We explore the business of India’s largest multiplex operator and assess the opportunities and challenges it faces.
Statutory Warning: This is NOT an investment advice to buy or sell shares. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I do not own the stock, but my analysis can be biased, and wrong. I have been wrong many times in the past. I, Vishal Khandelwal, am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).
About PVR Ltd. (PVR)
PVR operates the largest cinema chain in India. It began in 1995 as a joint venture between Priya Exhibitors Pvt Ltd and Village Roadshow Ltd, and started commercial operations in June 1997 with the first multiplex (Priya Cinema) in Delhi (I have memories of watching movies at this multiplex, and always queuing for the front row tickets because they were then priced at around Rs 10).
In last two decades, PVR has expanded to 51 cities with 128 theatres and 587 screens. With total seating capacity of more than 1.25 lac, PVR enjoys an annual footfall of close to 7.5 crore.
The company has three key sources of revenues –
1. Movie ticket sales (52% of FY17 revenue)
2. Sale of food and beverages (25%)
3. On-screen advertising and others (23%)
PVR has 40% share of Hollywood movies and about 25% share of Hindi films on the Indian box office. The company also holds the leadership position both region and city wise (except in East India and tier-3 cities) when it comes to the number of screens (see tables on the bottom left of this page).
About the Industry
India a unique country where regional language (other than English and Hindi) motion pictures do significant business. In the past few years, strong regional content seemed to have gained acceptance even among the non-native language speaking audience, improving the share of regional films in the overall industry revenues. Hollywood content continues to enjoy a double-digit growth trajectory in India. Because of a long history of love for movies, the Indian audience is attracted to theatres despite increasing average ticket prices. Although the number of options for entertainment are increasing (theme parks etc.), movie going remains the number one entertainment option for people in India.
Indian film industry is largest in the world in terms of number of movies released (1,200 movie releases across all languages) annually and also in terms of number of people who visit the movie theatre every year (more than 1.95 billion moviegoers annually). With a revenue of US$ 1.9 billion, India has moved ahead of the UK and France to become the fourth largest movie market in the world. Domestic box office collections contribute 70% of the film industry revenue.
Factors such as rapid urbanization, penetration of multiplexes in tier II and tier III cities, increasing sophistication in production and marketing of films, and the receptivity of audience towards differentiated content are together expected to help the industry sustain its growth. In 2016, the total revenue of film industry in India stood at Rs 14,200 crore. This is estimated to grow at a CAGR of 8% over the next 5 years. It’s expected that this number would be close to Rs 16,000 crore by 2020.
The multiplexes are fast replacing the single screen market in the country. In 2009, single screens accounted for 91 percent of the total number of screens. In 2016, that number has shrunk to 77 percent and the multiplexes now govern 23 percent of the total available screens.
As depicted by the chart below (Source – PVR’s presentation), the penetration of multiplex screen in India is far below other competing countries.
The under penetration of screens in India, relative to other counterpart countries (US, Japan, China, UK, etc.), is another strong factor which indicates that there’s a large headroom for the industry’s growth. For any exhibitor (like PVR), revenue comprises 70%, 20% food and beverage, and 10% cinema advertising. As the industry size grows, the revenue in each segment will also increase in absolute terms.
Since the major chunk of revenue for the movies come from multiplexes, the movie industry is slowly co-evolving with the multiplex businesses. Typically, the first week and weekend contribute almost 60-80 percent of a film’s total collection. Even within the first week, the trend is getting skewed towards the weekend. Considering this, multiplex chains are experimenting with pricing strategies to maximize revenue. By adopting a differential pricing model for weekdays and weekends, they are able to maximize footfalls across the week.
Anyways, let’s now analyze PVR using a set of questions to test the underlying business and management quality.
1. Has the company done well in terms of sales and profit growth over the past few years?
With a CAGR of 33%, PVR’s total revenue has quadrupled to Rs 2,180 crore over the last five years. Profit before tax has grown at a faster rate of 38% CAGR during the same period. The company has seen an all-round growth across
its key segments. While advertising revenue has grown at a CAGR of 31% over the past five years, the company has also seen a steady rise in admissions (19% CAGR over past five years), occupancy, and average ticket prices (ATP; 4% CAGR). In fact, PVR beats its closest rival INOX on all these parameters, and has done that consistently over the years. The company has also seen a 14% CAGR in the amount of money spent per head by visitors at its theatres.
