PVR Cinemas: Buy

Investors with a long-term perspective can consider accumulating the stock of PVR Cinemas in small lots. A lacklustre season at the box office and the migration of movie audiences to cricket with the onset of the Indian Premier League tournament have resulted in the stock languishing in the bourses in recent weeks.

However, the current market price offers a good entry point for investors willing to hold on to the stock for a two-three year period.

The stock trades at 21 times its trailing four quarters’ per share earnings. While the near-term outlook for earnings is likely to be dimmer than the past, amidst a sluggish period for the film industry, the long-term prospects for the company remain bright.
Earnings outlook

PVR has reported a strong performance in recent quarters on the back of ramp up in screen presence and expanding margins. A key positive for the company has been the strong performance of its existing properties, which have been clocking robust double-digit growth in footfalls. This means that earnings growth will be less dependent on the timely opening of theatres.

The fourth quarter is typically a relatively subdued one for multiplex operators. With the exception of Jodhaa Akbar and Race and some spillover collections from Taare Zameen Par, the box office did not have much to report. The dry spell appears to have continued into the summer, which may dampen box office collections in the first quarter of FY-09 as well.

New theatre openings may be the main revenue driver in the near term, if content remains sluggish. PVR continues to add screens, although there have been delays in screen openings across the industry.

The company has tied up with mall developers such as the Prestige group to broaden its presence in the South. It has a target of opening an additional 250 screens by 2011 from the current 95.

From a long-term perspective, however, PVR’s ability to maximise spends on tickets, food and advertisements augurs well for its overall profitability. PVR derives about 20 per cent of its revenues from food and beverages and, thanks to its large screen presence in metros, another 10 per cent from advertisements. Maximising revenue streams beyond the box office is key to maintaining profitability at a time when film hire costs (the cost to exhibit a film in a multiplex) are on the rise. PVR appears to have fared better than its peers on this score.
Focus on metros

This may be partly due to PVR’s focus on metros even as its peers scout for properties in Tier-2 and Tier-3 cities. The company believes that metros remain the most profitable centers for multiplex operators, as spending habits are yet to mature in smaller towns and cities.

This view appears to be validated by its ability to command higher ticket prices in cities such as Delhi and Mumbai. Its existing properties clock superior occupancy levels of over 40 per cent, charge an average ticket price of Rs 130 and there has been an increasing trend in spends per head.

The company’s operating margins are likely to remain higher than its peers, who are now foraying into smaller towns and cities.

PVR recently launched PVR Premiere for the urban elite, with ticket prices ranging from Rs 150-750. The company also operates a low-cost multiplex model PVR Talkies in towns such as Aurangabad and Latur, where tickets are priced at Rs 40. The use of multiple formats that straddle across income segments enables the company to capitalise on both increasing footfalls and the increasing willingness to spend on entertainment.
Building on distribution

With increasing screen presence, PVR is well-placed to build on its distribution business, operated by subsidiary PVR Pictures. Although it is early days still, we expect PVR Pictures to make an increasing contribution to revenues and profits over the next couple of years.

The company’s first co-production Taare Zameen Par with Aamir Khan Productions was a runaway hit. More such projects have been lined up, including one from Aamir Khan Productions expected to release in July 2008.

PVR Pictures, which already has a track record of distributing strong English movie titles, has distributed fairly successful Hindi movies such as Bheja Fry, Omkara and Honeymoon Travels over the past year.

The distribution business appears to be closely tied with the exhibition business, considering that these films clicked particularly well with multiplex audiences. PVR’s multiplexes are present in six of the nine territories for film distribution, which makes it easier for PVR Pictures to drive distribution through its own multiplexes.

A presence in distribution will also keep a check on film hire costs for the multiplex chain.