The article first appeared in the November, 2009 issue of Wealth Insight magazine. It charts the positive performances notched up by PVR Ltd, a recreational services provider, over the recent period.
Profile:
The concept of multiplexes was brought to India by Priya Village Roadshow (PVR) Ltd in 1997, when it set up its first theatre in Delhi. Since then, PVR has spread its wings all over the country and today boasts an unmatched 108 screens.
PVR has an early mover advantage, and is now working hard to maintain its dominance and position as a trendsetter. In 2001, PVR Limited floated a subsidiary — PVR Pictures — to venture into the business of film production. The busines can be classified under three segments — Film & Production, Exhibitions and Lifestyle Entertainment with contribution to revenues being 18.5 per cent, 81.1 per cent and 0.4 per cent respectively. PVR’s future plans include expanding its presence to 250 screens across India.
Promoters
PVR was a joint venture between Ajay Bijli and Village Roadshow of Australia. In 2006, the company went public and got itself listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Bijli, the promoter, became the Chairman & Managing Director — he still holds majority stake through some investment firms.
Investment Rationale
Leveraging Size
Q1FY10 was the non-performing quarter for the multiplex business due to the standoff between the producers and multiplex owners. Going forward Q2 and Q3 are expected to be the best quarters for the exhibition business mainly on account of a slew of big releases during the period , with quality content coming in from most of the production houses in the next 4-5 months’ time. Being one of the larger players in the segment, PVR is expected to benefit the most.
High Margins
Around 20 per cent of the exhibition business revenues of PVR come from food & beverages and around 13 per cent from the advertisement business. Both these segments command higher margins in the range of 65 per cent and 45 per cent respectively. This is the key driver in the overall profitability of the company. PVR commands higher Spend Per Head (SPH) of Rs 38 and an Average Ticket Price (ATP) of Rs 140, making it amongst the best in the industry.
Diversifying Reach
PVR recently entered into the lifestyle entertainment business in a 51:49 JV with Major Cineplex Group, a Thailand-based company. The margins in this business are around 30 per cent and PVR plans to add over 150 lanes in the next 3 years across key locations in Indian metros.
Withstanding Shocks
Being in the entertainment segment and diversifying itself within it. gives the company the edge to withstand any sudden shocks.
Risks & Concerns
Project Delays
The company generally follows the leased model. There has been a slowdown in the real estate sector, which has hampered and postponed many projects. Any delay on the developer front will increase the execution risk.
Entertaining Exemptions
Currently, entertainment tax exemption is available for a limited period. Multiplex profitability depends partly on entertainment tax exemptions that are available for a certain duration. At the moment, the exemption ratio is around 60 per cent, which is expected to come down. Therefore, there may be some pressure on the margins once the exemption period ends.
Reducing Shelf-Life
Success or failure of a movie now depends largely on its performance in the opening weeks. A cluster of releases from mid-June to July, 2009 reduced the shelf-life of the movies. This had an adverse effect on the revenues of the company. rampant piracy also has an adverse impact on legitimate revenues of the producer, distributor and exhibitor.
Performance-Based Success
PVR’s revenues are dependent on a film’s production, distribution, exhibition and allied activities. Thus, the company is highly reliant on the performance of the films that are produced and distributed by it. The impact of films on the box office has a large impact on the earnings of the company. The lack of quality content has also been a turn-off for people and it also became a major reason for the slowdown in the revenues of the company that was witnessed in the 2009 fiscal.
Valuations
At current market price of Rs 140 per share, PVR is trading at a price-to-earnings (P/E) multiple of 13.5x FY11E and 10.6x FY12E earnings per share (EPS) estimates, which looks reasonable when compared to peers.
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