PVR Inox (BUY): Merger synergies drive Q1 beat; if July momentum sustains, H2CY23 may set new benchmarks

PVR Inox beat revenue estimates in Q1FY24, helped by flow through of merger synergies (+9% QoQ in SPH and +3% QoQ in ATP). Admits also increased 11% QoQ despite flattish occupancy (+10 bps QoQ) led by an increased number of shows per screen. We believe this is commendable given the muted performance of some big budget movies in Q1FY24. Now that ‘movie-going’ has gathered momentum among premium viewers aided by ‘MI7’, ‘Oppenheimer’ and ‘Barbie’, we believe Q2 and Q3 could be breakthrough quarters for PVR Inox, given its strong content line-up (OMG 2, Gadar 2, Jawan). The stock had corrected meaningfully from its historical multiples owing to investor concerns around the relevance of movie exhibition amidst OTT disruption. We believe these concerns are not warranted (link) and re-iterate BUY on this stock.

Uptick in sequential performance
Revenue in Q1FY24 was INR 13.04bn (+14% QoQ/ -17% YoY pro forma). Gross profit margin remained stable at 69%. Employee cost was up 3% QoQ. EBITDA (adjusted for Ind-AS) was INR 808mn (vs INR 54 mn in Q4FY23). Net loss was INR 816 mn in Q1FY24, improving sequentially from INR 3.3 bn (net loss) in Q4FY23. Admits increased 11% QoQ to 33.9mn in Q1FY24 led to due to improvement in number of shows per screen. Average ticket price grew to INR 246, +2.9% QoQ and F&B spend per patron grew to INR 130, +9.2% QoQ as merger synergies started playing out. Ticketing revenue grew 15.4% QoQ despite muted April’23. F&B revenue was up 22% QoQ at INR 4.2bn led by higher admits and SPH. Ad revenue was flattish QoQ. PVR added 17 screens on a net basis during Q1FY24.

Management commentary
Management mentioned volatility in the performance of Hindi movies is reducing as medium-tier film like ‘Zara Hatke Zara Bachke’ was able to draw audiences. According to the management, the negative sentiment around movie exhibition business is slowly receding. It also sounded confident that the current content line-up should result in robust performance in FY24. Management also noted that bulk of ATP synergies will flow through in coming quarters, with SPH already showing promising results. Management attributed the 9% QoQ increase in SPH to 1) change in menu 2) new SKUs and 3) introduction of non-vegetarian items in some INOX properties. If big budget movies do well in Q2FY24, with higher attachment rates in F&B (driven by value for-money offerings), both ATP and SPH are likely to improve materially hereon.

Valuation
We see the content pipeline for PVR Inox improving from Q2FY24E and occupancy levels improving in tandem. We have factored in 9.2% revenue growth (pro-forma) for FY24E with 560 bps EBITDA margin (pro-forma) expansion. Accordingly, our target price is INR 1,950 (maintained) with an unchanged multiple of 16x FY25E EBITDA.

For QIFY24 result click. ICICI Securities