anand rathi- india film exhibition –blockbuster year

7/23/2019 Anand Rathi- India Film Exhibition –Blockbuster Year

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Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely ofARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analystcertifications are present in the Appendix.

Anand Rathi Research India Equities

Leisure and Entertainment

Sector Report

India I Equities

Sonal Gandhi

Research Analyst

+9122 6626 [email protected]

M-cap Price# TP Upside RoE (%) P/E (x) EV/EBITDA (x)

Key Data Reco ( bn) ( ) ( ) (%) FY 16e FY 17e FY 18e FY 16e FY 17e FY 18e FY 16e FY 17e FY 18e

PVR Ltd* Buy 37 795 1,002 26 18.4 15.1 16.3 30.6 26.0 20.8 12.7 10.4 8.5

Inox Leisure Ltd Buy 24 245 308 26 10.3 12.7 15.0 32.2 23.3 17.2 12.0 9.5 7.5

Source: Company, Anand Rathi Research * Does not incorporate acquisition of DT Cinemas# Share prices as on 23

nd Dec’15

28 December 2015

India Film Exhibition

Blockbuster year

The outlook for the exhibition sector in India appears vibrant, poweredby (1) the number of screens added, (2) greater acceptance ofHollywood and regional movies, (3) consolidation, providingeconomies of scale, (4) increasing proportion of high-margin food &beverages (F&B) and advertising to total revenue, and (5) marginexpansion, post-GST-implementation.

Indian exhibition sector offers significant growth opportunities. Indiareleases the most films globally (over 1,600 films annually). Yet, it is heavilyunder-screened, with just nine screens per million people (16 for China, 125for the US), offering substantial headroom for growth. Due to the heavy taxstructure and high fixed costs, many small screens are closing down, makingroom for multiplexes. Multiplexes are focussed on high-margin F&B and adrevenue to monetise on captive audiences. The better content in regionalcinemas has reduced dependence of multiplexes on Bollywood andHollywood.

Key operating parameters picking up. Following good content and greateracceptance of regional movies, occupancy climbed from 27-28% in FY15 to

31-33% in H1 FY16. We expect Inox and PVR to add more than 50 screenseach p.a. over next few years. Average ticket prices (ATP) would rise slightly(2-3%) but faster growth in F&B and advertising revenue is expected.

Expansion in tier-2 and 3 cities: significant growth opportunities. Screen penetration has been skewed toward the markets of Mumbai, UP andDelhi, which together account for 60% of box-office collection. However, weexpect more than 50% of screen additions to come from tier-2 and -3 cities inthe next ten years as mall development in metros and tier-1 cities havereached saturation point.

Valuations. India is an under-screened market, and we expect multiplexoperators to be the largest beneficiary of the revival in consumer discretionary

spending. We initiate coverage on PVR (with a Buy recommendation) andInox Leisure (also with a Buy). Risks. Weak content supply, increase in taxes,slow development of malls and slowdown in the economy.

Sensex: 25850

Nifty: 7866



28 December 2015 India Film Exhibition – Blockbuster year

Anand Rathi Research 2

India Film Exhibition

Blockbuster year

Indian exhibition sector offers growth opportunities ......................................... 3

Key operating parameters picking up ............................................................... 7

Expansion in tier-2 and tier-3 cities offer significant growth opportunities ...... 10

Valuation ........................................................................................................ 12

Company Section ........................................................................................... 13

PVR Limited ............................................................................................ 14

Inox Leisure Ltd ....................................................................................... 33

Annexure........................................................................................................ 49





Indian exhibition sector offers growth

opportunities

In an interview with the BBC, Karan Johar stated: “Of the 1.2bn

population of India, movies should reach out to at least 300m people(India’s middle class). But, currently, our reach is limited to 45m. If

we cover this gap, it will be a game-changer.”

Film industry to register a 10% CAGR over FY14-19

The Indian Media and Entertainment Industry is valued at ` 1,026bn, andis likely to record a 14% CAGR over FY14-19. Television is the largestsegment (44%), followed by print (26%) and films (12%).

Fig 1 – Indian media and entertainment

Source: FICCI-KPMG report 2015

The film industry is valued at ` 127bn, and is likely to record a 10% CAGRover FY14-19. Domestic theatricals contribute 74% to the film industry,followed by 12% from cable and satellite rights. India produces the mostmovies annually and is one of the largest box-office markets globally. WithHollywood movies and regional cinema gaining wider acceptance, we seeimmense potential for increased viewership of movies. Digitisation has ledto wider movie releases on the same day across the country at a muchlower cost.

Fig 1 – Domestic theatricals constitute three-fourths of the film industry

Film industry size ( bn) 2010 2011 2012 2013 2014 2015p 2016p 2017p 2018p 2019p

Domestic theatricals 62 69 85 93 94 100 114 124 134 145

Overseas theatricals 7 7 8 8 9 10 11 12 13 14

Home videos 2 2 2 1 1 1 1 1 1 1

Cable & satellite rights 8 11 13 15 15 16 18 19 21 23

Others 4 5 5 7 8 10 13 15 18 22

Total film industry 83 94 113 124 127 137 157 171 187 205

Source: FICCI-KPMG report 2015

TV46%

Print26%

Films12%

Others16%

Film industry contributes ` 127bnto Indian media and entertainment





Fig 4 – ... but the lowest density of screens per million

Source: Investor Presentation, Inox - Nov,2015

Multiplex screens have seen a 12% CAGR over FY09-14

Multiplexes have grown from 925 screens in CY09 to 1,630 in CY14, a12% CAGR. The share of multiplexes increased from 9% in 2009 to 17%in 2014 due to the shutting down of single screens or their conversion tomultiplexes. Around 1,700 single screens have either shut down or beenconverted to multiplexes during the same period owing to the greater costof operations (higher entertainment taxes, increase in distributors’ shareand lower ticket prices) and non-viability of running them on a standalonebasis.

Fig 5 – Multiplexes

Source: Investor Presentation, Inox - Nov, 2015

125

85 82

6157

26

139

0

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40

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100

120

140

U S

F r a n c e

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(No. Screens m)

9,7109,308 9,121

8,6858,451

8,002

925 1,075 1,225 1,350 1,500 1,630

0

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Single Sc reens Multiplex es

(Nos)

Fig 2 – India has the second-highest number of theatrefootfalls in the world...


Fig 3 – ... and the highest number of film releases in theworld...


2,178

1,930

1,364

208 197 176 171 169 156 1460

500

1,000

1,500

2,000

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(m)

1,602

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554476

324279

241204 182 166

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K o r e a

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(No of Movies)





At present, multiplexes account for ~17% of screens, but more than 40%of box-office collections. This can be attributed to key locations, state-ofthe-art equipment, more tastefully designed interiors, ambience andservice. Multiplexes offer a wider variety of content to patrons, resulting inhigher occupancy ratios.

Consolidation to improve economies of scale

In the past few years, larger multiplex operators have consolidated theirposition by acquiring smaller ones. 2014 was the year of consolidation:1) Inox acquired 38 screens of Satyam Cineplex; 2) Cinepolis acquired 83screens of Fun Cinemas; 3) Carnival acquired 242 screens of Big Cinemas,30 of Glitz Cinemas and 10 of Broadway Cinemas. On the acquisition ofBig Cinemas, Carnival, a small operator, entered the league of the top-fourmultiplex operators.

Fig 6 – Organic and inorganic screen addition

Source: Anand Rathi Research

The top-four operators (PVR, Inox, Carnival and Cinepolis) account for~75% of the multiplexes in India, although Carnival still has a substantialproportion of single screens.

Fig 7 – Recent acquisitions by multiplexes

Year Acquirer Target No. of screens Target EV in m EV/Screen m

2010 Inox Fame Cinemas 91 2,500 27

2012 PVR Cinemax 135 5,675 42

2014 Carnival Films HDIL 33 1,100 33

2014 Inox Satyam Cineplexes 38 2,200 58

2014 Cinepolis Fun Cinemas 83 4,800 58

2014 Carnival Films Big Cinemas 250 7,100 28

2015 PVR DT Cinemas 39* 5,000 128

Source: Company, Anand Rathi Research * Includes 10 screens in the pipeline

Increasing number of ` 1bn-plus movies

The increasing number of movies has been generating more than ` 1bn innet box-office collections, driven by wider screen releases due todigitisation and better content. Also, wider acceptance of regional andHollywood movies augurs well for the growth of the film industry.

