PVR: Correction offers attractive entry point

DT Cinemas buyout to be earnings accretive FY17 onwards: Analysts

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The PVR scrip fell four per cent on Wednesday to Rs 642 apiece, under-performing the S&P BSE Sensex, which surged 1.4 per cent. 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, for Rs 500 crore, which will limit immediate gains for the firm. This impacted the stock price on Wednesday, as the deal was announced after 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 a share indicates upside potential of 16 per cent from current levels.

 

The DT Cinemas buyout will provide multiple benefits to PVR. One, DT’s 29 screens across the Delhi and national capital region (NCR), and Chandigarh, will push PVR’s multiplex screens’ market share in Delhi-NCR and Chandigarh to 53 per cent and 60 per cent, from 35 per cent and 53 per cent, respectively. DT will add 10 more screens in two of its properties in NCR over the next year and a half, to be funded by DLF.

DLF will hand over completed properties to PVR. Most of DT's properties are in premium locations. That it is well maintained means PVR will incur nominal refurbishment charges. In this backdrop, PVR expects to generate annual operating profit of Rs 43-44 crore from the total of 39 screens in the first complete year of operations after the integration. This acquisition will also increase PVR’s dominance in the NCR, limiting competitive intensity.

According to analysts, PVR might look at raising ticket prices, as well as ad rates and food and beverages income, after integration of DT Cinemas.

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

This deal is estimated to add three or four per cent to PVR’s earnings per share in FY17 and Rs 200-250 crore to revenues when all 39 screens are operational. For FY15, PVR’s revenues stood at Rs 1,481 crore.