March 25, 2023
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PVR LTD, Multiplex behemoth arrives
Call & Research Report by Prabhudas Lilladher
Sector: Film Production, Distribution & Entertainment
CMP Rs. 1530, Target Rs. 2096 (37% upside potential)
Target Period: 12 Months
We increase our pre-IND AS EBITDA estimates for merged entity by 7.0%/7.5% for FY24E/FY25E, as we expect synergy benefits of ~Rs2bn to accrue over next 2 years. The PVR-INOX merger is expected to 1) lend invincible size advantage to combined entity (18%/30% screen/BO share respectively) 2) enhance BS strength (Inox had net cash BS as of Jan end) enabling rapid expansion into new markets and 3) improve bargaining power with various stakeholders in the value chain like film distributors, real estate developers, ad-networks and ticket aggregators resulting in material revenue/cost synergies. Though there are concerns over Bollywood underperformance, we believe it is not a structural issue (NBOC of Pathaan stood at ~Rs5.4bn despite high decibel negative campaigns); but a problem of content, as OTT proliferation has raised the bar of audience expectations from big screen. We expect merged entity to report footfalls of 170mn/185mn and pre-IND AS EBITDA margin of 19.7%/21.0% in FY24E/FY25E respectively. Retain ‘BUY’ on the stock with a TP of Rs2,096 after assigning EV/EBITDA multiple of 15.5x (no change) to merged entity.
Synergy benefits to accrue in next 12-24 months: Management has guided for synergy benefits of Rs2.25bn at EBITDA level over next 12-24 months. On revenue front, synergies would majorly accrue over 1) F&B 2) advertisement and 3) convenience income. On the other hand, cost synergies will arise from 1) scale advantage, 2) integration of supply chain, and 3) employee redundancies.
● Revenue synergies of ~Rs1.5bn to accrue over 2 years: Introduction of nonveg menu (Inox currently serves only veg food) and exploring pre-ticketing opportunity (selling F&B items to non-cinema patrons) will drive F&B sales while optimizing realization and focusing on off-screen advertising, events and sponsorships is expected to boost ad-revenue of the merged entity. In addition, improved bargaining power with ticket aggregators post-merger will drive convenience fee income. Overall, we expect revenue synergy benefits of ~Rs1.5bn to accrue over 2 years.
● Cost synergies of ~Rs0.5bn to accrue over 2 years: Integration of supply chain, improved bargaining power with film distributors, employee redundancies and vendor consolidation (savings in opex/capex from scale advantage) is likely to result in cost synergies of ~Rs0.5bn over 2 years.
On a conservative basis, we expect synergy benefits of ~Rs2bn to accrue (refer exhibit 1 for complete breakdown) over next 2 years (benefits of Rs0.9bn/Rs1.2bn in FY24E/FY25E respectively).
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