Stock Pick From The Entertainment Sector

HERE IS WHY:

• It is the largest company in the exhibition industry.
• Profitability and reach has increased after the acquisition of Cinemax
• With good capex plans, it intends to add 150-200 screens in the next two years

Buoyed by the investor sentiment in the movie exhibition business, we are following the theme from our previous issue to recommend PVR, the largest company in this sector in this issue. The company pays regular dividends, has diversified business operations and has pulled off one of the biggest acquisitions in the industry. Its shares are also soaring on the bourses, promising wealth creating opportunity.

PVR currently operates 255 screens at 52 locations across 29 cities in India. In November 2012, the company acquired 69.27 per cent stake of Cinemax, which had 138 screens and had been one of the marquee names in this industry. Post acquisition, it now operates 393 screens with a seating capacity of around 95000, making it the largest multiplex chain operator in the country.

The company is looking to add 150-200 screens in the next two years, which will give it a larger pie of the industry. The economics of scale would also come into effect as the new entity has become stronger, larger and more profitable due to the synergies between Cinemax and PVR. The stock should do well on the positives that PVR is witnessing.

The company has various business streams including income from ticket sales, film rights, production and distribution, bowling alleys, advertisement, sale of food and beverages, etc. It has categorised these activities in three business segments, i.e. Movie Exhibition, Movie Production & Distribution and Bowling Alleys. Movie Exhibition is the largest segment which contributes 90 per cent of the total revenues, five per cent comes from Movie Production & Distribution and the remaining five per cent comes from Bowling Alleys. The revenues from the Movie Exhibition business have seen a CAGR of 34 per cent in the last three years, while those from Movie Production & Distribution have grown at 18 per cent during the same period.

Bowling Alleys is a new concept in India, on which the company is very bullish. These are gaining a wide popularity and the future of this business remains very strong. The current turnover of this business has increased from Rs 13 crore in FY10 to Rs 40 crore in FY13. It operates five bowling centres in cities like Pune, Bengaluru and Gurgaon under PVR Blu-O, a joint venture in which it holds 51 per cent stake. It also intends to open new centres in cities like Chandigarh and Ludhiana.

On the financial front, the company’s revenues have witnessed a three-year CAGR of 34 per cent by FY13. Due to the higher costs in FY08-FY10, its profitability was hammered. In FY11, PVR sold its properties in Phoenix Mills Compound for Rs 100 crore, after which its performance improved remarkably. Its net profit has increased from Rs 26 lakh in FY10 to Rs 55 crore in FY13 and the EBITDA margins have moved to 17 per cent in FY13 from 11 per cent in FY10. The numbers for the first quarter of FY14 were also fantastic, with revenues rising by 28 per cent to Rs 229 crore while the net profit doubled to Rs 14 crore.

On the valuations front, at its CMP of Rs 440 the stock is trading at 7.8x its FY15 EV/EBITDA. The stock promises to yield 35-40 per cent returns in the next two years. Investors with a one-year horizon should book profits in the stock at a price of Rs 516.