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PVR Ltd: The Cinema (with) scope?

Aug 17, 2006

The Indian entertainment and media industry is growing at a fair clip. Amongst the many segments, multiplex cinemas have emerged as one of the fastest growing segments of the media industry. More than 60 additional multiplexes with more than 220 additional screens are slated to commence operations by the end of 2006, translating into a growth rate of 80% to 100%. This growth in multiplexes is due to the organised retail boom and entertainment tax benefits for multiplex cinemas. In FY05, there were 73 multiplexes operating in India with 276 screens. PVR Cinemas is one of the biggest and a major player in this market. Here is an analysis of the company's business; its past financials and future prospects.

Company background
PVR Cinemas is India's largest multiplex Cinema operator by number of screens. They established the first Multiplex Cinema in India, PVR Anupam, in Delhi in 1997 and the largest Multiplex Cinema in India, PVR Bangalore in 2004. As on date, it has 11 cinemas with a total of 47 screens in five A-class centres. Of these, PVR operates nine Multiplex Cinemas and two single-screen cinemas and managed one Multiplex Cinema with three screens. PVR was incorporated in April 1995 pursuant to a joint venture agreement between Priya Exhibitors Private and Village Roadshow, one of the largest non-US cinema exhibition companies in the world with more than 1,000 screens under operation. The latter's international experience enabled the company to begin its film exhibition business operations. PVR also operates a small film distribution business through its wholly owned subsidiary, PVR Pictures, which acquires and distributes Indian and international films.

Growth drivers
Diversifying its reach: Earlier PVR Cinemas was largely concentrated in the Northern parts of India, with Delhi and Haryana accounting for 78% of its total cinema seating capacity followed by Banglore (22%). But now the scenario seems to be changing. In FY06, Delhi and Haryana's contribution to total seating capacity fell to 60% of its total cinema seating capacity and Mumbai and other states emerged as new markets. The company is planning to establish further new cinemas and new screens across the country. (see charts below).

* Others include M.P, U.P and Hyderabad.

Robust ticket sales: The Company's film exhibition business earns revenues from five primary sources, which includes box office revenue, food and beverages, advertisement, royalty income and management fees. Total revenues for FY06 were higher by 50% over the corresponding twelve months of FY05. The highest contribution to revenues was from the ticket sales, which at Rs 705 m, accounted for 68% of the company's revenues. Food (Rs 213 m) and advertisement revenues (Rs 91m) were the next highest contributors accounting for 21% and 9% of the total income respectively. The 50% growth in total income was primarily driven by ticket sales, which increased by 58% YoY, mainly due to the robust increase in revenues of existing cinemas and from the new multiplexes, which commenced operations during the year.

Analysis of the past…
During the period between FY01 and FY06, PVR registered a CAGR of 43% in sales. While the company has been able to maintain its net profit margins, operating margins have come under pressure on account of higher outlays on employee costs and film distribution expenses. While depreciation has also been higher due to aggressive capacity expansion by the company, the same has been taken care of by a strong 80% CAGR increase in other income and benign interest charges during the said period. Going forward, if the company manages to improve its capacity utilisation, then the margins might see an upward movement.

FY01 FY02 FY03 FY04 FY05 FY06
Net sales(Rs m) 178 286 383 482 686 1049
% growth 61% 34% 26% 43% 53%
PAT 11 16 18 16 36 53
%growth 45% 13% -11% 125% 47%
Profitability ratios
EBITDA margins (%) 19% 21% 17% 14% 16% 15%
EBIT margins (%) 14% 15% 12% 9% 11% 11%
Net profit margin(%) 6% 6% 5% 3% 5% 5%

What to expect?
At the current price of Rs 233 the stock is trading at a steep price to earnings multiple of 100 times its consolidated FY06 earnings. Although, the company has huge expansion plans in the near future, we believe from a valuation perspective, the risk is on the higher side.

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