Institutional Equities

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Institutional Equities Table of Content Industry economics attractive despite poor history………………………………………………..….…05 Standalone property economics very attractive- GST will enhance it…………………….……..…….08 Industry is not as capital intensive as is made out by the street……………………………….………14 GST will be a big driver of margins and RoIC………..………………………………………….….……14 Oligopolistic consumer business………………………………………………………………….……….16 Indian multiplex industry is in its infancy………………………………………………………….………19 Multiplex industry’s structural drivers are aligned……………………………………………….….……28 Diversified content will improve occupancy rate………………………………………………….….…..30 Five Forces analysis of Indian exhibition sector………………………………………………….….…..33 Financials – sharp improvement with GST likely…………………………………………………..…….34 Valuation………………………………………………………………………………………………..……42 Risks to our investment thesis……………………………………………………………………..……...49 Companies PVR…………………………………………………………………………………….…………..….………51 Inox Leisure ……………………………………………………………..…………...…….….……………..53 Annexure Profile of players…………………………………………………………………………………………….56 Consumer survey……………………………………………………………………………………………65 Overview of Indian film industry …………………………………………….…………………………….71 Chinese film exhibition industry…………………………………………………………..………………..73 Media report on food served at PVR’s Director’s Cut…………………………………...………………77 Bollywood and Hollywood movie slate……………………………………………………………………79 4 Indian Film Exhibition Sector
FY07 2,000 FY07 FY08 2,110 FY08 FY09 2,687 FY09 FY10 3,090 FY10 FY11 3,414 FY11 FY12 2,830 FY12 FY13 6,427 FY13 FY14 3,993 FY14 FY15 4,092 FY15 FY16 8,695 FY16 FY17E 9,676 FY17E FY18E 11,367 FY18E FY19E 13,654 FY19E FY07 FY08 FY09 Institutional Equities FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Exhibit 1: Return ratios of PVR Industry economics attractive despite poor history Historical return ratios have been poor for various reasons… Return ratios of both PVR and Inox Leisure have been poor over the past decade (Exhibit 1 and 2) and it is only in FY16 that these have started looking up. These were poor because of: (1) High capex connected with strong organic growth on a small base. (2) High EV/screen paid for M&A transactions and a large number of screens being acquired in this fashion on a small base. (3) Investment in various non-exhibition businesses which have poor economics. (4) Revenue mix skewed towards box office rather than high-margin food & beverage and advertisement revenues. (5) Lower pricing of tickets, F&B and advertising. (6) High taxation and lack of set-off on taxes on inputs. (7) Low growth in real urban income. …but they are set to improve dramatically We believe that many of these drivers of poor return ratios are taking a turn for the better. (1) Organic screen growth from here on is likely to be moderate (8%-12% annually), constrained by lack of retail real estate - see Exhibits 5 and 6. (2) We believe worthwhile M&A opportunities have run out, at least for large players like PVR and Inox Leisure, and so the risk of a large return-dilutive transaction is low. (3) There is going to be defocus on non- exhibition business from here on by PVR, which has been the biggest culprit in this area. We already see that capital employed in non-exhibition business has fallen to 10% of the total capital employed against a peak of 25% - Exhibit 7 (4) Revenue mix is becoming margin-richer by the day as the share of F&B and advertising revenues rise in the total mix – Exhibit 8. (5) Pricing is improving steadily – Exhibit 9. (6) GST implementation will lower tax on box office revenues and also help set off taxes on inputs. (7) Better real urban income growth because of lower inflation, in our view, could lead to potential surprises on footfall growth – see Exhibit 10. The industry has done well despite a very hostile macro environment and we believe it will benefit when the macro takes a turn for the better. Exhibit 2: Return ratios of Inox (%) 25 Impact of GST (%) 25 Impact of GST 20 20 15 15 10 10 5 5 0 0 (5) RoE RoIC Source: Company, Nirmal Bang Institutional Equities Research Exhibit 3: Networth of PVR – Infusions in FY13 and FY16 Source: Company, Nirmal Bang Institutional Equities Research Exhibit 4: Equity Raised by PVR RoE RoIC (Rsmn) 16,000 14,000 Year Amount Raised At Stock Price of Raised From 12,000 10,000 8,000 2015 Rs3.5bn Rs700 Multiples Private Equity 6,000 4,000 2012 Rs0.576bn Rs200 L capital 2,000 0 2012 Rs1.53bn Rs245 Multiples Private Equity Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research 5 Indian Film Exhibition Sector
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Institutional Equities

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