Multiple triggers will improve PVR show

While GST is the immediate trigger, ancillary revenues will provide additional boost

While the broader markets have been on a downtrend, shares of multiplex chain PVR have touched 52-week highs in the past week. The stock ended 1.8 per cent higher in trade on Monday.

A key trigger is the potential passage of the goods and services tax (GST) legislation. Kotak Institutional Equities analysts say a GST rate of 18-20 per cent can lead to a 350-400-basis point expansion in operating profit margins, about 20-25 per cent upgrade in operating profit and 40 per cent increase in net profit. The current rate is 25 per cent, comprising entertainment tax (ticket sales), value added tax on food and beverage sales and service tax.

The other trigger is the expectation that the company will be able to sustain high advertising and ancillary revenues (food and beverages) helping it improve overall revenues and margins. Better operating performance in financial year 2016-17 (FY17) should come from a strong content pipeline, screen additions, improving realisations and advertising growth.

PVR plans to spend Rs 200-250 crore in adding new screens (65 to 610 by end FY17) and refurbishing existing ones. The company expects footfalls to increase 10-15 per cent in FY17 (on a higher base) with advertising growth expected to grow at double-digits. Footfalls and advertising revenue grew 17-18 per cent in FY16. Analysts at Maybank Kim Eng estimate revenues to grow 20 per cent supported by a 16 per cent increase in screens, 14 per cent surge in footfalls and a six per cent rise in ticket prices.

Further, ancillary revenues and advertising, which together formed 38 per cent of revenues in FY16, could aid margin expansion. While PVR’s overall gross margins stand at 25 per cent, those for food and advertising are at 75-90 per cent. For FY17, analysts expect food revenues to increase 26 per cent and advertising 19 per cent. Share of ancillary income is expected to move up 43 per cent, improving margins to 18.9 per cent in FY17. Margins could also get a boost from maturing screens (those that break even as capacity utilisation increases).

What is aiding box office collections in the June quarter is the good performance of Hollywood movies. However, given analysts’ target price of Rs 1,000-1,100, investors should wait for a correction before taking an exposure.