Lights, Camera, Action: PVR Inox set to star in a profitable sequel

Coming soon: Blockbuster content pipeline and asset-light model promise a box-office hit for investors

Since hitting lows in the first week of August, the stock of India’s largest multiplex operator, PVR Inox (PVR), has risen roughly 20 per cent, outperforming the benchmark S&P BSE Sensex, which gained 9 per cent during the same period. Following a muted April-June quarter (Q1) for 2024-25 (FY25), the improving sentiment for the stock can be attributed to a robust movie pipeline, which is expected to enhance collections in the July-September (Q2) and October-December (Q3) quarters, alongside expectations for deleveraging.

Q2 featured several blockbusters, including Kalki 2898 AD, Stree 2, Deadpool & Wolverine, and Raayan, among others. While PVR holds market shares of 40 per cent in Bollywood, 20 per cent in regional films, and 60 per cent in Hollywood, Anand Rathi Research anticipates a sequential improvement in occupancy and average ticket prices beginning in Q2. The company reported Q1 occupancy at 20.3 per cent, with average ticket prices at Rs 235. Revenue growth for the quarter is projected to increase by 20 per cent on a sequential basis, with operating profit margins between 10 per cent and 12 per cent.

Most brokerages believe the content pipeline in Q3 will enable the company to surpass its Q2 performance for 2023-24 (FY24), which was its best quarter to date. Analysts Abhishek Banerjee and Jayram Shetty of ICICI Securities expect PVR to benefit from a strong content lineup in Q3FY25, with highly anticipated movie releases such as Pushpa 2: The Rule, Bhool Bhulaiyaa 3, and Singham Again, among others.

This quarter features five mega-budget movies, including regional films, set to release during the festival season. The company may also see increased advertising spending as advertisers seek to capitalise on higher footfall.

The exhibitor is implementing strict cost control measures, which, combined with synergy gains, are expected to enhance its margins. Pre-pandemic, PVR achieved 20 per cent margins with occupancy levels of 33-34 per cent. Currently, the occupancy rate required to reach similar margins has decreased by 350-450 basis points. In August 2024, the company recorded an occupancy of 28.5 per cent and ended the month with 20 per cent margins, which is encouraging, according to B&K Securities.

PVR is aiming to reduce its debt by adopting an asset-light approach and lowering capital expenditure (capex) intensity in its business. The company is entering joint ventures with developers to invest in new screen capex and plans to reduce overall capex in FY25 by 25 per cent compared to FY24.

It is being selective about screen additions, targeting 120 new screens in FY25 and prioritising expansion efforts in the underpenetrated South Indian market. About 10 per cent and 20-25 per cent of gross screen additions for FY25 and 2025-26, respectively, will follow the management fee or revenue-sharing model. The management fee is set at 9 per cent of net collections, while the revenue-sharing model will require the developer to cover 70-80 per cent of the capex.

In addition to the content pipeline, efforts to reduce debt (through monetising three properties in Mumbai, Pune, and Vadodara) and improve operational efficiencies by adopting an asset-light model bode well for earnings growth and stock rerating, say analysts Shobit Singhal and Pranay Shah of Anand Rathi Research.

While the brokerage has maintained its ‘buy’ rating with a target price of Rs 2,065 per share, ICICI Securities has reiterated a ‘buy’ call on the stock with a target price of Rs 2,250. At the current market price, these target prices suggest returns in excess of 21 per cent. While B&K Securities has raised its medium- to long-term estimates for PVR, given cost rationalisation and lower capex intensity moving forward, it maintains a cautious stance on the sector with a ‘hold’ rating and a target price of Rs 1,624.