Graphic: Mint
Graphic: Mint

PVR pays a premium for south

Total revenue of the combined PVR-SPI Cinemas entity for FY18 is almost twice that of PVR's nearest rival Inox Leisure

PVR Ltd, India’s biggest multiplex company, has expanded its reach in south India by acquiring SPI Cinemas Pvt. Ltd. The deal makes PVR the leading multiplex operator in all major cities in the region. Total revenue of the combined entity for FY18 is almost twice that of PVR’s nearest rival—Inox Leisure Ltd. SPI has 76 screens, eight of which are expected to open in the next three months. PVR has 638 screens.

SPI’s Ebitda (earnings before interest, tax, depreciation and amortization) margin is higher than that of PVR. For FY18, SPI’s Ebitda was 63.3 crore and expectation is it will touch 90-100 crore within a year after the latest deal. The company boasts a robust occupancy rate of 58%, far higher than the 31.3% PVR enjoyed in FY18.

“The acquisition is margin accretive by about 30 basis points for PVR," says Karan Taurani, vice president (research) at Dolat Capital Market Pvt. Ltd. However, over the medium term due to better ad growth in SPI, it could be margin accretive by about 80-100 basis points, he adds. A basis point is 0.01%.

PVR expects SPI’s comparable footfalls to recover in FY19, as industry-level strikes had affected FY18 footfalls in south India. The increase in ticket price cap in Tamil Nadu is also expected to boost numbers this year.

All of this, however, isn’t coming cheap. The enterprise valuation (EV) for the deal is around 1,000 crore. Accordingly, SPI’s EV per screen works out to 14.7 crore if one considers 68 screens (since eight screens are expected to open in the next three months). And if one considers 76 screens, EV per screen is 13.2 crore. This is at a premium against PVR’s EV per screen of about 10.5 crore.

Even though the deal augurs well from a long-term perspective, all is not hunky dory. As Taurani says, “We believe concerns remain due to availability of only one trigger (advertising growth), as spend per head is already high at about 59% of the average ticket price (ATP)." This does not offer potential for strong growth and there is an ATP cap in most of the states where SPI has major presence, which will also limit growth prospects for box-office revenue growth, he adds. SPI’s ATP is 141.

That apart, tracking progress on SPI’s screen additions (23 screens in FY19) will be crucial for PVR investors. As of now, investors seem a bit cautious. On Monday, a day when the broad market was muted, PVR’s shares fell 2.6%, perhaps due to higher valuations paid for the deal.

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