OwnScreens, 342

OwnScreens, 262

Own Screens,64

OwnScreens, 134

Cinemax, 135

FameCinemas, 95

SatyamCineplexes, 38

89 Cinemas, 7

Big Cinemas,242

Glitz Cinemas,30

BroadwayCinemas, 10

Fun Cinemas,83

0

100

200

300

400

500

PVR Inox Carnival Cinepolis





Fig 8 - Wider screen releases led by digitisation


Fig 9 - More 1bn-plus movies

Source: Industry

1,000

1,598

2,065 2,101

2,6383,014

3,446 3,359

5,200

0

1,000

2,000

3,000

4,000

5,000

6,000

3 I d i o t s ( 2 0 0 9 )

D a b a a n g ( 2 0 1 0 )

B o d y g u a r d ( 2 0 1 1 )

E k T h a T i g e r ( 2 0 1 2 )

D a b a a n g 2 ( 2 0 1 2 )

C h e n n a i E x p r e s s ( 2 0 1 3 )

D h o o m 3

( 2 0 1 3 )

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( 2 0 1 4 )

(No. of screens)

12

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( ` bn)

Rs 1 Bn + Rs 2 Bn +





Key operating parameters picking up

Occupancy levels to improve with better content and increased

screening of Hollywood and regional movies

FY15 was a dull year at the box office, because of poor film content. Weexpect occupancy to pick up in FY16 and FY17 because of better content,star casts and increasing acceptance of Hollywood and regional movies.Regional films such as “Bahubali” have crossed ` 5bn, an encouraging sign.Gross box-office collections of the top-10 Hollywood films in Indiaincreased from ` 3.2bn in 2013 to ` 4.2bn in 2014, driven by youth and anincrease in consumption in tier-2 and -3 cities, where dubbed content does

well. “Fast & Furious 7” entered the ` 1bn club, showing increasedacceptance of Hollywood movies.

Industry segmentation

Content is king

Content is the prime factor in the success of any movie. H2 of FY16 looksexciting, with many big-banner movies slated for release.

Fig 14 – Also, content in FY17 looks very exciting, coupled with famous star castContent pipeline - FY17 Star cast Release

Mohenjo Daro Hritik Roshan Aug’16

Dangal Aamir Khan Dec’16

Raees Shahrukh Khan Jul’16

Sultan Salman Khan Diwali’16

Jagga Jassos Ranbir Kapoor Jun’16

Ae Dil hai Mushkil Ranbir Kapoor Diwali’16

Housefull 3 Akshay Kumar, Abhishek Bacchan Jun’16

Shivaay Ajay Devgn Diwali’16

Golmaal 4 Ajay Devgn 2016

Bahubali -The Conclusion Prabhas 2016


Fig 10 – Language-wise-film collections in India

Source: Company, Anand Rathi Research

Fig 11 – Language-wise films certified in India

Source: Industry, Central Board of film certification

Regional44%

Hindi48%

English8%

Hindi13%

Telugu18%

Tamil17%Malayalam

10%

Marathi8%

Kannada7%

Bengali7%

Others20%

Fig 12 – Bollywood Content pipeline – H2 FY16

Bollywood Star cast Release Date

Bajirao Mastani Ranveer Singh, Priyanka Chopra 18th Dec’15

Dilwale Shahrukh, Kajol, Varun Dhawan 18th Dec’15

Airlift Akshay Kumar 22nd

Jan’16


Fig 13 – Hollywood Content pipeline –H2 FY16

Hollywood Star cast Release Date

Star Wars VII Gwendoline Christie, Mark Hamill 25th Dec’15

The Revenant Leonardo di Caprio 8th Jan’16

The Accountant Ben Affleck, Anna Kendrick 29th Jan’16






Average ticket prices for Bollywood movies registered a 12% CAGR overCY1996-2014. This can be attributed to the increase in multiplex screens,priced at more than 100% to single screens. Regional movies are lowerpriced than Hindi movies.

Fig 15 – Bollywood films ATP at 12% CAGR (1996-2014)

Source: Anand Rathi Research, Box office India

Food & Beverage revenue growing more rapidly

Multiplexes are expanding F&B options beyond basic offerings to includelocal delicacies and Western fast foods in order to induce patrons to spendmore. Rising income levels and more food options available have led to anincrease in revenue of multiplex operators. Companies are investing intechnology to more easily enable patrons to pre-order meals or order fromtheir seats to avoid long queues. F&B margins of the companies we coverhave expanded rapidly—from 66-68% in FY11 to 71-75% in FY15. Weexpect margins to continue at ~75%.

4.0

9.0

14.0

19.0

24.0

0

30

60

90

120

1 9 9 6

1 9 9 7

1 9 9 8

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2 0 1 2

2 0 1 3

2 0 1 4

(%)( ` )

Avg ticket price YoY% (RHS)

Fig 16 – F&B margins grew 500bps over FY11-15

Source: Company

Fig 17 – F&B Spending per head (SPH)

Source: Company

68%

69%70%

71%

74%

66%66%

66%

71% 71%

60%

62%

64%

66%

68%

70%

72%

74%

76%

2 0 1 1

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Inox PVR

(%)

4144

4749

55

4143

49

54

64

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20

30

40

50

60

70

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(%)





Fig 18 – SPH as % of average ticket price has grown faster and is catching upwith spending in developed nations


In-cinema advertising to grow rapidlyIn-cinema advertising is expected to rise from ` 4.9bn in 2014 to ` 13.8bn in2019, a 23% CAGR (FICII-KPMG report, 2015). With screens across thecountry, multiplex operators have gone national. Also, to expand theirbusiness, companies are now focusing on tier-2 and 3 cities. It has becomeeasier for advertisers to deal with multiplex operators for in-cinemaadvertising than with single-screen operators. Also, cinemas have captiveaudiences and lower costs than other mass media channels.

Digitisation has enabled simultaneous screening of movies on a number ofscreens, transparent electronic logs and minimum impact of re-runs on thequality of ads, establishing cinema as a credible source of entertainment.

Advertising income has near 95% profitability, which can turn out to be astrong growth catalyst for multiplex operators. On blockbuster weekends,ad rates are at a premium, anywhere between 25% and 30% to the averagead-rate.

Fig 19 – In-cinema advertising recorded a 24% CAGR over FY11-14


27%

31%

34%

34%

36%

42%

43%

51%

0% 10% 20% 30% 40% 50% 60%

CJ-CGV (Korea)

Major Cineplex (Thailand)

Inox

Cineworld (UK)

PVR

Regal (US & Canada)

AMC (US & Canada)

Cinemark (Americas)

SPH as % of ATP

172292 324

495

815

492614

753

1,425

1,687

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600800

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1800

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Inox PVR

(mton)(mton)





Expansion in tier-2 and tier-3 cities

offer significant growth opportunities

India leads the world in the number of movies produced annually.

However, the low density of screens continues to be worrisome. Additionally, screen distribution is largely skewed towards the markets ofMumbai and Delhi/UP, which together account for 60% of box-officecollections for most films.

Fig 20 – Mumbai and Delhi/UP make up 60% of box-office collections


The growth of domestic theatricals is likely to be driven by tier-2 and tier-3cities as mall development in tier-1 cities has reached saturation point. At

present, only 25% of malls are located in smaller cities. In the last fewyears the retail attractiveness of tier-1 cities has been stagnant; investorsare finding tier-2 cities more attractive. Over 50% of screen additions inFY15 by Inox and PVR has been in tier-2 and 3 cities.

Even though spending capacity in tier-2 and 3 cities is low, such citiesoffer large, inexpensive spaces for mall development. Smaller cities aredriven largely by regional films; Bollywood follows. We see huge potential

in the southern market, which has a large number of single-screen cinemahalls. We expect 50% of screen additions for Inox and PVR to come fromtier-2 and -3 cities.

