Can PVR Inox script a turnaround?

PVR Inox’s increased focus on deleveraging, pricing innovations and growing food and beverages revenues offer some comfort.
PVR Inox’s increased focus on deleveraging, pricing innovations and growing food and beverages revenues offer some comfort.

Summary

  • Not only has the stock delivered negative returns over the past year, the lack of major Bollywood or Hollywood blockbusters in the three months ended March (Q4FY24) means investors are bracing for another dull quarter.

Multiplex chain operator PVR Inox Ltd seems to be playing the protagonist in a tragic movie of its own. Not only has its stock delivered negative returns over the past year despite a raging bull market, the lack of major Bollywood or Hollywood blockbusters during the three months ended March (Q4FY24) means the Street is bracing for yet another lacklustre quarter.

However, PVR Inox’s increased focus on deleveraging, pricing innovations and growing food and beverages revenues offer some comfort. Nevertheless, when the entire film screening business is facing headwinds, it is hard for the biggest player to escape the after-effects.

“After Q2FY24 turned out to be the best quarter in the Indian multiplex history, Q3FY24 saw a sharp QoQ dip (despite a strong December 2023) and we believe that the trend continued in Q4FY24 on a QoQ basis as content (both Bollywood and Hollywood) was not strong enough to pull the audiences in," analysts at domestic brokerage Nirmal Bang said in a note on 3 April. It expects PVR Inox to report weak numbers in Q4 with occupancy likely to be about 21-22%. In comparison, PVR Inox’s occupancy in Q2 and Q3 stood at 32.3% and 25.2%, respectively.

In Q3, the reported consolidated net profit had dropped 20% year-on-year to 12.8 crore. This came amid December emerging as the highest grossing month of 2023, thanks to Bollywood superhit Animal, which grossed over 650 crore, while other notable releases included Salaar ( 480 crore), Dunki ( 270 crore) and Sam Bahadur ( 110 crore).

However, Q4 did not have such box office successes. The key Bollywood movies for the quarter included Fighter (gross box office collections or GBOC of around 260 crore), Shaitaan (~ 165 crore) and Article 370 (~ 90 crore). In the regional genre, Hanu-man (Telugu and Hindi versions) at ~ 165 crore and Manjummel Boys (Malayalam and Tamil) at 150 crore delivered relatively strong numbers. But Hollywood movies disappointed.

“We had highlighted that due to the strike by Hollywood writers and actors, film production had come to a halt in 2H2023 and that would hit availability of Hollywood content in 1H2024. We think this weak Hollywood content situation will continue in the June 2024 quarter too before improvement in 2H2024," Nirmal Bang added.

Notably, PVR Inox has a much higher share (~50-70%) of Hollywood box office revenue in India compared to Bollywood (30-40%) and regional movies (10-25%).

While having quality movies is not in the company’s hands, it is taking multiple steps to spruce up its balance sheet and improve capital allocation.

In an interaction with analysts from ICICI Securities, PVR Inox CFO Nitin Sood said the firm’s focus in the next 12-18 months will be on lifting the operational performance of the business. This will be done by shutting down non-performing screens, renegotiating rental contracts with landlords, reducing capex intensity and becoming free cash flow positive. “The proportion of minimum guarantee rental contracts has gone down giving way to revenue sharing rental agreements. He added the objective is to reduce the rental cost to pre-covid levels (16-17% of revenue) from current 19-20% (of revenues) level," ICICI Securities said.

PVR Inox is also moving towards an asset-light model, wherein it plans to reduce its capex by 30-40% over the previous year to 400-450 crore by entering into partnerships with landlords for investment purposes. Another big focus for PVR Inox in the coming year will be to reduce debt and turn free cash flow positive. Sood added that QoQ volatility in gross box office performance has increased after the pandemic due to which deleveraging has become a top priority.

To be sure, for PVR Inox, a lot would continue to depend on how movies fare at the box office amid the rising threat from OTT platforms. It may help investors to keep expectations low, and also keep an eye on how occupancies shape up. In the absence of Bollywood movies starring the Khans in the near term, IIFL Securities has pruned FY25 occupancy ratio from 26% to 25.6% and trimmed the ad revenue estimate.

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