For PVR, blockbuster success in the first quarter

Baahubali, Bajrangi Bhaijaan whip box office

VR posted strong set of numbers for the June 2015 quarter with revenues up 34.2% to Rs 486 crore and net profit up 658% at Rs 58 crore, on a year-on-year basis, much ahead of Bloomberg consensus estimates of Rs 443 crore and Rs 39 crore, respectively. Notably, many factors contributed to this growth. Addition of 10 new screens, strong performance of movies such as Tanu Weds Manu returns, Fast & Furious, Piku, Avengers, Jurassic World, amongst others drove the topline. Average ticket price of Rs 188 also grew 5% year-on-year, though it was aided by charges towards 3D glasses. Spends per head improved 16% year-on-year to Rs 75 led by focus on food and beverages (F&B) revenues. Going forward as well, PVR believes there is significant scope to improve F&B revenues via innovations. Strong margin gains coupled with negligible tax rate (most properties are tax-exempt) aided net profit in the quarter.

While absolute costs have not reduced, strong topline has led to a fall in costs as a% of revenues, and boosted margins. Notably, PVR's EBITDA margin expanded a whopping 790 basis points year-on-year to 23.3% and is it’s highest in the past 11-12 quarters. Interestingly, the savings came in each cost item including film exhibition cost (down 76 basis points to 23.4%), rent (down 233 basis points to 15.9%) and so on. Synergies from full integration of Cinemax buyout also boosted profitability. PVR believes its latest acquisition of DT Cinemas will add Rs 40-50 crore to its annual EBITDA and will be integrated in 4-6 months.

Nitin Sood, CFO, PVR, says, "We expect EBITDA margin to expand significantly in FY16. The quantum of expansion will be contingent on our performance in Q2 and Q3. For now, the momentum appears strong with good start to Q2 and robust content pipeline in the next 4-6 months."

Given the lack of significant players in premium locations, PVR is not exploring further acquisitions. The focus from here on will largely be on organic growth and pushing revenues from F&B (28% of revenues) by introducing new products and improving quality to compete efficiently with quick service meals in food courts. The company has reduced its net debt by Rs 50 crore to Rs 650 crore in the June quarter and will use surplus cash flows to reduce debt going forward as well.

In the near-term, given the earnings beat, there could be some upward earnings revisions by analysts, which in turn could push PVR’s stock further. The PVR scrip surged 5.4% to Rs 859.7 on Wednesday.

However, even though the September 2015 quarter has begun on a strong note with robust collections by Baahubali and Bajrangi Bhaijaan, PVR's medium-term performance will mirror box office performance (59% of revenues). This may result in some volatility in PVR’s financials and is a downside risk.