Multiplex - Upside risk from consolidation - ICICI Securities

'History shows fans want consolidation; you see it across the web every place. The big players are people like Google, Amazon, eBay, Facebook.' Irving Azoff, CEO of Azoff MSG Entertainment.

Everyone knows that most new industries are fragmented, and consolidate as they mature. Indian cinema theatres, though not a new industry, but is highly fragmented. We see Covid-19 as a catalyst to accelerate consolidation in Indian theatre chain business. Though large screen shut down is likely in single screens, it may drive multiplexes' occupancy higher. Our working shows 100bps higher occupancy will drive EBITDA higher by 9.1% and 11.7% for PVR and INOX, respectively. Our FY23E occupancy estimate for PVR and INOX is at 35% and 28%, same as FY20; we see an upside risk to these numbers. We maintain our BUY rating on PVR (TP: Rs1,679); and INOX (TP: Rs424).

- Understanding the India multiplexes industry. India multiplexes' industry is highly fragmented, and top four operators control only 24% of screens share in FY20. Domestic box office collection was Rs122bn, and we estimate industry average ticket price (ATP) to be Rs130, and admits at 939mn. In CY19, Ormax stated admits (or footfalls) was ~1bn, and we estimate this to have decline in FY20 due to under performance of regional box office, which drives higher admits but lower ATP, and impact of Covid pandemic. Total industry seat capacity is seen at 2.8bn, thus, occupancy was 34%.

Multiplexes' box office revenue is estimated at Rs58bn (47% of industry box office revenue) driven by 320mn admits (34% of industry admits) and ATP of Rs180. Multiplexes' occupancy was 30%, which is lower compared to industry due to lower presence in South India which enjoys higher occupancy.

Single screen cinema theatres' box office revenue was Rs65bn, and controls 53% of industry revenue; but have higher admit at 620mn (66% of industry admits). They enjoy higher occupancy at 36.5%, but lower ATP of Rs104.

- Consolidation is inevitable. As per KPMG India's Media and Entertainment report 2020, 'Post the lockdown in Mar'20, no new screens are expected to be added during FY21 other than those already under progress. Also, many single screens may be permanently closed.' Our working of single screen shows the business model is very fragile, and has been surviving due to depreciated asset, owned property, and low operational cost. In comparison to multiplexes, single screens suffer from low F&B and ad contribution, which make highest money for multiplexes. Though single screens have been shutting down for the past five years, we see stepdown post-Covid.

The strength of multiplexes' business model can be explained from rise in F&B and ad contribution in revenue; they are contributing significantly to EBITDA and FCF.

- Stronger theatres' chain may gain most. We have put out a scenario analysis to measure the impact of industry occupancy on assuming decline in seats availability by 5%, 10% and 20%. We also estimate admits to fall (from FY20 base) by half of seat reduction due to affordability (higher ticket price of surviving screens), change in distance to nearest theatres etc. Based on our working, occupancy for the industry will improve by 100bps, 200bps and 440bps, respectively, in the three scenarios. The maximum reduction in seat availability may happen in single screen, and benefit of consolidation (via higher occupancy) can be higher for surviving single screens; but we expect good spell over benefit for multiplexes as well. Our working shows, 100bps higher occupancy for PVR / INOX to improve EBITDA by 9.1% and 11.7%, respectively. The EBITDA benefit could be lower if these admits spend lower on F&B.

Maintain BUY rating on PVR and INOX

We maintain our BUY rating on PVR and INOX and target price of Rs1,679 and Rs424, respectively, valuing PVR at 13x FY23E EBITDA and INOX at 12x FY23E EBITDA. INOX is our top pick in media sector.

PVR is a premium theatre chain in India, and its strong business of F&B (which was 62% Westlife Development and 25% Jubilant FoodWorks revenues in FY20), and advertising is under-appreciated in our view. PVR will continue to grab higher market share over the next decade as well with its ability to raise funds in crucial periods, and likely vacuum in system with many theatres struggling to reopen post Covid. At current price, PVR is trading at 11.1x FY23E EBITDA (adj. Ind-AS 116) and 23.2x FY23E EPS.

INOX is strongly positioned to grow faster ahead of competition on account of narrowing gaps in F&B and advertising revenues vs PVR. It is still at only 81% and 64% of PVR on spend-per-head and ad revenue/screen, respectively, and has huge headroom for growth, which indeed will also boost profitability. Further, INOX has stronger balance sheet vis-à-vis PVR, which on normalisation should allow INOX to grow its screen market share. In the past two years, its incremental multiplex screen market share was strong at 42% and 27% (vs total screen market share of 19.9%). At current price, INOX is trading at 8.6x FY23E EBITDA (adj. Ind-AS 116) and 17.1x FY23E EPS.

Source : Equity Bulls

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