37 39 44 4031

39 37 36 36 35

23 2019 23

2122 21 24 22 27

40 41 37 3748

39 42 40 42 38

0.0

20.0

40.0

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H a p p y N e w

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e t u r n s

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B a n g B a n g

J a i H o

2 S t a t e s

E k V i l l a i n

G u n d a y

Q u e e n

(%)

Mumbai Delhi/UP Other States

Fig 21 – Retail attractiveness of tier-2 and -3 cities

Source: Jones Lang LaSalle, Feb 2014, Retail Realty in India : Evolution and Potential,FICCI KPMG India Media & Entertainment Report,2015

Fig 22 – Retail attractiveness of tier-1 cities stagnant

Source: Jones Lang LaSalle, Feb 2014, Retail Realty in India : Evolution and Potential, FICCIKPMG India Media & Entertainment Report,2015





Fig 23 – Expansion plans of the top-four multiplex operators

Source: Industry, Anand Rathi Research

493

372341

193

1,000

557

1,000

400

0

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400

500600

700

800

900

1,000

P V R + D T

I n o x

C a r n i v a l

C i n e p o l i s

2015 2018

(UNITS)





Valuation

India is an under-screened market despite being the largest film producingnation worldwide. With better content outlook and revival in consumerdiscretionary spends, we expect multiplex operators to be the largest

beneficiary. As 50-55% costs of multiplexes are fixed in nature, we expectmargins to expand with increase in footfalls, rise in F&B SPH and higherad revenue per screen. Also, rollout of GST can result into marginexpansion of 100-300 bps for both the companies. We initiate coverage onPVR (with a Buy recommendation) and Inox Leisure (also with a Buy).

PVR - We value PVR at 10.5x FY18e EV/EBITDA, with a price target of ` 1,002. Our valuation is justified by the company’s leading position as afilm exhibitor, healthy screen-addition plans and the GST rollout, resultingin expanded margins. We expect revenue and EBITDA to register CAGRsof respectively 20% and 34% over FY15-18, driven by more screens andstrong content.

Inox - We expect revenue and profit to register CAGRs over FY15-18 of,respectively, 23% and 90%, driven by the increase in the number ofscreens, better content, greater occupancy and higher margins. We valuethe company on the basis of FY18e EV/EBITDA and assign a 9.4xmultiple to arrive at a price target of ` 308.

Fig 24 – Valuation Parameters

Local Currency EV/EBITDA (x) P/E (x)

Companies Currency CMP Market Cap (m) FY 16e FY 17e FY 18e FY 16e FY 17e FY 18e

Major Cineplex CAD 48 3,050 14.1 11.2 8.6 31.6 24.8 20.7

Regal Entertainment USD 18 2,372 9.8 8.3 7.6 15.1 13.2 11.5

AMC Entertainment USD 24 2,351 10.6 8.1 7.2 22.5 17.7 16.9

Cinemark Holdings USD 32 3,732 9.5 7.8 6.8 16.7 15.2 13.0

Carmike cinemas USD 23 557 7.5 5.6 4.5 60.1 28.4 19.1

Cineworld Group PLC GBP 6 1,459 14.2 11.3 9.6 19.2 17.5 15.8

Shanghai new culture media group CNY 44 23,607 152.3 69.4 44.8 76.6 56.2 45.3

Major Cineplex THB 33 29,003 13.7 12.9 10.8 22.3 20.0 17.8

Median 12.2 9.8 8.1 22.4 18.8 17.4

PVR Ltd* INR 795 37,049 12.7 10.4 8.5 30.6 26.0 20.8

Inox Leisure Ltd INR 245 23,681 12.0 9.5 7.5 32.2 23.3 17.2

Source: Bloomberg, Anand Rathi Research * Does not incorporate acquisition of DT Cinemas

Fig 25 – Valuation ParametersCAGR FY 15

Companies Sales (%) EBITDA (%) PAT (%) EBITDA margins (%) Net Debt/Equity (x) RoE (%) RoCE (%)

Major Cineplex 8.0 18.1 24.6 15.7 0.4 10.3 8.7

Regal Entertainment 2.9 8.8 24.9 17.2 - - 10.6

AMC Entertainment 5.9 13.8 29.6 14.5 1.1 4.2 4.0

Cinemark Holdings 6.3 11.7 14.3 20.5 1.2 17.5 8.6

Carmike Cinemas 9.0 18.8 279.8 13.0 0.4 -3.4 5.1

Cineworld Group PLC 10.6 14.0 14.6 19.8 0.6 15.6 11.2

Shanghai new culture media group 56.5 50.4 62.5 24.9 -0.1 12.4 11.6

Major Cineplex 8.8 8.2 14.4 27.9 0.6 17.5 11.1

Median 8.4 13.9 24.7 18.5 0.55 12.4 9.6

PVR Ltd* 19.7 33.9 140.6 13.6 1.6 3.7 8.1

Inox Leisure Ltd 23.4 37.4 90.4 13.7 0.3 3.9 6.9

Source: Bloomberg, Anand Rathi Research * Does not incorporate acquisition of DT Cinemas





Company Section



Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities research firm and the views expressed therein are solely ofARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analystcertifications are present in the Appendix.


Key financials (YE Mar) FY14 FY15 FY16e FY17e FY18e

Sales ( ` m) 13,481 14,771 18,512 21,713 25,323

Net profit ( ` m) 529 149 1,176 1,423 1,782

EPS ( ` ) 12.5 3.5 26.0 30.6 38.3

Growth (%) -10.0 -71.8 635.2 17.5 25.3

PE (x) 63.4 224.6 30.6 26.0 20.8

PBV (x) 7.0 7.5 4.0 3.5 3.0

RoE (%) 10.1 3.7 18.4 15.1 16.3

RoCE (%) 10.4 8.1 16.5 16.8 19.3

Dividend yield (%) 0.3 0.1 0.1 0.1 0.1

Net debt/equity (x) 1.2 1.6 0.7 0.5 0.3

Source: Company, Anand Rathi Research Share price as on 23 th December 2015


Initiating Coverage

India I Equities

Sonal GandhiResearch Analyst

+9122 6626 6477

[email protected]

Rating: Buy

Target Price: ` 1,002

Share Price: ` 795

Relative price performance

Source: Bloomberg

PVRL

Sensex

600

650

700

750

800

850

900

D e c - 1 4

J a n - 1 5

F e b - 1 5

M a r - 1 5

A p r - 1 5

M a y - 1 5

J u n - 1 5

J u l - 1 5

A u g - 1 5

S e p - 1 5

O c t - 1 5

N o v - 1 5

D e c - 1 5

Key data PVRL IN / PVRL.BO

52-week high / low ` 889 / ` 572

Sensex / Nifty 25850 / 7866

3-m average volume $1.6m

Market cap ` 37bn / $561m

Shares outstanding 46.6m

Shareholding pattern (%) Sep ’15 Jun ’15 Mar’14

Promoters 26.3 29.5 29.5

- of which, Pledged - 0.6 0.6

Free Float 73.7 70.5 70.5

- Foreign Institutions 25.4 21.9 23.5

- Domestic Institutions 14.0 8.9 7.7

- Public 34.3 39.7 39.3

28 December 2015

PVRLeading all the way; initiating coverage, with a Buy

We initiate coverage on PVR, with a Buy rating and a price target of1,002. With established operations in key box-office markets of India,

PVR commands higher ticket prices and premium charges on advertisingand F&B due to its locations and strategy. It aims to double its screens inthe next 3-5 years, boosting revenue and profitability. The GSTimplementation could provide a further fillip to margins.

Leading multiplex operator in India. The largest multiplex operator inIndia, with 482 screens in 44 cities, PVR has a 26% market share and sturdyoperations in the key box-office markets of Mumbai, Delhi and UP. It alsoleads, with ~20% share of Bollywood films and 30% of Hollywood films. Itspremium positioning is reflected in its industry-leading operating parameters.

Many tailwinds for healthy revenue growth. We expect PVR to add 199screens (160 organically, 39 through DT Cinemas) leading to 14.2% footfallgrowth over FY15-18. Content was robust in H1 FY16 and the pipeline forH2 looks promising. We expect its box-office revenue to improve, driven bymore screens and ticket prices rising at a 3% CAGR over FY15-18e. It isfocused on improving the high-margin F&B and advertising revenue, which

we expect to register, respectively, 26.5% and 20% CAGRs over FY15-18e.

