Box office recovery, synergies could drive more gains for PVR-Inox

PVR–Inox is in an inherently fickle business. If there is a string of flops, the box office collections will be weak. Conversely, Q2FY24, which witnessed several hits, has brought about an upside in revenues.

However, the merger has led to market share gains and synergies that helped bring breakeven down to approximately 20 per cent occupancy.

PVR INOX operates the largest multiplex network with 1,709 screens across 358 properties in 113 cities (India and Sri Lanka). It picks up around one-third of total box office collections across India. 

Given the promise of further operational gains from the merger synergies, there is the promise of reasonable visibility of margins.

As of now, the analysts are modeling a 25 per cent occupancy through FY24 and FY25 despite the possibility of a couple of quiet quarters from Bollywood and Hollywood.

Between FY 18-20, average occupancy was 31 percent, so the post-COVID assumptions of 25 per cent seem reasonably conservative and could see an upside. 

Hollywood has been hit by the writers’ strike while Bollywood delayed productions due to the ICC Men’s Cricket World Cup, which will impede content flow through H2FY24.

Revenues through October-November were sharply lower than the average collections through Q2.

The company added 22 new screens during the Q3 quarter after achieving an addition of 68 new screens in H1FY24. It has a target of 160 new screens in FY24.

Advertising income, which was muted before Q2FY24, is also expected to gain traction.

Strong cash flow generation due to the merger should aid in debt reduction.

PVR INOX has realised Rs 1,200-1,400 crore merger synergies and expects to realise more synergies.

According to the management’s estimates, it has only realised around 63 per cent of possible synergies. 

There are multiple risks to the business model of the multiplex business.

These include emerging competition from over-the-top or OTT players. 

A possible deterioration of popular content might affect footfalls and advertisement revenue growth.

An inability to take adequate price hikes at the right time would also affect margins in the food and beverage (F&B) segment. 

A rise in COVID-19 infections or another similar pandemic would also be a global risk of course. 

A comparison between Q2FY24 and average quarterly FY20 (pro-forma) performance – periods with similar occupancy levels – demonstrates operational leverage.

For a 15.5 per cent rise in admissions, the increase in revenue (ticket plus F&B) has been about 50 per cent. Ad revenue growth and sustainability is another key monitorable. 

Fixed cost as a percentage of revenues declined by 630 bps reflecting on-going cost rationalisation measures and synergy benefits.

If this is a sustainable change in cost structure, or if it can be improved by further synergies, it has an excellent impact on margins. 

The post-Covid recovery should take FY24 into profit from losses in the prior fiscals.

There should be a strong improvement in margins and growth through the next two fiscals. Valuations from an inherently unpredictable business are hard to arrive at.

Consensus target prices for analyst ratings this month are at Rs 2,140 which offers an upside of 29 per cent from the current levels.