growth, thanks to a rising number of movie- goers and exports of film content to foreign markets, particularly to China and West Asia.

PVR recently forayed into Sri Lanka (Colombo), and is expanding through additional screens and multiplexes.

With its wide reach, strong content, increasing footfalls, premium offerings and expansion plans, the company has good growth prospects. However, the stock is expensive, which limits the upside for investors in the near term. At ₹1,756, the stock trades at 35 times its FY21 estimated earnings. Its peer Inox Leisure trades at 22 times its estimated earnings.

Investors with a two- to three-year perspective can hold the stock.

Strong market presence

PVR is one of the leading players in the movie exhibition sector and enjoys about 28 per cent market share. During the first half of FY20, the company added 42 new screens across cities. Rapid urbanisation has also helped the company expand its screen presence. The number of screens has risen from 579 in FY17 to 800 (including SPI Cinemas) till date. The company has a strong pipeline for growth, with 120-odd projects under way. The company plans to open 50-60 screens this year and 80-100 screens in FY21.

The slow rise in premium format screens (IMAX, Onyx, P[XL]), which attract significantly higher ticket prices, would also help increase the revenue for the company.

Nearly 10 per cent of the firm’s screen portfolio (80 screens) is premium. PVR recently added to this segment by launching a 12-screen complex in Dwarka, Delhi, with premium screens such as IMAX, 4 DX and LUXE auditorium.

Further, an increasing demand for modern cinema screens featuring quality infrastructure, latest audio-visual systems and multiple food and beverages offerings, augur well for the company’s growth prospects. PVR offers these facilities for people across all income levels. For instance, to capture movie-goers in tier II and tier III cities, the company launched PVR Utsav where the ticket prices start at ₹100. On the other hand, PVR’s Luxe and Director’s Cut offer superior projection and sound systems, special assistance services and so on. The ticket prices in such properties are typically ₹800-1,200.

Since most of PVR’s screens are at prime locations, the company has been able to charge a higher average ticket price (ATP) to its customers. During the first half of FY20, the ATP stood at ₹ 202; its peer Inox had an ATP of ₹197.

Revenue to grow

PVR derives the maximum revenue from its box office collection, which contributes 54 per cent; 29 per cent comes from food and beverages and 10 per cent from advertisement income. The balance revenue is from convenience income (5 per cent) and other income including film production, gaming and management fee (2 per cent).

The company’s performance has been robust, thanks to strong movie content, premium brand positioning and partnership with multiple brands. The impact of this performance is seen in the increased box office collection which grew at a compound annual growth rate of 15 per cent between FY16 and FY19; footfalls grew (CAGR) 9 per cent during the same period. The diverse product offerings have helped add to the ‘spend per head’ — it increased 8 per cent (CAGR) between FY16 and FY19.

With over 1,000 movies being released every year in the country, the box office collections are set to grow for the company. The movies currently running, such as Frozen II , Terminator: Dark Fate and Panipat , along with those in the pipeline, including Chhapaak , Darbar , Panga and Chehre , should translate into good revenue growth in the coming quarters.

But the company faces risks from OTT (over- the-top) players such as Netflix, Amazon Prime and Disney+ which have deepened their penetration, thanks to better internet connectivity.

While there is an implicit practice of maintaining an 8-10 week window between release on screen and digital platforms, some movies are being released directly on these platforms. However, this segment is still at a nascent stage in India.

Also, to adapt to the changing market conditions, PVR has reviewed its business model. It has not only introduced virtual reality and IMAX screens, but also entered into a partnership with MUBI (an OTT player) to encourage both in-home and out-of-home movie experiences.

Through the partnership, PVR would offer free tickets for movies that have low marketing budgets and thereby improve footfalls at cinemas.

Stable financials

PVR’s revenue stood at ₹1,853 crore, a growth of 37 per cent; profit grew 86 per cent y-o-y to ₹65 crore during the first half of FY20 (figures without adoption of IndAS has been considered for comparison). The operating margin (EBITDA) rose to 20 per cent in H1FY120 from 19 per cent in the same period last year.

The company has a debt-equity ratio of 1.32.