Better financial performance. We expect diluted EPS to shoot up sharply(635%) from a rather weak FY15, and 17% and 25% in FY17 and FY18respectively, driven by (1) more screens, strong content, rising spend on high-margin F&B and advertising, (2) EBITDA expanding 540bps, driven byoperating leverage as 55% costs are fixed, and (3) lower interest expense. Weexpect gearing ratio to improve to 0.3x in FY18, from 1.6x in FY15.

Valuation. We value PVR at 10.5x FY18e EV/EBITDA, with a price targetof ` 1,002. Our valuation is justified by the company’s leading position as afilm exhibitor and healthy screen-addition plans. Risks. Poor content, slowmall development, adverse tax regulations.



28 December 2015 PVR – Leading all the way; initiating coverage, with a Buy


Quick Glance – Financials and Valuations

Fig 1 – Income statement ( m) Year-end: Mar FY14 FY15 FY16e FY17e FY18e

Net revenues 13,481 14,771 18,512 21,713 25,323

Revenue growth (%) 67.2 9.6 25.3 17.3 16.6

- Oper. expenses 11,358 12,763 15,100 17,615 20,503

EBIDTA 2,123 2,008 3,412 4,099 4,820

EBITDA margins (%) 15.7 13.6 18.4 18.9 19.0

- Interest 795 783 784 663 565

- Depreciation 944 1,168 1,320 1,512 1,718

+ Other income 107 89 177 67 102

- Tax 19 8 326 557 845

Effective tax rate (%) 3.5 5.1 21.7 28.2 32.2

+ Associates/(Minor it ies) 57 11 19 -11 -13

Adjusted PAT 529 149 1,176 1,423 1,782

+ Extraordinary items 32 -22 - - -

Reported PAT 561 128 1,176 1,423 1,782

Adj. FDEPS ( ` /sh) 12.5 3.5 26.0 30.6 38.3

Adj. FDEPS growth (%) -10.0 -71.8 635.2 17.5 25.3


Fig 3 – Cash-flow statement ( m) Year-end: Mar FY14 FY15 FY16e FY17e FY18e

Adjusted PAT 529 149 1,176 1,423 1,782

+ Non-cash items 944 1,168 1,320 1,512 1,718

Cash profit 1,472 1,317 2,496 2,934 3,500

- Incr./(decr.) in WC -84 1,141 -123 97 89

Operating cash-flow 1,556 176 2,619 2,837 3,411

- Capex -1,669 1,313 5,200 1,840 1,915

Free cash-flow 3,225 -1,137 -2,581 997 1,496

- Dividend 121 50 56 56 56

+ Equity raised -2,958 -366 3,481 11 13

+ Debt raised -419 1,343 -996 -828 -828

- Investments -145 -216 - - -

- Misc. items -32 22 - - -

Net cash-flow -95 -15 -151 124 624

+ Op. cash & bank bal. 368 273 257 106 230

Cl. Cash & bank bal. 273 257 106 230 854Source: Company, Anand Rathi Research

Fig 5 – PE band

Source: Bloomberg, Anand Rathi Research

Fig 2 – Balance sheet ( m)Year-end: Mar FY14 FY15 FY16e FY17e FY18e

Share capital 411 415 465 465 465

Reserves & surplus 3,582 3,677 8,246 9,612 11,338

Net worth 3,993 4,092 8,712 10,078 11,803

Total debt 6,133 7,470 6,475 5,646 4,818

Minority interest 771 383 365 376 388

Def. tax liab. (net) 4 11 11 11 11

Capital employed 10,901 11,956 15,561 16,110 17,020

Net fixed assets 8,324 8,570 12,450 12,778 12,975

Intangible assets 938 837 837 837 837

Investments 235 19 19 19 19

- of which, Liquid 223 4 4 4 4

Working capital 1,131 2,272 2,149 2,246 2,335

Cash 273 257 106 230 854

Capital deployed 10,901 11,956 15,561 16,110 17,020

Working capital (days) 31 56 42 38 34

Book value (`/sh) 113 106 201 225 262Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ 795Year-end: Mar FY14 FY15 FY16e FY17e FY18e

P/E (x) 63.4 224.6 30.6 26.0 20.8

Cash P/E (x) 22.8 25.5 14.4 12.6 10.6

EV/EBITDA (x) 20.1 22.0 12.7 10.4 8.5

EV/sales (x) 3.2 3.0 2.3 2.0 1.6

P/B (x) 7.0 7.5 4.0 3.5 3.0

RoE (%) 10.1 3.7 18.4 15.1 16.3

RoCE (%) 10.4 8.1 16.5 16.8 19.3

Div idend y ie ld (%) 0.3 0.1 0.1 0.1 0.1

Div idend payout (%) 22.8 33.8 4.8 4.0 3.2

Net debt/equity (x) 1.2 1.6 0.7 0.5 0.3

Debtor (days) 14 19 16 16 16

Inventory (days) 3 3 3 3 3

Payables (days) 44 38 37 37 37

Debt/EBITDA 2.9 3.7 1.9 1.4 1.0

Fixed asset T/O (x) 1.5 1.6 1.4 1.6 1.8Source: Company, Anand Rathi Research

Fig 6 – FY15 revenue break-up (standalone)

Source: Company Note*: Net box-office collections

25x

30x

35x

0

100

200

300

400

500

600

700

800

900

1,000

1,100

D e c - 1 1

M

a r - 1 2

J u n - 1 2

S e p - 1 2

D e c - 1 2

M

a r - 1 3

J u n - 1 3

S e p - 1 3

D e c - 1 3

M

a r - 1 4

J u n - 1 4

S e p - 1 4

D e c - 1 4

M

a r - 1 5

J u n - 1 5

S e p - 1 5

D e c - 1 5

NBOC*

71%

F&B18%

Advertising9%

Others2%





Leading multiplex operator

The largest multiplex operator in India, with 482 screens in 44 cities,PVR has a 26% market share and strong operations in the key box-office markets of Mumbai, Delhi and UP. It is a leader, with a ~20%

share of Bollywood box office films and 30% of Hollywood box-officefilms. Its premium positioning is reflected in its industry-leadingoperating parameters.

No.1 film operator

Over FY12-15 PVR added 347 screens organically and 135 throughacquiring Cinemax, making it the leading multiplex operator in India. It has482 screens and commands a 26% market share, followed by Inox with 402screens. Its revenue has registered a 42% CAGR over FY12-15 driven bythe number of screens added.

Fig 7 – Market segmentation of top 4 players

Source: Company, Anand Rathi Research.

Strong operations in key box-office markets

Maharashtra, Delhi and UP together bring in ~60% of Bollywood box-office collections. PVR’s strong operations and number one multiplexchain in key markets (Maharashtra 137 screens, Delhi 36 screens and UP 27screens) gives it an edge over its peers.

Fig 8 – Screens in key markets

Key markets PVR InoxMaharashtra 137 96

Delhi 36 13

UP 27 13

Total screens in key markets 200 122

Source: Company

PVR leads other multiplex operators in the markets of the north and west.Its 482 screens are divided thus: in the north (29% screens), the west(44%), the south (23%) and the east (4%).

PVR26%

Inox

21%

Carnival Cinemas18%

Cinepolis12%

Others23%





Fig 9 – Number of screens – PVR and Inox

Source: Company

Good locations and Product strategy

PVR is an anchor tenant in more than 55% of the top-20 malls in India. Itsdominant position in the best malls ensures more footfalls, occupancy and

ATP (average ticket price). Also, such locations ensure premium chargesfor advertising and more expenditure on F&B. At present, it operates onmore than 4.3m sq.ft., with another 3m being developed.

Fig 10 – Partnership with the top-20 malls in India

Source: Company

Diversified products to cater to all consumer segments

PVR has diversified offerings such as Director’s Cut (premium luxuryauditorium, fine dining menu) and PVR Talkies catering to tier-II / -IIIcities. Such a diversified offering allows it flexible pricing based on locationand spending capability of patrons. It plans to premiumise Cinemax / oldtheatres to benefit from the increase in spending by consumers.

