PVR and Inox merger will create a mega cinema entity

Here is the analyss by Karan Taurani, senior analyst at Elara Securities (India) Private Limited, about the PVR-Inox merger:


The combined entity will be named PVR INOX Limited with the branding of existing screens to continue as PVR and INOX, respectively. New cinemas opened post the merger will be branded as PVR INOX.

The promoters of INOX will become co-promoters in the merged entity along with the existing promoters of PVR. Board of Directors of the merged company would be re-constituted with total board strength of 10 members and both the promoter-families having equal representation on the Board with two board seats

Ajay Bijli would be appointed as the MD and Sanjeev Kumar would be appointed as the ED. Pavan Kumar Jain would be appointed as the Non- Executive Chairman of the Board. Siddharth Jain would be appointed as Non-Executive Non-Independent Director in the combined entity.
PVR promoters will have 10.62% stake while INOX Promoters will have 16.66% stake in the combined entity; INOX shareholders will receive three shares in PVR for 10 shares of INOX.

Synergy on ad revenue and convenience fee – near-term benefit

INOL’s ad revenue per screen is at a 33% discount vs that of PVR as on FY20; we believe both entities getting merged will lead to better yields on advertising, wherein INOL will come on par with PVR and the combined entity may even command a further premium over the medium term. In terms of convenience fee too, INOL derives a much lower convenience fee per screen (50% lower than PVR on a per screen basis), which too will be revised upwards. We believe there is a synergy benefit of INR 1.5bn on EBITDA of INOL due to the above two metrics (about INR 0.9bn/0.6bn benefit on ad/convenience fee respectively) Monopolistic market approach – 42% Box Office share in Hindi/English

In terms of Box Office revenue, both entities have a combined Box Office share of ~42% (Hindi and English content which has a 65% share in overall Box Office industry), which becomes irreplaceable. Market share may trend up as the combined entitymay gain from smaller chains and single screens that have struggle led due to the COVID situation. In terms of regional genre (South and other languages contribute 35% of Box Office), PVR/INOL have a market share of mere 6%/3% respectively as regional content is heavily dependent on single screens (almost 60% of Box Office for regional content comes from single screens); overall, PVR and INOL have a Box Office market share of 34% including the regional genre

Premiumisation is the way to go - Synergy on other metrics (SPH, ATP) to only come over medium term In terms of ticket prices/spend per head too, INOL is at an 5%/25% discount vs that of PVR; we expect INOL to move towards rapid premiumisation in line with PVR. We believe use of new technologies (3D, 4DX, IMAX) and other luxury offerings will drive ticket prices higher.

Further introduction of gourmet food will have a positive impact on combined entity spend per head. We believe advantage on SPH and ATP in terms of synergy will come in the medium to long term, as it is based on location and consumer spending patterns. We have not assumed any synergy benefit of SPH/ATP metric in our estimates.

Synergy on rentals/distributor share remains far stretched

We don’t expect any synergy on distributor share as the producers already have pre-fixed agreements with exhibitors; in fact, any hike in distributor share from the exhibitors will be taken negatively by the producer/studios, as they have the option to go direct OTT for film releases. In terms of rentals too, we don’t expect any major synergy, as it will only stop poaching of screens between PVR and INOL, which may not have a big positive impact on overall rental outgo. We have not taken any benefit on rentals as of now in our estimates.

Broad based presence – largest share in the multiplex segment

The merged entity will have a screen share of 50% within India multiplexes and a share of 18% within overall screens; it will lead to a broader presence on pan India basis; PVR is stronger in the north, west and south, whereas INOL has more screens in the East. We believe this will be a huge competitive advantage over other multiplex operators, in terms of brand recall and brand equity.

Risks not too many – high likelihood of the deal going through

We believe there is a high likelihood of the deal going through and the CCI too may not object on the merger, as the combined
entity revenue is below INR 10bn as on FY21. However, we believe there may be a lot of opposition from the film trade and fraternity fearing hike in distributor share as the entities having a commanding Box Office position; we believe some kind of assurance from the exhibitors for not increasing distributor share will augur well for the film trade and distributors.

Valuation

In terms of target valuation multiples, we usually assign an EV/EBITDA multiple of 14x/11x one year fwd .for PVR/INOL respectively. Basis synergies, we believe the combined entity has the potential to trade at higher multiple of even 15-16x one year forward; this in turn would imply a higher upside for INOL currently than that of PVR as the former already trades at lower multiples.

We believe the above acquisition is a big win-win for the cinema industry and will benefit both the players with a higher positive bias towards INOL; based on the share swap arrangement, INOL valuation has been pegged at INR 64bn (EV per screen of INR 0.1bn) whereas PVR is currently trading at a valuation of INR 110bn (EV per screen of INR 0.12bn).

The valuation on a standalone basis is largely fair, however the combined entity valuation can be higher by 30%-45% basis 1) synergies on various metrics (ad revenue and convenience fee) as mentioned above and 2) re-rating due to the large size of the entity. In terms of management control , we believe it will augur well if PVR has a control in the initial years, as latter has a better brand equity vs that of INOL; we need to monitor in terms of who gets the control over medium to long term . As indicated by exchanges, currently both promoters will have equal board seats in the entity.

We have assumed a revenue of INR 68bn for the consol. entity for FY24, of which PVR revenue remains same at INR 42bn, whereas INOL revenue would move higher towards INR 24bn (earlier estimate of INR 22bn) due to synergy on ad. revenue and convenience fee; our FY24 EBITDA margin estimates (EX IND-AS) is pegged atINR 15bn assuming the synergy on ad/convenience fee for INOL

We currently have a BUY rating on PVR/INOL with a TP of INR 2,375/575 respectively; we believe multiple re-rating is the only
trigger for PVR at current valuations, which may lead to an upgrade of TP towards INR 2,600 (basis 15.5x one year fwd.
EV/EBITDA), which implies a market cap of INR 156bn (33% upside from current market cap).

However, in case of INOL, there is a trigger in terms of synergy on ad. revenue and convenience fee, which in itself will have a positive impact of almost INR 1.3- 1.5bn on its EBITDA; further, post the re-rating of multiple towards 15.5x one year fwd EV/EBITDA, TP for INOL has the potential
to move towards INR 680, which implies a market cap of INR 80bn (45% upside from current market cap)

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