PVR Ltd Stock Analysis

In this blog we analyse the PVR Ltd stock. PVR (Priya Village Roadshow) operates India’s largest multiplex chain. It has ~ 625 screens in 134 theatres across 51 cities. The company has a 40% share of the Hollywood screening and 25% share of the Bollywood screening in India.

Industry

India is the 5th largest box office market in the world, just behind UK.

Hindi movies alone contribute ~ 40% to India’s box office collection. The exhibition space is still dominated by single screens although their share is reducing sharply. Single screens and Multiplexes generate 50% each of the total sales. However as ~ 400/500 single screens are shutting down every year, multiplex chains would become the major contributors.

The number of screens per million population in India is 8. Brazil has 10 and China has 26. PVR, Inox, Carnival and Cinepolis are the dominant multiplex operators. The multiplex chains are rapidly adding more screens and the count is changing every week.

Food & Beverage segment is an important contributor to the revenue of multiplexes. Some of the large multiplex chains make 30% to 35% of their revenues from food & beverage. However, Indian multiplexes are below this range. Indian movie watchers are consuming more than just the regular popcorn and coca cola now days. Many multiplex chains are coming up with gourmet cuisines to cater to the taste buds of movie watchers.

Financial Performance

While the PVR Ltd stock is close to all time highs, are the revenues and profits moving in line?

PVR has posted impressive growth numbers over the last 5 years

• The EBITDA margins have improved and the company is paying tax at full rate
• The company is on an expansion spree and thus has accumulated negative free cash flows
• Box office collection makes up ~ 55% of the revenues

Acquisitions

PVR Ltd. has used debt to purchase other multiplex players in the past. The company acquired SPI Cinemas in August 2018 to strengthen it’s position in the Southern India market. The cost of acquisition varies greatly from region to region. For example, screens in NCR region have a higher average spend than those in southern region. Moreover, many regions have caps on ticket prices too!

While doing the PVR Ltd stock analysis, we need to be careful in the analysis of investments and capital expenditure. This avenue is a grey area and can be mis-used to siphon away funds from the company. The company is investing more cash than it is generating, thus there is a high reliance on debt.

PVR Ltd Stock Investment

The revenue of PVR depends on the box office collection of films in India. For footfalls to increase, the content being offered has to lucrative. PVR has demonstrated it’s ability to increase the average ticket price and average spend per head over a 3 year period. Also, the opportunity to grow at double digits is huge because of the tailwinds. Higher disposable income, more spend on food and beverage, ever growing box office collections are strong tailwinds for the multiplex industry.

Return Ratios

PVR Ltd’s return ratios are bad from an investor’s perspective. Since 2005, the company has made an ROE of more than 15% just once! Ideally, a company with a strong franchise and a strong business would make more than it’s cost of capital. PVR Ltd. becomes a very risky investment for the long term portfolio.

PVR Ltd. has been going through a rapid expansion phase. Inline with the industry, PVR has been acquiring companies and adding screens which requires heavy investments. In this growth phase, the industry itself is witness low return ratios.

Valuations

PVR Ltd is richly valued at a consolidated PE of 53. The EV/EBITDA is ~ 18x and the investors are assuming a very strong growth in earnings over the next few years. However, the peer company Inox Leisure trades at much cheaper valuations.

However, the valuation gap has historically existed due to multiple factors. Higher average ticket price, better presence in regions of higher spending and more number of screens give PVR the muscle to command a higher premium.

We have PVR on our watchlist. It is a proper long term structural growth company but the valuations are expensive for a stock that generates no free cash flow and has very low return ratios. Moreover, the talks of allowing outside food in multiplexes could hit the stock price.