Fig 11 - PVR property formats (Q2 FY16)

Format Screens Comment

Director's Cut 4 Luxury movie screen with fine dining; one-of-a-kind experience

Gold Class 11 Comfortable reclining seats; gourmet menu with live kitchen

PVR Premier 70 Premier seating, 4k digital projection, 7.1 Dolby surround sound

PVR Cinemas 369 Regular seating; multiple content options

PVR Talkies 20 Cater to tier-II / -III markets; basic facilities in a hygienic environment

Source: Company

140

214

110

18

95

151

89

67

0

50

100

150

200

250

North West South East

PVR Screens Inox screens





Cutting-edge technology

All PVR’s properties are 3D-enabled. It has installed 7.1 Dolby surroundsound and 4K digital systems, which offer enhanced cinematic experienceto patrons. It has 100% digital screens, which are 2K DCI-compliant.Digital prints cost one-fifth of analog prints, leading to lower film costs.

Online brings in 23% of ticket sales through PVR’s app and other onlineticket booking sites.

Industry-leading operating parameters

Fig 12 – More screens than peers

Source: Company

142 163

360

421

464 474 474

239257

285310

372 377393

0

100

200

300

400

500

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F 1 5

Q 1 F Y 1 6

Q 2 F Y 1 6

PVR Inox

Fig 13 – Greater occupancy due to location advantage ...

Source: Company

Fig 14 - ... translating to higher footfalls

Source: Company

27%

31%

34% 34%

31%

38%37%

23%

25%

28% 28%

25%

33%32%

20%

24%

28%

32%

36%

40%

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F 1 5

Q 1

F Y 1 6

Q 2

F Y 1 6

PVR Inox

19.624.7

37.0

59.8 59.2

19.0 18.8

25.830.7

35.338.6

41.1

14.5 14.5

0

10

20

30

40

50

60

70

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F 1 5

Q 1

F Y 1 6

Q 2

F Y 1 6

(Footfalls in m)

PVR Inox





Acquisition of DT Cinemas to strengthen PVR’s operations in the NCR

PVR acquired from DLF 39 screens of DT Cinemas for EV of ` 5bn on aslump-sale basis (approval from the Competition Commission of Indiaawaited). DT Cinemas operates 29 screens and has 10 coming up in Noidaand Delhi. Most of DT’s properties are located in the premium NCR; theacquisition would further strengthen PVR’s dominance in north India. Of39 screens, 12 are located on third-party properties.

DT’s properties pay an average rent of 15% of revenue vs. ~18% for PVR. The acquisition gives PVR the right of first refusal at malls that DLF willdevelop in future. DT’s average ticket price and F&B spending per head is,respectively, ` 250 and ` 95. Management indicated that DT’s ATP wouldimprove to that of PVR’s NCR properties. (PVR enjoys an ATP of ` 280-290 in the NCR.) With the increase in number of screens, there is a scopeto raise ad revenue per screen of DT to PVR’s level. DT Cinemas attracted4m footfalls in FY15 and 30% occupancy.

PVR raised ` 3.5bn (5.06m shares at ` 700 each, a 10.7% dilution) from

Multiples Private Equity to finance the deal. PVR will pay `

3.5bnimmediately, ` 1bn when seven screens in Noida are operational and ` 0.5bn when three screens in Chanakyapuri begin operations.

Fig 15 - ATP at a premium due to better screen locations

Source: Company

Fig 16 – Gross Box Office Collection/screen > than peers

Source: Company

162

156

167 168

177

183

187

152

156

160

156

164 165

169

145

154

163

172

181

190

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F 1 5

Q 1 F Y 1 6

Q 2 F Y 1 6

( ` )

PVR Inox

2 3 . 2

2 3 . 8

2 2 . 3 2

5 . 7

2 3 . 6

7 . 3

7 . 3

2 0 . 8

2 1 . 1

2 2 . 9

2 1 . 8

2 0 . 9

6 . 4

6 . 3

0

5

10

15

20

25

30

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F 1 5

Q 1 F Y 1 6

Q 2 F Y 1 6

( ` m)

PVR Inox

Fig 17 - Gross spending on F&B, more than Inox

Source: Company

Fig 18 - Premium ad revenue / screen due to key markets,more screens

Source: Company

4 1 . 0

4 3 . 0

4 9 . 0

5 4 . 0 6

4 . 0 7

4 . 0

6 8 . 0

4 1 . 0

4 4 . 0

4 7 . 0

4 9 . 0

5 5 . 0

5 9 . 0

5 6 . 0

0

20

40

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80

F

Y 1 1

F

Y 1 2

F

Y 1 3

F

Y 1 4

F 1 5

Q 1 F Y 1 6

Q 2 F Y 1 6

( ` )

PVR Inox

3 . 9 4

. 2

3 . 9

3 . 7

3 . 9

1 . 0

1 . 0

0 . 8 1

. 3 1 . 4 1

. 8 2

. 5

0 . 6

0 . 6

0.0

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4.5

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F 1 5

Q 1 F Y

1 6

Q 2 F Y

1 6

( ` m)

PVR Inox





Fig 19 - DT Cinemas - Location details

City Location Screens

Delhi Vasant Kunj 7

Delhi Saket 6

Delhi Shalimar Bagh 4

Delhi DT Cinemas @ GK - II 1

Gurgaon Mega Mall 3

Gurgaon City Centre 3

Gurgaon Star Mall 2

Chandigarh Chandigarh 3

Noida, UP (upcoming) Mall of India 7

Delhi (upcoming) Chanakyapuri 3

Source: Company

PVR and DT have only one overlapping property—at Saket.





Tailwinds a-plenty for revenue growth

Robust screen addition

PVR plans to add 55-70 screens annually and to double its screen count

organically and inorganically in the next five years. It averaged 55 screensadded in the last three years. We estimate 50 screens would be added inFY16, and 55 each in FY17 and FY18 due to the slower pace of malladdition and delay in approvals from licensing authorities. The DTCinemas acquisition would further add 39 screens (29 operational in FY16,10 in FY17). With an average of five screens, we expect PVR to add 10properties in FY16 and 11 each in FY17 and 18. Management indicatedthat it has strong assurance of screen additions backed by signedagreements.

Fig 20 – Organic screen addition at a 10.4% CAGR over FY15-18e


Footfalls

We expect average footfalls per screen to grow from 136,000 in FY15 to149,000 in FY16 (9.5% growth) driven by strong content. In the past, PVRhas had more footfalls per screen than peers. Even though content forFY17 looks promising, we have factored in footfalls per screen to hold atthe same levels as FY16. At 235-240 seats per screen, we expect occupancyat 34% to 34.5% from FY16 to FY18. PVR has 12% fewer seats than Inoxand 11% more footfalls (based on FY15 figures), which result in greateroccupancy.

0%

20%

40%

60%

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100%

120%

140%

0

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700

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

Screens Growth (RHS)





F&B SPH at a 12% CAGR over FY15-18

PVR enjoys the best-in-class spending per head on F&B due to better F&Bofferings. Global operators have seen the proportion of F&B revenuereaching ~50% of ATP. PVR’s F&B share (as percent of ATP) has risenfrom 25% in FY11 to 36% in FY15. We expect F&B SPH to record a 12%CAGR over FY15-18, driven by menu innovations and longer intervals.

Ad revenue per screen to register a 10% CAGR over FY15-18e

PVR has industry-leading ad revenue per screen due to its screen network,ability to attract a greater number of footfalls and its strong operations inkey box-office markets. Also, its premium brand recognition leads to aprice premium over Inox (ad revenue, twice that of Inox). We expect adrevenue per screen to clock a 10% CAGR over FY15-18e, driven by therising preference for in-cinema advertising (a captive audience) and morescreens (increase in ad inventory because of more screens, entailing higherbargaining power). PVR has worked out innovative marketing strategiessuch as ‘pay per eyeball’, which should further support ad revenue per

screen.

Fig 21 - Footfalls to grow with screen additions


Fig 22 - Occupancy rates at 34-34.5% over FY16e-18e


0.13

0.14

0.15

0.16

0.17

0.18

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F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

(m)(m)

Total Footfalls Footfall/screen (RHS)

27%

31%

34% 34%

31%

34%34% 34%

25%

28%

31%

34%

37%

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

Fig 23 - Gross F&B SPH


Fig 24 - F&B (as percent of gross ATP) to inch toward global level


0%

4%

8%

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0

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F Y 1 1

F Y 1 2

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F Y 1 7 e

F Y 1 8 e

( ` )

Gross F&B growth (RHS)

25%

28%

29%

32%

36%

39%

43%

46%

25%

28%

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34%

37%

40%

43%

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49%

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e





Fig 25 - Ad revenue per screen at a 10% CAGR over FY15-18e


Ad revenue in FY13 and FY14 was affected by the impact of the Cinemax

acquisition.

