About The Company
PVR Limited, incorporated in 1995, is the top cinema exhibition company in India with 845 screens across 176 properties in 71 cities. It had established the first multiplex cinema in India in 1997 at Saket, New Delhi. PVR came into existence pursuant to a joint venture between Priya Exhibitors Private Limited and Village Roadshow Limited, Australia. Village Roadshows divested its stake in PVR in November 2002. PVR entered the capital market with its IPOs in December 2005 and raised equity of ₹2,288 lacs. The company acquired Cinemax in 2012 which helped it scale up and become the largest multiplex company in India. PVR is present in the movie distribution business and has also ventured into retail entertainment and management of food courts to diversify its revenue stream.
Subsidiaries: Its subsidiaries include PVR Cinemas, PVR Leisure and PVR Pictures. PVR Leisure looks into food and beverage and retail entertainment concepts. PVR BluO, largest bowling chain in India, has 151 odd bowling lanes across 7 centers. Mistral combines film and food experience by roviding
prime food indulgence. PVR pictures is distribution subsidiary, which has distributed independent international films and big studio productions till date. All subsidiaries have their own CEOs, highlighting that the company is focusing on each segment separately to help them evolve.
Reasons to Avoid this Stock
Declining Premium Pricing Ability - Increasing competition in tier 2 and tier 3 cities
Multiplex has been the local monopoly business. PVR has established its brand successfully which makes it the most preferred brand amongst the mall developers. PVR enjoys the price premium over the industry because of the differentiated experience it provides. However, the premium has been declining steadily. This is due to increasing competition and its expansion in tier 2 and tier 3 cities. PVR is the leading player amongst the multiplexes, however, it will face tough competition from Carnival cinemas in tier 2 and tier 3 cities. If we leave aside the top 15 cities, PVR is present in only 15 other cities compared to Carnival which is present in 84 and Inox in 50. As PVR increases focus on smaller cities, increased competition and lower ATPs (Average Ticket Price) in these cities will limit its premium pricing ability.
Infrastructure Risk - Slow retail real estate growth
Since PVR looks for upmarket locations for its theatres, the slow development of malls and multiplexes has always been a concern for the company. The supply of quality retail real estate locations is an issue. There is an average delay of 3–6 months on the upcoming properties. To add to that are the regulatory lags in terms of the license to operate multiplexes at these locations. Also, the existing malls aren’t doing well. Out of the total mall's operational malls in the top 7 cities, only 20% are considered to be performing well. Owing to low footfalls and vacancy rates as high as 30%, it is estimated that a few malls will withdraw operations soon. Extrapolating that to tier 2 and 3 cities, the picture doesn’t look favorable for PVR’s aim of adding 100 screens every year.
Technology Risk - Innovate to be ahead of times
New technologies like DTH, IPTV, home-video, and online streaming platforms are increasingly appearing in households and are a potential threat to the industry. PVR is keeping ahead of times by introducing technologies like 4DX, Dolby Atmos, and hospitality options like PVR Icon which are difficult to be adopted by other platform providers
OTT (Over-The-Top) Market Risk- Necessity might become luxury and exclusivity
The idea of entertainment has seen a change during the lockdown. Even after the pandemic is over, people might be reluctant to change the habit and may not quickly go to cinema theatres. Theatres might turn into a luxury experience as people can sit back at home and watch movies as long as they have a good internet connection.
Content Risk- Maturing cinema and improving release quality
Content and flow quality of the releases are of prime importance to the exhibition industry. Lack of it and poor performance of the movies leading to failure in attracting patrons to PVR can adversely affect the business and results of operations. Poor content in 2017 had brought down margins
considerably
Consumer Behavior Risk - Provide a wholesome outing experience
With the increasing disposable income and other newer sources of entertainment such as amusement parks, gaming alleys, admissions can see a slowdown. Consumers may switch to these avenues as the cost involved is low. In addition to that, hospitality initiatives taken by the company may not prove to be successful.
Inorganic Growth Risk - Not too many options left to acquire
In the past, PVR has used inorganic growth to get a major boost in the number of screens. Cinemax and DT Cinemas acquisition has added nearly 167 screens to its kitty. Now with the top 4 players, i.e. PVR, Inox, Carnival, and Cinepolis controlling 70% of the multiplex landscape in India, the scope of this approach has reduced. Also, small regional exhibitors are highly fragmented, and acquiring single screens is not considered an option by the management. With limiting inorganic growth scope, organic growth will drive the future. However, the company has not been able to consistently grow organically as the management had expected.
Regulatory Risk- Price Ceiling to pose a challenge
Some states like Tamil Nadu, Andhra Pradesh, Telangana, and Kerala have an upper cap on the ticket prices while Chandigarh follows a fixed pricing system. These regulations impact the revenue of PVR. The company is hopeful that the government will allow flexible pricing in these regions which will
also, reduce black marketing.
Prospective Corporate Governance Risk- Flouting disclosure norms
There is a possible issue with corporate governance in the company. In 2013, PVR made a preferential issue of shares to a PE firm Multiples and L Capital. They together invested ₹235 crores in PVR to buy 96 lakh shares through the preferential route at ₹245 per share. Post that, the two investors signed agreements with Mr. Ajay Bijli, the CMD of PVR, to reward him privately at around 20% of the total return that PVR shares generate for the PEs over and above a minimum IRR of 30%. Consistent with this agreement, Mr. Bijli received a payment of ₹3.64 Crores in March 2015. The information about
this agreement was not disclosed to the stock exchanges or the shareholders and is viewed by the team as a violation of fair corporate governance practices.
Cost Risk- Revenue sharing model key to lower costs
With the rental costs growing at a rate of 5% on existing properties and 11% on new ones, the fixed liability in terms of rent eats into PVR’s revenues. In tier 2 and 3 cities where footfalls don’t translate to impressive revenues easily, expansion becomes an expensive proposition.
Valuation and Promoter Holdings
Valuation methods indicate a current intrinsic value of ₹1,042 per share which is a discount of 19.85% to its CMP of ₹1,300(As of 01st October 2020). The intrinsic value is calculated through the discounted cash flows method using Safal Niveshak’s Stock Analysis Excel Template Version 5.0. Very low promoter shareholding (19%), poor net profit margins (Less than 6%), mediocre ROCE and ROE over the years, increasing leverage do not throw an attractive story.