Growth going forward is likely to be aided by increase in screens and footfalls, plus increase in spend per head. Higher spends on food and beverages by moviegoers is also expected to drive revenue and profit growth for PVR.
In 2012, for instance, the food and beverage spend per head were 28% of PVR’s average ticket price. This figure has steadily increased to 41% in 2017. Just as a comparison, the same figure ranges from 46-59% in the US, which suggests some headroom to grow.
Moreover, India has a unique concept of intermission which gives additional opportunity for moviegoers to spend more on food and beverages.
Ad revenue, which has increased by four folds in last five years, is also expected to drive revenue and profit growth going forward.
Currently, in-cinema advertising constitutes just about 1% of the total advertising revenue pie but has huge growth potential. This growth can be attributed to expansion of multiplexes in metro/non-metro cities and nearly 100% digitisation of screens.
Overall, going forward, continued market leadership combined with limited competition (just three other key players – Inox, Carnival, and Cinepolis), low screen density in India, ramp up in the number of screens (from around 600 now to 1,000 by 2020), and high-quality services and content should ensure that PVR’s sales and profits continue to grow well. Higher advertising revenues and higher sales of food and beverages will provide a kicker.
2. Does the business have a durable competitive advantage?
PVR’s key competitive advantage are its size – number of screens – prime locations that offer it the ability to charge premium pricing, and offerings across price spectrum. While these advantages are not invincible by their nature, the fact that the company has managed a leadership position in the industry for long (currently around 40% share of Hollywood Box Office and approx. 25% share of Bollywood Box Office) speaks a lot about the edge it has built over key competitors like Inox and Carnival.
Despite its premium pricing, PVR also boasts of the best occupancy levels among the larger multiplex chains (33% occupancy in FY17, against 28% for Inox), which aided by a strong movie watching culture in India, provides it pricing power. Talking about pricing, the company has been able to increase the average ticket price steadily every year, from Rs 167 in FY13 to Rs 196 in FY17. Its annual attendance per screen is also the best in the industry, even worldwide, at 1.3 lac (FY17).
While profitability for the business has been low over the years, especially considering the continued expansion, it’s better than peers, which again provides some proof of the edge PVR has. Going forward, increasing F&B spend by consumers (41% of average ticket price in FY17 – best in the industry) should provide some fillip to the company’s profitability and return ratios.
3. How has the management fared?
PVR has a high-quality and professional management, with Ajay Bijli running the show. He established PVR in 1995, has over 22 years of experience in the movie exhibition industry, and is recognised as the pioneer of the multiplex industry in India. Anyways, one point worth noting about the management is its compensation. The total compensation of its key managerial people (including the MD) stood at around 20% of net profit in FY17, which is on a higher side.
4. What are the risks to the business?
One of the obvious risk to PVR’s business is piracy. In fact, piracy has been one of the biggest risks for the whole film industry. The pirated versions of the movies are released within a day or two of the release of the movie and the DVDs are available the next day in the market.
The second and bigger risk is the risk of disruption which is threatening almost every other traditional business. A recent study in U.S. reveals that tickets sold per head have declined to their lowest point since the early 1970s, before the introduction of the multiplex. More and more people are spending their time on internet and streaming services like Netflix and Amazon Prime. However, this disruption risk is long-term in nature and has no immediate threat to PVR’s business.
On this risk, the management has indicated that there is a large window of more than two months between theatrical exhibition and television exhibition of films and it does not see it coming down as theatrical exhibition contributes around 70% to overall revenues of Indian film industry.
PVR’s stock is currently trading at around Rs 1,425 (as on 20th Dec. 2017), which implies a P/E multiple of 71 times its trailing twelve months EPS of Rs 20. Price to book value is about 6 times.
Statutory Warning: This is NOT an investment advice to buy or sell shares. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I do not own the stock, but my analysis can be biased, and wrong. I have been wrong many times in the past. I, Vishal Khandelwal, am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).[/show_to] [hide_from accesslevel=’almanack’]
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