75
(^) Outlook BUSINESS / (^) 22 December 2017
and high-end food and beverage (F&B) options have
already resulted in higher asset turn of 1. 4 x for PVR
versus 0. 8 x for its peers. This makes PVR well-placed
to translate margin gains from better indirect tax
effi ciency (e.g. GST) into sustainable return on eq-
uity. We expect margins to improve by 360 bps by
FY 20 with higher average ticket prices ( 4 % CAGR),
and higher revenue share of F&B ( 31 % in FY 20 from
27 % in FY 17 ).
With the highest occupancy levels in the world,
PVR’s premium positioning is strong as more than
50 % of its screens are in the top eight cities whose
per capita GDP is 7 x that of India. Customers willing-
ness to pay a premium is evident from Starbucks’ suc-
cess in India, where the US cafe giant clocks 5 x more
sales per store than that of the domestic cafe market
leader. The low screen density in major cities coupled
with increasing standards of living imply that ATP,
as a percentage of city GDP, in major cities is on par
with other major cities of the world. There is room for
growth, since India’s screen density is signifi cantly
lower compared with these cities.
Unlike consumer discretionary peers that operate
in a more competitive environment, PVR’s risks and
earnings volatility are limited to content, which can
be cyclical rather than structural. Hence, PVR’s valu-
ation of 29 x estimated FY 19 earnings EPS is driven by
growth prospects in a low screen density market ( 7
screens per million population versus 30 in China),
inherent pricing power ( 5 % CAGR over FY 17 - FY 20 )
and improving revenue share of F&B.
THE RIGHT CLIMAX
Expectations of GST rate of 18 % and consequent mar-
gin gains of 400 bps ( 25 % increase in FY 19 operating
profi t) was watered down as the government imposed
28 % GST on movie exhibition. This rate is similar to
current taxation, but results in better tax effi cien-
cy gains of 180 bps. However, GST has also brought
regional movies, which paid lower taxes, under the
higher tax net.
GST will help PVR in a big way. The states could
wave off their share of GST on regional fi lms. With
central government unlikely to cede its share of
GST, regional cinema in some states will be taxed at
a higher rate. Tamil Nadu has already raised ticket
prices. Regional cinema, which enjoys preferential
taxation, forms 23 % of PVR’s revenues. A waiver by
even two states (Andhra Pradesh and Tamil Nadu)
could add 120 bps to its operating margin.
Thus, we feel PVR’s valuation has enough room for
a rerating as it is expected to clock healthy earnings
growth ( 46 % earnings CAGR over FY 17 - FY 20 ) and re-
turn ratios (return on invested capital from 15 % in
FY 17 to 25 % in FY 20 ). Hence, we expect a meaningful
upside in the stock over the next 12 months. b
*The article has been co-authored by Abhishek Ranganathan.
Mukherjea has not made any stock recommendations in this article and
the recommendations are solely attributable to Ranganathan. The views
expressed in the article are personal and cannot be attributed to that of
Ambit. Neither Ambit nor the authors have any holding or other interest
and proprietary dealings with and in any stocks discussed in this article
See more, spend more
PVR has seen its patrons spending more on F&B
28
29
32
36
38
41
FY12 FY13 FY14 FY15 FY16 FY17
Locational advantage and high
occupancy levels give PVR
more pricing power compared
with players in the apparel
and jewellery business
Source: Company
CY17 RETURN 11%
net profit# 96 cr
ttm p/e (x) 64
roce 14.61%
F&B spend as % of average ticket price