Even with zero Q1 sales, this stock is a box office hit among brokerages

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NEW DELHI: This company, and the sector it deals in, are among the worst casualties of the Covid-19 crisis.

An industry body estimated that the sector, which provides around 2 lakh jobs, has lost Rs 9,000 crore in revenue in last six months due to shutdown of operations.

Despite the recent unlocking, concerns over rising Covid cases, which hit the 50 lakh mark this week, has restrained the government from giving a green signal to the sector. It’s no brainer that the company reported almost nil sales and logged Rs 226 crore loss for June quarter, and is likely to post similar numbers for the September quarter as well.

But analysts are hopeful. This company is multiplex owner PVR.

While nobody knows when this sector can resume operations, companies in this space are doing their bit to cut costs, analysts said.

More than 84 countries, including China, Korea, the UK, France, Italy, Spain, UAE and the US, have already opened cinemas to the public, while maintaining a high degree of safety protocols.

Analysts say one can wait and ‘hold’ the stock till things get clearer. Liquidity and cost control would be key for the financial health of the company.

Prabhudas Liladher (PL) said the reopening timelines are highly uncertain, and rising instances of producers opting for over-the-top media platforms are only making FY21 highly unpredictable and a complete washout for the sector. That said, many production houses have have resumed shooting post relaxation in lockdown guidelines, the brokerage noted.

The recently released Hollywood movie Tenet’s collection stood at $200 million and PVR Lanka’s spend per hour to average ticket price ratio (SPH/TPR) of 60 per cent does not indicate any structural behavioral changes in content or food and beverage consumption pattern, reducing the skepticism on valuation, PL said.

PVR operates 845 screens in 176 cinemas in 71 cities in India and Sri Lanka, with an aggregate seating capacity of approximately 1.82 lakh.

“We expect PVR to emerge stronger on three counts: permanent downward reset in cost structure; moderation in capex-competitive intensity, especially in new lease signings; and market share gains from smaller multiplexes or single screens as hygiene/safety would influence consumer preferences,” said Kotak Institutional Equities.

The brokerage said restaurant listings on online food delivery platforms may drop 10-15 per cent due to permanent closures and trusted food and beverages (F&B) brands are likely to gain share.

“PVR is a well-established brand and its F&B turnover is higher than that of many QSRs. We see an opportunity for PVR to establish itself on the food delivery platforms and cater to online demand,” Kotak said. QSR stands for quick service restaurants.

Q1 Earnings

The multiplex chain operator reported a net loss of Rs 225.73 crore for the June quarter compared with Rs 17.53 crore profit reported for the same quarter last year. Revenues from operations plunged to Rs 12.70 crore from Rs 880.39 crore reported for the corresponding quarter of the previous financial year. Other income increased to Rs 42.65 crore from Rs 6.77 crore.

“PVR’s fixed expenses during the quarter stood at Rs 130 crore, including nil charges for rent and provisions for common area maintenance (CAM) and inventory charges of Rs 28 crore and Rs 2.5 crore. Thus, excluding provisional expenses, actual fixed expenses stood at Rs 97.3 crore, amounting to Rs 32.40 crore a month. The company expects monthly expenses to drop to Rs 22-25 crore a month in September quarter,” Motilal Oswal Securities said.

What does the management say

The company management pegged the capital expenditure for 30 screens, where 70-95 per cent of the work is complete, at Rs 40 crore. Another 28 screens are under fitouts, which will require a capex of Rs 75 crore.

PVR noted that employee salaries have been cut in the 25-50 per cent range across the organisation. For the September quarter, average employee expense is expected to be in the range of Rs 13,000-14,000 per month compared with June quarter’s average of Rs 23,000.

“The management is hopeful that the government would allow resumption of operations from next month. Although it will be a positive sign, footfalls, occupancy and F&B consumption after the reopening will be key monitorables,” said Emkay Global.

Delivery on key operating parameters in the next 3-6 months after reopening will be critical for a re-rating of valuation, it said.

Sri Lankan operations so far had an SPH/ATP ratio at 60 per cent, which was better than the pre-Covid level. PVR believes employee cost savings of 15-20 per cent is expected due to the current restructuring exercise and that the movie pipeline looks strong with Sooryvanshi, 83, and KGF Chapter 2 in the offing. Most regional films have held back their releases and are waiting for the multiplexes to reopen, it said.

Stock valuations

Motilal Oswal said PVR’s near-term profitability and business scale would be affected, as cinemas would be the last to open and would need to operate with much reduced capacity and limited timings.

“Rental waivers come as a great relief for the company. However, other operational charges, such as sanitisation costs, would increase post the reopening of cinemas, along with the expected decline in revenues in the high-margin F&B category,” it said. The brokerage valuing the stock at 14 times FY22E Ebitda to arrive at target price of Rs 1,460.

IDBI Capital has increased its projected stock price to Rs 1,520 based on an EV/Ebitda of 13 times FY22 compared with 12 times earlier. Kotak is most bullish on the stock among all. It has a revised target of Rs 1,650 (from Rs1,625 earlier), based on 11 times Sep-22 EV/Ebitda. This target suggests up to 35 per cent potential upside for the stock.

“A 25-30 per cent reduction in monthly cash burn, ample liquidity and resumption with a leaner cost structure (expect breakeven occupancy to be 17-18 per cent against 20 per cent earlier) bode well for the business, in our view,” Edelweiss said. This brokerage has a target of Rs 1261 on the stock, which traded at Rs 1,220 on Thursday.



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