Brokerage Report on PVR. Post the Merger much of the outlook hinges on footfall retrieval.
Emkay believes after the merger much of the outlook hinges on footfall retrieval.
This is Emkay Resarch’s analysis on PVR. The report is produced by Pulkit Chawla from Emkay Global
The PVR-Inox merger has resulted in a mighty multiplex, accounting for as much as 30% of the total box-office industry-share. While focus of the merged entity now shifts to realizing synergies, the crucial issue of footfall recovery remains moot. Post Covid, we have witnessed a clear dichotomy in box-office performance, with a high proportion of movies turning out to be duds; we believe the main culprit is the sub-par content quality, punctured by the weak critic & audience reviews. The movie-performance polarization has been further accentuated by: i) rapid adoption of OTT; ii) proliferation of social media; iii) an active ‘Boycott Bollywood’ campaign; and iv) higher ticket/F&B prices. This has caused the sharp tightening in the content filtration process to impact footfalls. For PVR and Inox, some of this footfall moderation can be recouped via: i) increased adoption of regional cinema by Hindi-speaking audiences, ii) accelerated market-share gains from single-screen theatres. To factor-in this weaker performance, we had cut our footfall assumptions for FY24/25 by 8-9% post the Q3 results and reduced the multiple to 11.5x (from 12.5x). Despite our temperance of footfall growth, we uphold our belief that multiplexes remain one of the most-preferred out-of-home entertainment avenues; we maintain BUY with TP of Rs2,050/share.
Down but not out: As we have recurrently highlighted in our past notes (Bollywood yet to get its mojo back and Bollywood block’bust’er performance concerning) Bollywood performance is critical to film exhibitors’ success. Post Covid, such performance has been patchy, with only 7 films managing to breach the Rs1-billion mark. Success of these limited number of movies, however, indicates that there is no aversion towards the industry if quality of content/experience is superior. Past box-office trends reveal weak collections, often over stretched time-periods (e.g. CY14-16), before seeing a rebound in the subsequent years. Thus, the weaker performance includes a cyclical element. However, audiences have become more selective about the movies they wish to watch in theatres, leading to a polarized box-office performance.
OTT threat: The pandemic clearly accelerated the adoption of OTT, while also being responsible for audience-behavior conditioning, with home screening becoming the preferred mode of viewing. We believe OTTs have had a larger impact on specific content genres and, in cases where content quality is sub-par, audiences are willing to wait a couple of months before watching such content in their homes. While OTTs do compete with exhibitors for grabbing a bigger bite of the overall entertainment pie, the real race for them has always been with broadcasters, as both vie for their share of home screen time.
The southern push: The rage for cinema remains unparalleled across all South Indian states. Given the attractiveness of the market, the push by PVR-Inox to add more screens seems logical. In FY23 alone, PVR & Inox have added/will add ~40% of their incremental screens in the region. While this coincides with the higher mall-addition in South India this year, we believe that it is a concerted effort by the managements to tap the movie craze in the area. The strategy adopted by multiplexes to break the stranglehold of single-screen theatres, which continue to dominate in related states, would be key.
Outlook: From the competition perspective, the merged entity has no real competitor and should hence see further strengthening of its position at the cost of single-screen theatres and smaller chains. The recovery in footfalls would remain a crucial determinant of the performance of the combined entity. Synergies should also gradually flow through, to the merged entity. The merged entity, in turn, will enjoy revenue synergies from: 1) advertisements, 2) convenience fees, 3) higher spend per head (SPH) for Inox, and 4) better reach for PVR Pictures. The related cost synergies comprise: i) rent negotiations with overlapping mall owners and rent on incremental properties; we believe rental negotiations will happen in the medium term; ii) F&B sourcing along with vendor consolidation; and iii) savings in corporate overheads and employee costs.
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