PVR Ltd: Hold

In a business where scale brings in greater profits, a few multiplexes are faring well despite a sluggish economy.

PVR, one of the largest multiplex operators in the country, has managed to have audiences thronging its halls and has also been able to raise its ticket prices.

Since the ‘buy’ recommendation last August, the stock has run up 45 per cent.

While the company’s business prospects remain quite robust, the stock’s valuation now seems a tad expensive. At ₹514, the PVR stock trades at 20 times its likely per share earnings for 2014-15. Given the good business prospects but high valuation multiple at which the stock trades, investors can retain their holdings. Further exposure can be considered on declines linked to the broader market.

Increase in footfalls, ticket prices and enhanced spend on food and beverages by customers have helped PVR deliver healthy numbers in the past two years.

PVR’s buyout of Cinemax has added to its screen count in lucrative cities such as Mumbai. Cost rationalisation has also helped the company increase profits.

Occupancies in its theatres are steady, and with a slew of mega releases featuring top movie stars set to hit the screen over the next few months, the trend may continue in the next fiscal as well. Advertising revenues too have improved.

In the first nine months of 2013-14, PVR’s revenues grew 82 per cent over the previous fiscal to ₹1,044 crore, while net profit rose 69 per cent to ₹55 crore.

PVR and Cinemax together have presence in 39 cities with a total screen count of 408.

While PVR is strong in the northern parts of the country, especially in the lucrative Delhi-NCR region, Cinemax is a key player in the western states, including the large market of Mumbai. The synergies thus are significant. After its acquisition of Cinemax, PVR, by capitalising on its superior brand image, has been able to drive up the former’s ticket prices steadily.

Besides, the company has been able to increase pricing of its tickets substantially over the past one year. The average ticket price (ATP) for the consolidated entity has risen over 4 per cent in the past one year to ₹175. Spends on food and beverages per head have increased more than 15 per cent to about ₹54 currently.

By sourcing goods as a combined entity, the company has also been able to derive cost benefits, thanks to increased scale. Advertising, which accounts for a tenth of the total revenues, has grown at a healthy 38 per cent in the nine months of this fiscal compared to the same period last year.

The occupancies, though reasonably good, were not top notch as there were not many mega releases during much of 2013. Also, many films failed at the box office. While Chennai Express, Ram Leela, Krrish 3 and Dhoom 3 clicked, R…Rajkumar , Boss and Bullet Raja failed to set the box office counters ringing.

Over the next one year, many Hindi as well as regional language movies featuring top stars such as Rajnikanth ( Kochadaiyaan ) are expected to release. This should help occupancies. Recent hits such as Queen and Shaadi Ke Side Effects too may work in bringing in the audience and revenues.

Content risk is a big challenge that multiplexes such as PVR face, as their fortunes tend to gyrate with the success or failure of films that are screened. This is especially so with films that the company co-produces.

To hedge against content risk, producers are increasingly pre-selling satellite rights to direct-to-home providers, thanks to this medium’s rapidly increasing penetration. This could turn away potential audiences from cinema screens.