Stock Pick From The Entertainment Sector

HERE IS WHY:

• It is one of the top three companies among its peers.
• The company’s box office collections are rising.
• Multiplexes are dominating the film exhibition space.

Film making has become a very big business in India. Rs 100 crore in gross revenues is fast becoming an easily achievable target for quality movies. The recently released Chennai Express has actually gone on to achieve Rs 400 crore in gross revenues in a span of just four weeks. These numbers indicate that the movie making and exhibition business is flourishing in India.

It is also noteworthy that there has been a much higher number of movies garnering Rs 100 crore in revenues over the last two years. In 2012, a total of nine movies grossed Rs 100 crore or more. This year, with four months still to go, a total four movies have already made the cut. Ahead in this year, films like Dhoom 3, Krrish 3, Zanjeer, Besharam, Boss, Ram Leela, etc. are set to release, which promise to make it a very good year for the entire value chain of the movie business.

With this backdrop, we are recommending Inox Leisure, a popular name in the film exhibition space. Inox Leisure (Inox) is owned and operated by Gujarat Fluorochemicals, which holds more than 66 per cent stake in the company. Inox currently operates a chain of 72 multiplexes, with a total of 281 screens in India as of date. Another marquee name PVR has total of 383 screens, while the ADAG-led Big Cinemas operates 510 screens in India, US and Malaysia. Inox emerged as one of the top three screen operators after it acquired 91 screens from Fame India earlier in 2013. Further, it is also looking to increase this tally by means of inorganic acquisitions, which will further consolidate its position.

The company notably has three business segments, i.e. box office, food & beverages (F&B) and others. Box office revenues account for the highest contribution, i.e. 73 per cent, while F&B makes for around 19 per cent. The remaining eight per cent comes from its other businesses, which includes parking, power generation, etc. In the last five years, box office revenues have grown from Rs 166 crore (FY09) to Rs 558 crore (FY13), translating into 35 per cent growth. F&B revenues have grown even more strongly, witnessing a CAGR of 42 per cent.

The industry as a whole is benefitting from rising consumer spends on entertainment. From FY09 to FY13 Inox has seen its average box office revenue per seat per year doubling from Rs 61951 to Rs 111478. The average per seat spending on F&B has also increased from Rs 3500 to Rs 14200 in the same period. With the festive season ahead, the company may see a further rise in these numbers, which will lead to an overall increase in its revenues.

On the financial front, the company has seen revenues rise at a CAGR of 30 per cent to Rs 765 crore in FY13. The net profit has also seen a CAGR of 36 per cent to Rs 18.5 crore in FY13, thanks to the acquisition of Fame India and higher spending by audiences. For the latest quarter, Inox has reported an 88 per cent rise in revenues to Rs 219 crore and its net profit has increased by 50 per cent to Rs 14 crore. The June quarter numbers look very strong especially because the company had reported losses in the March 2013 quarter. Its debt-to-equity ratio is 0.5x, which is quite comfortable and gives room to raise funds in the future.

On the valuations front, at a CMP of Rs 59, the stock is trading at a TTM EV/EBITDA of 8.5x. This is very cheap as compared to that of PVR at 15.4x. Inox should do well and give 12-15 per cent returns over the next one year. Hence, we advise readers to enter the counter with a one year price target of Rs 65.