CRISIL Research has assigned a CRISIL IER fundamental grade of '4/5' to PVR. The grade indicates that the company's fundamentals are 'superior' relative to other listed equity securities in India. ''Our fair value of the stock is Rs 1,022 a share. At the current market price of Rs 813 a share, our valuation grade is '5/5' indicating that the market price has strong upside from the current levels,'' the agency said.
The grades are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument's future market price or its suitability for a particular investor.
The assigned fundamental grade reflects PVR's leadership position in the domestic multiplex industry, an expanding screen network and strong industry growth potential. Through organic and inorganic (acquired Cinemax and DT Cinemas) expansion, PVR has cemented its leadership position in the industry and enjoys 26% share of the total multiplex screens in the country.
The Indian multiplex industry, one of the least penetrated globally, is expected to register healthy growth supported by shift in consumer preference from single screens to multiplexes and rise in disposable income, the agency said. ''We believe PVR is aptly positioned to capitalise on this growth opportunity on the back of well-entrenched presence in key markets (currently PVR leads in the key northern and western regions, while lags Inox Leisure in the eastern region), and expansion in screen network. Planned addition of ~160 screens over the next couple of years (including 39 screens of DT Cinemas, which were acquired recently), 4-5% increase in average ticket price (ATP) and increase in F&B and advertising revenues are expected to drive future revenue and profit growth. Implementation of Goods and Services Tax (GST) is expected to boost margins as PVR would be able to set off input taxes against GST.''
However, the grade is constrained by inherent risks in a multiplex business model - exposure to unpredictable content quality, extent of supply of retail malls, and high fixed cost structure. Quality of content is the key driver for footfall growth. Further, ongoing slowdown in mall development across major cities can obstruct the expansion plans of multiplex operators, including PVR (although it has tied up for the next 450 screens, providing medium-term visibility). High entertainment tax in most states and high operating leverage are additional risks.
PVR's revenues are expected to grow at a three-year CAGR of 21.5% over FY15-17 to Rs 21.8 billion driven by increase in footfalls stemming from the addition of ~160 screens over FY16-17, and higher F&B income. EBITDA margin is estimated to expand to 19.5% in FY17 from 13.5% in FY13 owing to higher contribution from the high-margin F&B and advertising segment, and operating leveraging benefits following sturdy revenue growth. Healthy EBITDA growth is expected to boost PAT to Rs 1.4 billion in FY17 from Rs 133 million in FY15, CRISIL said.
CRISIL Research has used the EV/EBITDA multiple method to value PVR. We have assigned a multiple of 12x on FY17 EBITDA to arrive at a per share fair value of Rs 1,022.
