A pricey show: PVR - Hold

This leader in the movie exhibition business has grown steadily. But the stock is expensive

The media and entertainment industry is expected to clock healthy growth due to changing consumption pattern and increasing income levels. The stock of PVR, the leading movie exhibitor in the country, stands to benefit from this trend. The stock has gained almost over five-fold in the last five years. But despite the run-up, investors with a two to three year perspective can continue holding the stock.

The company’s leadership position in the movie exhibition business, its strong brand, plans to expand its presence across the country through additional screens and multiplexes, and the underpenetrated movie exhibition market, aid its prospects. The growth in the business, while volatile during some periods, has been steady over the long term.

The company’s valuation is, however, expensive. At ₹1,307 the company trades at 32 times its FY19 estimated earnings, higher than the 27 times average of forward earnings over the past three years.

Strong movie pipeline

PVR enjoys a leadership position in the movie exhibition sector with 600 screens across the country, enjoying 27 per cent market share. The company operates in a fast-growing segment. According to the recent KPMG-FICCI report, the media and entertainment industry is expected to grow at a compounded annual growth rate (CAGR) of about 14 per cent in the five years from 2016 to 2021.

The company has opened 36 screens in the first nine months of FY-18 and plans to open 31 more in the last quarter. With the screen penetration in India being low (seven screens per million population), leading players such as PVR have good scope to expand. During the December quarter of 2017, the company has opened three screens. With most of the properties located in prime locations, the company is able to charge a higher average ticket price to its customers. For FY-17, the average ticket price of PVR stood at ₹196, higher than the average price charged by its competitor, Inox movies.

Box office collection is a major source of revenue for PVR, contributing 53 per cent, while 27 per cent comes from food and beverages. The CAGR in the box office segment over three years to FY-17 was 12 per cent. The impact of this robust growth is seen in the company’s key performance metrics. Footfalls witnessed a CAGR of 19 per cent to FY-17, spend per head too increased at 14 per cent (CAGR) for the same period, thanks to diversified product offerings, and average ticket price grew (CAGR) 4 per cent to FY-17.

The company derives 12 per cent of its revenue from advertisement and 8 per cent from other income that includes movie production and distribution. Premium brand positioning and partnership with multiple brands helps the company attract higher rates from advertisers, even in its new properties and screens. Between FY-14 and FY-17, the CAGR for advertisement was 18 per cent.

PVR being market leader, its box office collections are set to grow well as nearly 1,200 movies are being released every year in India, and the industry derives about 70 per cent of its revenue from domestic box office collection. The ongoing hits such as Padmaavat, Tiger Zindha Hai, Star Wars and Insidious, along with the pipeline of new movie releases, including Maze Runner, Black Panther, Hichki, Pari and Raid will translate into good revenue growth in the coming quarter.

But the short screen window — the time period between movie releases to television — can impact the box office collection for players such as PVR, though the management says that most content suppliers have agreed to maintain an 8-10 week window. The company also faces risk from OTT (over the top) players such as Netflix and Amazon Prime, which have increased their presence, thanks to rising internet connectivity.

To catch up with the television market, OTT players have also begun to screen movies (including Indian films), along with their original shows.

However, this segment is still at a nascent stage in India and the underlying need for movie going experience is expected to trump these threats.

Also, surge in digital consumption has compelled players in all sectors to review their business models. PVR too has made changes in its business such as introduction of VR (virtual reality) screens and IMAX screens. Tech and digitally-savvy consumers have also contributed to the company’s increasing ticket sales.

Stable financials

For the full year, the company reported a revenue growth of 15 per cent in FY-17 to ₹2,119 crore. Accordingly, the ticket collection grew 13 per cent to ₹1,125 crore, food and beverages increased 16 per cent to ₹578 crore and advertisement revenue increased 17 per cent. Adjusted profit also grew about 6 per cent for the same period to ₹376 crore.

The company reported revenue growth of about 7 per cent year-on-year to ₹1,749 crore for the nine months ended December 2017 and profit growth of 2 per cent for the same period. Revenue in the key box-office segment of the company also grew 8 per cent year-on-year to ₹1,690 crore.

The debt-equity ratio of the company is 0.8 times, giving enough room for expansion.

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