Robust revenue growth, at a 20% CAGR over FY15-18e

We expect revenue to clock a healthy 20% CAGR, supported by (1) an18.4% CAGR in box-office collection, supported by a yearly 3% hike in

ATP and a 14% CAGR in footfalls, (2) a 26.5% CAGR in F&B, (3) a 20%CAGR in advertising revenue, and (4) 6% growth in other income. Strongcontent in FY16e and FY17e would support our revenue assumptions.

Fig 26 – Revenue at a 20% CAGR (FY15-18e)


3.9

4.2

3.9

3.7

3.9

4.3

4.7

5.2

3.5

4.0

4.5

5.0

5.5

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

( ` m)

0%

15%

30%

45%

60%

75%

0

6,000

12,000

18,000

24,000

30,000

F Y 1 1

F Y 1 2

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F Y 1 8 e

( ` m)

Revenues growth (RHS)





Fig 27 - Key revenue assumptions

FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e

Screens at year end 142 163 360 421 464 514 569 624

Growth (%) 15 15 121 1 10 11 11 10

Average operating screens (excl. Mgmt screens) 126 147 256 384 436 484 538 593

Growth (%) 12 1 74 50 14 11 11 10

Footfalls (m) 19.6 24.7 37.0 59.8 59.2 72.0 80.0 88.2

Growth (%) 21 26 50 62 -1 22 11 10

ATP ( `) 162 156 167 168 177 182 188 193

Growth (%) 7 -4 7 1 5 3 3 3

F&B SPH (gross, `) 41 43 49 54 64 72 80 90

Growth (%) 5 5 14 10 19 12 12 12

Advertising per screen ( ` m) 3.9 4.2 3.9 3.7 3.9 4.3 4.7 5.2

Growth (%) 25 7 -7 -4 4 10 10 10

Other revenue / screen ( ` m) 0.5 1.1 0.8 0.9 1.0 1.0 1.0 1.0

Growth (%) 98 106 -27 16 6 2 2 2






Financial performance to improve

Healthy margin expansion; EBITDA margin to expand 540bps by FY18e

We expect the EBITDA margin to improve from 13.6% in FY15 to 19%

in FY18e, assisted by (1) an increase in footfalls because of more screensand better content, (2) operating leverage, as 55% of operating costs arefixed (film hire and F&B expenses are variable, accounting for ~45% ofoperating expenses). Film-hire expenses are likely to remain at 33.5% ofgross box-office collections as we do not foresee a material change inagreements between distributors and exhibitors. We have assumed a 5%rise in rental costs every three years, with other expenses per screenincreasing 6-7% p.a.

We believe that the GST implementation could further boost margins. At astandard 18%, we expect 200-300bps in margin gains.

Fig 28 - EBITDA margin at a 34% CAGR over FY15-18e


Robust EPS growth

We expect EPS to improve from abysmal levels of ` 3.5 in FY15 to ` 38.3 inFY18e. FY15 was a poor year because of a 13% drop in footfalls due tounderperformance of movies, the Lok Sabha elections in Q1 and thecricket World Cup in Q4. We expect the EPS to grow 6.4x in FY16, 17%in FY17e and 25% in FY18e due to decline in interest costs.

Free-cash flows from FY16e

We expect free-cash flow to be generated from FY16, helped by the strongEBITDA margins. We are uncertain of the acquisition timeline of DTCinemas and thus have excluded it from our calculations.

10%

12%

14%

16%

18%

20%

0

1,000

2,000

3,000

4,000

5,000

F

Y 1 1

F

Y 1 2

F

Y 1 3

F

Y 1 4

F

Y 1 5

F Y

1 6 e

F Y

1 7 e

F Y

1 8 e

( ` m)

EBITDA Margins (RHS)





Fig 29 - Free cash flows generation from FY16e

Source: Company, Anand Rathi Research Note: Above numbers excludes Rs. 3500 mn raised for DT Cinemas acquisition.

Better return ratios, gearing to improve

Better margins and higher asset-turnover ratios augur well for the returnratios. We expect the RoE and RoCE to expand from 3.7% and 8%respectively in FY15 to 16.3% and 19.3% in FY18. We expect asset turnsto improve assisted by better utilisation of assets and lower pace of growthin screens added.

The debt-to-EBITDA ratio is likely to improve—from 5.6x in FY13 to

~1x in FY18, driven by healthy growth in EBITDA and robust free-cash-flows generated, lowering debt. We expect the net-debt-to-equity ratio toimprove from 1.6x in FY15 to 0.3x in FY18.

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

( ` m)

OCF Free Cash flows

Fig 30 - Return ratios to improve


Fig 31 - With better PAT and asset turns


0

4

8

12

16

20

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

(%)

RoE RoCE

0.78

1.01

0.58

1.24 1.24

1.19

1.35

1.49

0%

1%

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3%

4%

5%

6%

7%

8%

0

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F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

(x)

Asset turns PAT (RHS)





Fig 32 - Debt to EBITDA to be at comfortable level


Fig 33 - Gearing ratio to improve, after having hit a peak in FY15


0.0

1.0

2.0

3.0

4.0

5.0

6.0

F Y 1 1

F Y 1 2

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F Y 1 8 e

(x)

Debt to EBITDA

0

0.3

0.6

0.9

1.2

1.5

1.8

F Y 1 1

F Y 1 2

F Y 1 3

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F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

(x)

