PVR needs Cinemax to deliver a hit

It would be a couple of quarters before investors can know the full impact of the Cinemax deal
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First Published: Mon, Feb 04 2013. 06 03 PM IST
Cinemax enjoys higher net profit margin than PVR and post this deal, it’ll be interesting to watch how the combined entity’s bargaining power improves with this kind of scale. Photo: Priyanka Parashar/Mint
Cinemax enjoys higher net profit margin than PVR and post this deal, it’ll be interesting to watch how the combined entity’s bargaining power improves with this kind of scale. Photo: Priyanka Parashar/Mint
Updated: Mon, Feb 04 2013. 08 21 PM IST
Fridays are critical for Indian cinema. They determine whether a movie has made a fortune or not for its stakeholders. So far, the newly released Midnight’s Children, distributed by PVR Pictures, a unit of PVR Ltd, doesn’t show signs of being a blockbuster. The same can be said of its December quarter performance.
PVR’s last quarter results were unimpressive, relative to the preceding quarter. Sure, the business has a seasonal element and much depends on the movies released during the period as well.
However, even on a year-on-year (y-o-y) basis, consolidated net profit remained flat despite the fact that total operating revenue increased by 43% to Rs.202 crore. One of the main reasons for net profit being weak was higher interest cost. Even depreciation costs were higher.
PVR’s operating performance, too, was weaker on a y-o-y basis and sequentially. That’s primarily because certain components of costs (employee benefit expenses, rent, repairs and maintenance) increased at a comparatively faster pace.
The multiplex operator was the talk of the town in the December quarter thanks to the Cinemax India Ltd deal in which it paid a hefty premium. Note that the full impact of the Cinemax deal is not yet reflected in the numbers. From the March quarter onwards, financials of Cinemax would be included in PVR’s consolidated performance.
Still, it would be a couple of quarters before investors can get a clear picture of the synergies. The PVR stock rose about 11% since the company announced that it was in “active discussions” with Cinemax on 27 November. Still, in this fiscal year, shareholders should have little to grumble as the stock has delivered good returns till now. What next then?
At the current market price, PVR trades at 13 times its estimated earnings for the next fiscal year. While valuations look attractive, the coming quarters would be crucial to figure out how the Cinemax deal is panning out. Investors would do well to track the improvement in margins after the integration. Cinemax enjoys a higher net profit margin than PVR and post this deal, it’ll be interesting to watch how the combined entity’s bargaining power improves with this kind of scale.
Another important variable to track would be the leverage and its impact on the profitability. Also, screen expansion plans will be a critical factor to watch as it is a major growth engine.
In a post-earnings conference call, PVR maintained that it is looking to open 150 screens in the next 18-24 months, which is a significant jump as the company had 213 screens running as of 31 December. While more screens are always welcome, having good content that draws moviegoers is essential for the sector and for PVR to flourish.
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First Published: Mon, Feb 04 2013. 06 03 PM IST
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