PVR: Correction offers attractive entry point

DT Cinemas buyout is expected to be earnings accretive FY17 onwards, say analysts

The PVR scrip fell about 4% on Wednesday to Rs 642 a piece, under-performing the S&P BSE Sensex which surged 1.4%. Notwithstanding the deal's long-term benefits and synergies, most analysts believe PVR is paying a premium to acquire DLF's cinema exhibition business DT Cinemas (DT) for Rs 500 crore which will limit immediate gains for the company.

This impacted the stock price on Wednesday as the deal was announced post-market hours on Tuesday. However, this correction offers a good entry point in the PVR scrip. Most analysts remain positive on PVR and their average target price of Rs 744 per share indicates upside potential of about 16% from current levels. 

The DT Cinemas buyout will provide multiple benefits to PVR. One, DT's 29 screens across Delhi NCR and Chandigarh will push PVR's multiplex screens' market share in Delhi-NCR and Chandigarh to about 53% and 60% from 35% and 53%, respectively.

DT will add 10 more screens in two of its properties in NCR over the next year and a half which will be funded by DLF. DLF will hand over completed properties to PVR. Most of DT's properties are in premium locations and the fact that they are well maintained means PVR will incur nominal refurbishment charges.

In this backdrop, PVR expects to generate annual operating profit (EBITDA) of Rs 43-44 crore from the total 39 screens in first complete year of operations post the integration.

This acquisition will also increase PVR's dominance in the NCR region, limiting competitive intensity. Analysts believe PVR may look at raising ticket prices as well as ad rates and Food and Beverages income post integration of DT Cinemas. 

The deal will be funded largely by equity and some debt. "As promoters would want to retain a controlling stake (at least 25.01%), we expect PVR to dilute a maximum of 18% of existing equity and raise Rs 497 crore at current market price to fund the deal," says Rohit Dokania of IDFC securities in a recent note on PVR.

While PVR states that the deal is valued at 11 times one-year forward EV/EBITDA, analysts at IDFC Securities estimate it at 12.5 times FY17 EV/EBITDA. When compared to recent deals in the exhibition business valued between 7-15 times one-year forward EV/EBITDA, the deal valuations appear to be on the higher end.

Analysts believe these valuations provide scarcity premium to DT Cinemas. This deal is estimated to add about 3-4% to PVR's EPS in FY17 and Rs 200-Rs 250 crore revenues when all 39 screens are operational. For FY15, PVR's revenues stood at Rs 1,481 crore and at 10 times FY17 EV/Ebidta the stock is trading at the lower end of its historic band of 10-12 times.