Gearing ratio





Fig 34 – Income statement ( m)Y/E: March FY14 FY15 FY16e FY17e FY18e

Net revenues 13,481 14,771 18,512 21,713 25,323

Other Op revenues - - - - -

Revenues 13,481 14,771 18,512 21,713 25,323

Growth (%) 67.2 9.6 25.3 17.3 16.6

Material Cost -923 -1,074 -1,298 -1,603 -1,966

Employee Cost -1,295 -1,430 -1,665 -1,955 -2,277

Manufacturing cost - - - - -

Marketing cost -327 -292 -344 -409 -482

Administrative cost -2,987 -3,530 -4,054 -4,732 -5,477

Energy cost -966 -1,116 -1,239 -1,474 -1,738

Other cost -1,566 -1,899 -2,103 -2,408 -2,847

Distributors cost -3,295 -3,422 -4,396 -5,033 -5,715

EBITDA 2,123 2,008 3,412 4,099 4,820

Growth (%) 81.7 -5.4 69.9 20.1 17.6

EBITDA margin (%) 15.7 13.6 18.4 18.9 19.0

Other income 107 89 177 67 102Operating profit 2,230 2,097 3,588 4,166 4,922

Depreciation -944 -1,168 -1,320 -1,512 -1,718

EBIT 1,286 929 2,268 2,654 3,204

Interest cost -795 -783 -784 -663 -565

PBT 491 146 1,484 1,991 2,639

Tax -19 -8 -326 -557 -845

Effective tax rate 3.9 5.5 22.0 28.0 32.0

PAT 472 138 1,158 1,433 1,795

Minority interest 57 11 19 -11 -13

Associate profit - - - - -

Consol PAT 529 149 1,176 1,423 1,782

Growth (%) 15.6 -71.8 687.7 21.0 25.3PAT margin (%) 3.9 1.0 6.4 6.6 7.0

Extra-ordinary income 32 -22 - - -

Dividends (incl Tax) -121 -50 -56 -56 -56

Transferred to reserves 440 77 1,120 1,366 1,726

Per Share data

FDEPS ( ` ) 12.5 3.5 26.0 30.6 38.3

DPS ( ` ) 2.4 1.0 1.0 1.0 1.0

Adj BV ( ` ) 113.0 106.1 200.8 224.6 261.9

CEPS ( ` ) 34.9 31.2 55.2 63.0 75.2

Valuation ratio

P/E (x) 63.4 224.6 30.6 26.0 20.8

P/adj BV (x) 7.0 7.5 4.0 3.5 3.0P/C (x) 22.8 25.5 14.4 12.6 10.6

Dividend Yield (%) 0.3 0.1 0.1 0.1 0.1

EV/S (x) 3.2 3.0 2.3 2.0 1.6

EV/E (x) 20.1 22.0 12.7 10.4 8.5

Quality ratio

Dividend Payout (%) 22.8 33.8 4.8 4.0 3.2

Other income/PBT (%) 21.8 60.6 11.9 3.4 3.9

Interest cover (x) 1.6 1.2 2.9 4.0 5.7

Operating CF/EBITDA (x) 0.7 0.1 0.8 0.7 0.7






Fig 35 – Balance sheet (

m)Y/E: March FY14 FY15 FY16e FY17e FY18e

Equity 411 415 465 465 465

Reserves 3,582 3,677 8,246 9,612 11,338

Minority interests 771 383 365 376 388

Less: Misc Exp - - - - -

Networth 4,764 4,475 9,076 10,453 12,192

Equity (% of CE) 43.7 37.4 58.3 64.9 71.6

LT Debt 4,790 6,355 5,531 4,702 4,334

ST Debt 1,343 1,115 944 944 484

DTL (net) 4 11 11 11 11

Total debt 6,137 7,481 6,485 5,657 4,828

Net D/E (x) 1.2 1.6 0.7 0.5 0.3

Capital Employed 10,901 11,956 15,561 16,110 17,020

Gross block 11,819 13,186 14,886 16,726 18,641

Acc Depreciation -3,622 -4,582 -5,902 -7,414 -9,132

Net block 8,197 8,603 8,983 9,312 9,508

CWIP 1,065 804 4,304 4,304 4,304

Fixed assets 9,262 9,407 13,287 13,616 13,812


Cash Equivalents 273 257 106 230 854

Inventories 106 126 157 183 214

Debtors 523 767 818 956 1,112

Loans & Advances 2,897 3,459 3,639 3,885 4,136

Other Current Assets 226 253 253 253 253

Current Assets 4,025 4,862 4,973 5,507 6,569

Creditors -1,619 -1,520 -1,898 -2,212 -2,560

Provisions -239 -172 -178 -178 -178

Other Current Liabilities -763 -641 -641 -641 -641

Current Liabilities -2,621 -2,333 -2,718 -3,032 -3,380

Net Current Assets 1,404 2,530 2,255 2,476 3,189

Capital Deployed 10,901 11,956 15,561 16,110 17,020

FA/CE (%) 85.0 78.7 85.4 84.5 81.2

Investments/CE (%) 0.1 0.1 0.1 0.1 0.1

Liquid assets/CE (%) 4.5 2.2 0.7 1.4 5.0

Working Capital/CE (%) 10.4 19.0 13.8 13.9 13.7


Fig 36 – Cash flow statement ( m)Y/E: March FY14 FY15 FY16e FY17e FY18e

Cash Profit 1,472 1,317 2,496 2,934 3,500

Chg in WC 84 -1,141 123 -97 -89

Operating CF 1,556 176 2,619 2,837 3,411

Capex 1,669 -1,313 -5,200 -1,840 -1,915

Free CF 3,225 -1,137 -2,581 997 1,496

Equity -2,958 -366 3,481 11 13

Debt -419 1,343 -996 -828 -828

Investments 145 216 - - -

Dividends -121 -50 -56 -56 -56

Misc inflows 32 -22 - - -

Net change in cash -95 -15 -151 124 624

Opening cash 368 273 257 106 230

Closing cash 273 257 106 230 854


CWIP in FY16e includes ` 3,500m raised for acquisition of DT Cinemas





Fig 37 – Ratio analysis @ 795Y/E: March FY14 FY15 FY16e FY17e FY18e

Dupont Analysis

Margins (%) 9.5 6.3 12.3 12.2 12.7

Capital turn (x) 1.1 1.3 1.3 1.4 1.5

RoCE (%) 10.4 8.1 16.5 16.8 19.3

Leverage factor(x) 2.4 2.8 2.1 1.7 1.5

Interest burden (x) 0.4 0.2 0.7 0.8 0.8

Tax burden (x) 1.0 0.9 0.8 0.7 0.7

Consol factor (x) 1.1 1.1 1.0 1.0 1.0

RoE (%) 10.1 3.7 18.4 15.1 16.3

Working capital (Days)

Inventories 3 3 3 3 3

Debtors 14 19 16 16 16

Loans & Advances 78 85 72 65 60

Other CA 6 6 5 4 4

Creditors -44 -38 -37 -37 -37

Provisions -6 -4 -4 -3 -3

Other CL -21 -16 -13 -11 -9

Net WC 31 56 42 38 34

Other ratios

Op CF/Rev (%) 11.5 1.2 14.1 13.1 13.5

FCF/Rev (%) 23.9 -7.7 -13.9 4.6 5.9

Intangibles/GB (%) 7.9 6.3 5.6 5.0 4.5

Intangibles/CE (%) 8.6 7.0 5.4 5.2 4.9

Revenue/GB (x) 1.1 1.1 1.2 1.3 1.4

Revenue/FA (x) 1.5 1.6 1.4 1.6 1.8

CWIP/GB (x) 0.1 0.1 0.3 0.3 0.2






Valuation

We value PVR at 10.5x FY18e EV/EBITDA, with a price target of ` 1,002.Our valuation is justified by the company’s leading position as a filmexhibitor, healthy screen-addition plans and the likely GST rollout,

resulting in expanded margins. We expect revenue and EBITDA to registerCAGRs of respectively 20% and 34% over FY15-18e, driven by morescreens and strong content.

Fig 38 – Valued at 10.5x FY18e EV/EBITDATarget EV/EBITDA (x) 10.5

EBITDA ( ` m) 4,820

Target EV ( ` m) 50,610

Net debt ( ` m) 3,945

Market cap ( ` m) 46,664

Shares o/s (m) 46.6

Expected share price ( ` ) 1,002CMP ( ` ) 795

Upside 26%


Risks

Under-performance of content

Increase in taxes

Escalating rental costs and slow development of malls

Price control by state governments

Sports and other entertainment events reducing footfalls





Company Background & Management

Company Background

The largest cinema exhibitor in India, PVR operates a cinema circuit of 482

screens at 108 properties in 44 cities across India.

Two subsidiaries – PVR Pictures and PVR BluO.

PVR Pictures is an all-India distributor, with an all-India distributionnetwork. It has distributed more than 100 international and Indian films inthe past three years. It owns the entire distribution rights for internationalfilms in India.

PVR BluO is 51:49 JV with the Major Cineplex group of Thailand. It ispositioned as a premium leisure and entertainment destination. It has sixbowling centres with 125 lanes in five cities in India.

PVR acquired the Cinemax properties in 2012 and serves 60m patrons at

an all-India level. From Gold Class and mainstream cinema to Director'sCut, PVR has made exceptional technology such as IMAX and the ECX(enhanced cinema experience) accessible to audiences.

Fig 39 - Management ProfileAjay Bijli - Chairman & MD Established PVR in 1995; over 20 years’ experience in

movie exhibitionSanjeev Kumar - Joint MD Manages film acquisition and distribution and

programming activities; over 16 years; experience inmovie exhibition; also Involved in development & growthstrategy

Gautam Dutta - Chief executive officer Over 25 years’ experience in advertising; handling entireoperations, F&B and sponsorship revenue

Kamal Gianchandani – President, PVR Pictures Over 22 years; experience; handling film financing,

distribution, syndication, licensing & exhibition for bothIndian- and foreign-language films in India

Nitin Sood - Group Chief financial officer Over 19 years’ experience; as group CFO, involved inoverall business, financial & strategic planning for allbusinesses, project evaluations, compliance andcorporate governance

Vishal Sawhney - Chief operating officer Over 22 years; experience; responsible for operations

Source: Company



Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely ofARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analystcertifications are present in the Appendix.


