Merged entity plans to open 200 screens per year- PVR & Inox Leisure

Update on the Indian Equity Market:

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Film exhibitors Inox Leisure and PVR have approved a plan of merger. the combined entity will be called PVR Inox. Mr. Ajay Bijli, CMD, PVR Ltd (PVR), and Mr. Siddharth Jain, Director, Inox Leisure Ltd (INOX) explained the merger rationale in an interview with Business Standard on 28th March 2022. here are the excerpts:

• For regulatory approvals, they have to go through the whole process- the stock exchange, Securities and Exchange Board of India (SEBI), and National Company Law Tribunal (NCLAT). The companies have been told by councils that they don’t need a Competition Commission of India (CCI) approval.
• India has 9,500 screens and is still growing. New players are coming in and old ones are expanding. PVR and INOX will have 1,500 combined screens. From a macro angle, content is getting consumed everywhere and not just in theatres as consumer behaviors have changed. INOX and PVR are only a subset of the whole revenue pie that gets created.
• INOX and PVR have a symbiotic relationship with their film, producers, and distributors. They require more films because, as a result of the pandemic, the majority of them have moved to OTT platforms. INOX and PVR are looking at the overall pie of the gross box office collections of India that got severely impacted.
• They expect the revenue pie to increase if they have more screens and the full support of their stakeholders. The film fraternity is an important stakeholder for PVR and INOX and they expect to play more cinemas in theatres. They don’t intend to spoil this equation by coming together and using their pricing power.
• In the pre-pandemic era, both companies were adding about 60-80 screens per year. They plan to increase this number to 200 per year going forward.
• India has 9,500 screens compared to 70,000 in China. As a country, India has been adding 400 screens a year as compared to 6,000-7,000 per year in China which shows how underpenetrated the market is in our country.
• This partnership is expected to encourage the cinema exhibition industry to continue its investments. Content creators would get encouraged as the size of the industry grows.
• The merger process is expected to take six to nine months.
• Smaller towns have smaller malls and shopping centers coming in. A lot of single screens are converting into two and three plexes. INOX and PVR are not against growing in any format but they would be interested to seek any opportunity that comes up organically.

Asset Multiplier Comments

• The film exhibition sector has been one of the worst impacted sectors due to the pandemic. This has led to a majority of the films getting released on OTT platforms. The sector is expected to go back to its pre-pandemic levels on the back of new film releases and the reopening of theatres.
• We expect revenue and cost synergies to be created out of this merger. We believe the merged entity would have improved bargaining powers in terms of rentals and advertising rates charged due to an increase in market share.
• We expect the merged entity to ramp up screen openings over the next few years and take advantage of the underpenetrated film exhibition market in India.

Consensus Estimate: (Source: market screener website)

• The closing price of INOX was ₹ 525/- as of 28-March-2022. It traded at 40x/ 29x the consensus earnings estimate of ₹ 13/ 18/- per share for FY23E/FY24E respectively. The consensus target price of ₹ 500/- implies a P/E Multiple of 28x on the FY24E EPS estimate of ₹ 18/-
• The closing price of PVR was ₹ 1,883/- as of 28-March-2022. It traded at 54x/ 30x the consensus earnings estimate of ₹ 35/ 63/- per share for FY23E/FY24E respectively. The consensus target price of ₹ 1,886/- implies a P/E Multiple of 30x on the FY24E EPS estimate of ₹ 63/-

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