PVR-Inox Merger: An Opportunity You May Not Know of

PVR and Inox Leisure, India's leading multiplex chains, have announced their merger.

Post the announcement, the share price of both these companies surged as investors gave a big thumbs up.

These companies were the top gainers on 28 March 2022. The share price of PVR and Inox surged 10% and 20%, respectively.

While you might be aware of this, you might not know about a listed company closely associated with this merger and is likely to benefit from it.

The company that didn't make it to the news is GFL Ltd.

GFL (formerly known as Gujarat Flourochemicals) is part of the Inox group. It's the holding company of Inox Leisure.

GFL is the single largest shareholder in Inox Leisure, owning 43.1% of the company as of December 2021.

Post the merger with PVR, GFL would have a stake of 16.6% in the merged entity.

GFL is not to be confused with Gujarat Fluorochemicals (GFCL), which is the chemical arm of the Inox group.

The chemicals business of the company was spun off in 2020. The resultant entity was GFCL (Gujarat Flourochemicals). The existing company was renamed as GFL.

If you take a hard look at the marketcap of GFL and its subsidiary Inox Leisure, you will notice an anomaly.

Inox Leisure commands a market cap of Rs 64.6 bn (as of 31 March 2022). Since GFL owns 43.1% of Inox Leisure, it should have a market cap of around Rs 27.5 bn.

However, the holding company commands a marketcap of only Rs 8.8 bn. This means that GFL is trading below the total value of assets it owns.

So here's the thing.

GFL seems to be trading at a steep discount. On top of that, the company will be a significant stakeholder in what's going to be India's largest multiplex chain.

Considering all these facts, does GFL look like a good investment? Is this the right time to invest in the company?

Before we answer these questions, you need to know a few points that probably explain why GFL trades at a discount.

You see, GFL doesn't have any business operations of its own. Also, it doesn't interfere with the day-to-day operations of its subsidiaries.

So, the company lacks control over its investments. The lack of control is probably one of the reasons why GFL trades at a discount.

The other reason is uncertainty. GFL is a holding company. So dividends constitute a large chunk of its revenues. This means the performance of GFL depends on the performance of its subsidiaries.

Due to this, there is a lot of uncertainty around the cash flow. And markets don't like uncertainty with regards to earnings. This is accounted for in the share price.

Now coming to why we think GFL might be a good investment...

The cinema business in India is a high-growth business. Indians love watching movies. On the supply side, India produces more movies per year than any other country in the world.

This is the reason why many analysts have come up with rave estimates for the industry. As per some estimates, the Indian cinema industry will grow in double digits for the next decade.

Another interesting fact is that the industry has been consolidating for the last few years. The single-screen cinemas have been losing their market share to multiplexes. And the pandemic has only accelerated this trend.

The merged entity, the largest multiplex chain with a network of more than 1,500 screens, stands to be the biggest beneficiary of this trend.

Another thing that investors should take note of is PVR's premiumisation efforts. PVR is focusing on providing a luxurious experience to its customers.

PVR's premium services account for 10-11% of its total revenue and the company aims to increase it to 20% by 2025. We could see the premiumisation efforts continue post-merger.

As far as the number of screens is concerned, India lags behind other countries. The country has around 9,500 screens compared to 40,000 screens in the US and 70,000 screens in China.

As per the management commentary, the merged entity will focus on adding more screens in the next few years. The move is certainly going to drive its growth.

Many analysts believe the merged entity would have higher pricing power on the revenue front and higher bargaining power on the costs front. The synergies would result in robust free cash flows which bode well for GFL.

Speaking of PVR and Inox, Research Analyst at Equitymaster Aditya Vora recently recorded a video discussing multiplex stocks.

In the tug of war between theatres and OTT, Aditya believe theatres will triumph and create long term wealth for investors. Watch the video for more details...

So, should you buy GFL right away?

Although the merger is confirmed as far as companies are concerned, it's yet to be approved by the competition commission of India (CCI). The CCI's decision could be a roadblock for this deal. So, keep a check on that.

If everything goes smoothly, you could keep an eye on GFL, especially if you want dividend income.

However, tread cautiously. Go through the fundamentals of the company thoroughly, especially the balance sheet.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.