PVR – The show must go on.

PVR (Rs 255) is another of our Buy what you see picks . The company is the largest multiplex cinema operator by number of screens engaged in a scorching growth drive and this should see the number of screens and seats more then tripling over the next 12-18 months.

PVR is also engaged into film distribution business through PVR Pictures (100% subsidiary). This company acquires and distributes international film. The distribution strategy revolves around taking up distributing rights for the territory where PVR cinemas are located. For the international business the company purchases the entire suite of distribution rights on an All India basis.

Of an estimated 12,900 active screens, over 95% are stand-alone, single screen theaters. Most of these would be converted into multiplexes over the next 4-5 years because of economic advantages to the exhibitor and the growth drivers for the multiplexes:

I have not calculated the EPS and Revenue figures for the current year since it is very difficult to estimate the number of screens that the company would actually roll out for this year and the ones that could be spilling over to the next year. Motilal Oswal did at the time of the IPO have an EPS target of Rs 19.8 for Fy 08  but I would not look too much into that since this should be a broad 24 month call rather then a 6 month bet.

Total Revenues for the quarter ended June 2006, were Rs.42.89 crores, up 62% over the corresponding quarter ended June 2005. During the June quarter the company entertained 3.66 mn people at their cinemas compared to 2.12 mn during the corresponding quarter in previous year (up 72% Y-O-Y).

The average occupancy in the cinemas was 51% during the quarter ended June 2006.

The average ticket price was Rs.115 across the cinema circuit during the quarter ended June 2006 as compared to Rs.116 achieved during the corresponding quarter of previous year. The average ticket pricing at the existing cinemas grew by approximately 5% as compared to the corresponding quarter of the previous year.

One drawback with PVR’s business model is the tax exemption it receives (generally for the first five years) for its new cinema theatres. Once five years passes by these theaters are brought under the tax net so that could be a rolling process with new tax free cinemas being set up while the older ones coming under the tax net..From the shareholders point of view I would not be too perturbed by this provision.

Recommendations: The kind of growth the multiplex sector is about to witness over the next 4 years is unprecedented. Generally an investor can play the organized retail boom through the multiplex companies because the profile of the crowd that shop at the mall and the ones who visit these cinemas are very similar. The stock is a buy at the current price of Rs 255 and should deliver supernormal returns over the next 4-5 years incase the company’s plans are executed as per expectations.At this time the risk reward  profile favourrs PVR CInema over Inox Leisure (which we had discussed earlier).

The company trades at a PE of mnore then 100 times trailing. Now for The june quarter they did a sales for Rs 42 crs (approx) - Thta makes it Rs 188 crores annualised - Generally the second half is better due to the festive and holidfay season. Capaity is being more then tripled over the next 12- 18 months. So in Fy 08 the sales should be more then Rs 500 crores or may be 3 times annualised current quarter.

1. Large Capex requirements, the companies would need to raise debt.
2. Rising real estate prices
3. Key to profitability in this biz is pricing & occupancy rates. The average ticket price cannot be increased beyond a point. Due to intense competition, occupancy rates might come down which could create pricing pressures.

PVR is the largest player in film exhibition space.