PVR Inox – Form is temporary; class is permanent, ICICI Securities

As clichéd as it sounds, we feel the cricket inspired title of the note holds true for PVR Inox. It is a strong market leader in its category with a history of value creation and a clean record on corporate governance. Further, competitive intensity in the space has reduced materially over the past couple of years. Given that India’s per capita GDP growth is likely to be sustained over the foreseeable future, we think movie exhibition is likely to benefit as more Indians enter the category of discretionary consumers. However, the stock has corrected ~35% from its peak over the past year due to rising concerns over content quality and inability of movie exhibitors to get back to pre-covid occupancy levels. This has been further exacerbated by a persistent inflationary environment since CY22 which has had a meaningful impact on ad-revenues across the board.

Our analysis indicates that the concerns regarding the impact of digital mediums (‘watching OTT content at home’ substituting ‘going to theatres’) and the ability of Hindi movies to draw audiences into theatres are not warranted.

While Q1FY24E is likely to be muted from a revenue standpoint, given the subdued performance of ‘Adipurush’, we think some indications of merger synergies such as – improving ATP and SPH for the merged entity – should start flowing through. We also believe improvement in content quality should start reflecting in higher occupancy levels in theatres from Q2FY24E as we note a stronger content lineup for the quarter.

At current valuations, we think the stock is a strong BUY with >40% upside and a favourable risk-reward skew (3.56:1). We think its rerating will probably require a trigger – such as strong performance from two or more Hindi movies in a quarter or green-shoots such as improvement in advertiser-sentiment.

Valuation: We see the content pipeline for PVR Inox improving from Q2FY24E and occupancy levels improving in tandem, hence, we expect a mean reversion of valuation multiples to historical averages. We have factored in 9.2% revenue growth (pro-forma) for FY24E with 560 bps EBITDA margin (pro-forma) expansion. Accordingly, our target price is Rs1,950 (prior: Rs2,100) with an unchanged multiple of 16x FY25E EBITDA. In our bull case, we see the stock trading at Rs2,200 and in our bear case – at Rs1,150, implying a risk reward skew of 3.56:1. Re-iterate BUY. Key risks: occupancy improvement to pre-covid level delayed beyond FY25E and merger synergies/efficiencies of scale not playing out. BCS Bureau