Sonal GandhiResearch Analyst

+9122 6626 6477

[email protected]

Key financials (YE Mar) FY14 FY15 FY16e FY17e FY18e

Sales ( ` m) 7,628 8,954 11,848 14,196 16,835

Net profit ( ` m) 373 206 735 1,017 1,380

EPS ( ` ) 3.9 2.1 7.6 10.5 14.3

Growth (%) 78.2 -44.7 256.3 38.3 35.7

PE (x) 63.4 114.7 32.2 23.3 17.2

PBV (x) 6.1 3.5 3.2 2.8 2.4

RoE (%) 10.4 3.9 10.3 12.7 15.0

RoCE (%) 12.4 6.9 13.8 16.5 19.6

Dividend yield (%) - - - - -

Net debt/equity (x) 0.57 0.33 0.26 0.15 0.0

Source: Company, Anand Rathi Research Share price as on 23 nd December, 2015


Initiating Coverage

India I Equities

28 December 2015

Inox LeisureA hit story; initiating, with a Buy

We initiate coverage on Inox with a Buy and a price target of 308. TheNo.2 in film exhibition, Inox has chalked out an expansion plan to add50-60 screens a year over the next few years. India is an under screenedmarket and we expect Inox to benefit from the revival in consumerdiscretionary spending. Also, the GST implementation could result in a200-bps margin expansion.

Second-largest multiplex operator, with a dedicated growth plan. With

402 screens, Inox commands a 21% market share in multiplex screens, andplans to add 50-60 screens every year. It has an 18% share in Bollywood and25-30% in Hollywood box office collections. Through organic and inorganicacquisitions, it has increased its screen count 3.4x, from 119 in FY10 to 402now. On average, in the last decade it added three screens a month.

Operating parameters to improve. We expect Inox to add 150 screens inthe next three years, driving growth in footfalls-from 41.1m in FY15 to morethan 67m in FY18. We expect the average ticket price to rise a small 2%, withnon-box office revenue gaining momentum. Inox has significant scope toincrease its ad revenue per screen, which was ` 2.5m in FY15, vs. ` 4m forPVR. We forecast F&B and advertising revenue to register CAGRs of,

respectively, 31% and 33% over FY15-18, leading to better margins.Strong earnings outlook. We expect EPS to register 90% CAGR (FY15-18e) driven by good content, a greater proportion of non-box-office revenueand operating leverage kicking in. With a 0.9x asset turn in FY15 and a lowergearing ratio, Inox has a healthy balance sheet. The greater profitability andlower debt lead us to expect the RoE and RoCE to rise from 3.9% and 6.9%,respectively, to 15% and 19.6%.

Valuation. We value the company on the basis of FY18e EV/EBITDA andassign a 9.4x multiple to arrive at a price target of ` 308. Risks. Rise in taxes,poor content, expensive acquisitions.

Rating: Buy

Target Price: ` 308

Share Price: ` 245

Relative price performance

Source: Bloomberg

INOL

Sensex

130

160

190

220

250

280

D e c - 1 4

J a n - 1 5

F e b - 1 5

M a r - 1 5

A p r - 1 5

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S e p - 1 5

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N o v - 1 5

D e c - 1 5

Key data INOL IN / INOL.BO

52-week high / low ` 276 / ` 145

Sensex / Nifty 25850 / 7866

3-m average volume $1.3m

Market cap ` 24bn / $358m

Shares outstanding 96.5m

Shareholding pattern (%) Sep'15 Jun'15 Mar'15

Promoters 48.7 48.7 48.7

- of which, Pledged - - -

Free Float 51.3 51.3 51.3

- Foreign Institutions 21.4 20.5 20.7

- Domestic Institutions 9.0 8.9 7.6

- Public 20.9 21.9 23.0



28 December 2015 Inox Leisure – A hit story; initiating, with a Buy


Quick Glance – Financials and Valuations

Fig 1 –Income statement ( m) Year-end: Mar FY14 FY15 FY16e FY17e FY18e

Net revenues 7,628 8,954 11,848 14,196 16,835

Revenue growth (%) 15.0 17.4 32.3 19.8 18.6

- Oper. expenses 6,408 7,726 9,715 11,571 13,650

EBIDTA 1,220 1,228 2,133 2,625 3,184

EBITDA margins (%) 16.0 13.7 18.0 18.5 18.9

- Interest 276 386 286 288 237

- Depreciat ion 507 758 852 957 1,061

+ Other income 89 83 87 114 143

- Tax 153 -40 346 479 649

Effective tax rate (%) 29.0 -24.4 32.0 32.0 32.0

+ Associates / (minorities) - - - - -

Adjusted PAT 373 206 735 1,017 1,380

+ Extraordinary items -4 -6 - - -

Reported PAT 369 200 735 1,017 1,380

Adj. FDEPS ( ` / sh) 3.9 2.1 7.6 10.5 14.3

Adj. FDEPS growth (%) 78.2 -44.7 256.3 38.3 35.7


Fig 3 –Cash-flow statement ( m) Year-end: Mar FY14 FY15 FY16e FY17e FY18e

Adjusted PAT 373 206 735 1,017 1,380

+ Non-cash items 507 758 852 957 1,061

Cash profit 880 965 1,588 1,974 2,441

- Incr. / (decr.) in WC -18 807 68 50 75

Operating cash-flow 898 158 1,520 1,923 2,366

- Capex 903 2,745 1,250 1,250 1,250

Free-cash-flow -5 -2,587 270 673 1,116

- Dividend - - - - -

+ Equity raised 294 2,652 - 0 -

+ Debt raised -326 -57 290 -250 -650

- Investments 26 34 - - -

- Misc. items 4 6 - - -

Net cash-flow -68 -31 560 424 466

+ Op. cash & bank bal. 233 166 134 694 1,118

Cl. Cash & bank bal. 166 134 694 1,118 1,584Source: Company, Anand Rathi Research

Fig 5 – PE band

Source: Bloomberg, Anand Rathi Research

Fig 2 –Balance sheet ( m)Year-end: Mar FY14 FY15 FY16e FY17e FY18e

Share capita l 961 962 962 962 962

Reserves & surplus 2,948 5,800 6,536 7,553 8,933

Net worth 3,909 6,762 7,497 8,514 9,894

Total debt 2,422 2,412 2,702 2,452 1,802

Minority interest - - - - -

Def. tax l iab. (net) 290 243 243 243 243


Net fixed assets 6,347 6,681 7,079 7,372 7,562

Intangible assets - 1,652 1,652 1,652 1,652


- of which, Liquid 27 64 64 64 64

Working capital 71 878 946 996 1,071

Cash 166 134 694 1,118 1,584


W C turn (days) 3 36 29 26 23

Book value ( ` / sh) 41 70 78 88 103Source: Company, Anand Rathi Research

Fig 4 –Ratio analysis @ 245Year-end: Mar FY14 FY15 FY16e FY17e FY18e

P/E (x) 63.4 114.7 32.2 23.3 17.2

Cash P/E (x) 26.9 24.5 14.9 12.0 9.7

EV/EBITDA (x) 21.2 21.1 12.0 9.5 7.5

EV/sales (x) 3.4 2.9 2.2 1 .8 1 .4

P/B (x) 6.1 3.5 3.2 2.8 2.4

RoE (%) 10.4 3.9 10.3 12.7 15.0

RoCE (%) 12.4 6.9 13.8 16.5 19.6

Dividend yield (%) - - - - -

Dividend payout (%) - - - - -

Net debt/equity (x) 0.6 0.3 0.3 0.1 0.0

Debtor (days) 16 25 20 19 19

Inventory (days) 4 3 3 3 3

Payables (days) 34 36 33 33 32

Debt/ EBITDA 2.0 2.0 1.3 0.9 0.6

Fixed asset T/O (x) 1.2 1.1 1.4 1.6 1.8Source: Company, Anand Rathi Research

Fig 6 – FY15 revenue break-up

Source: Company

20x

30x

40x

0

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D e c - 1 1

M

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NBOC62%

F&B21%

Advertising9%

Other income8%





Second-largest multiplex operator

The Indian cinema exhibition sector has ~9,600 screens, 1,630 inmultiplex format. The multiplex segment is highly concentrated,

with the top-four operators controlling 78% of the screens. Inox is

the second-largest multiplex operator with 402 screens at 102 properties in 55 cities.

Second-largest multiplex operator

Inox has 21% of the multiplex screens, and plans to add 50 to 60 everyyear. It enjoys 8% of domestic box-office collections, ~18% of Bollywoodbox office collections and 25-30% of Hollywood box office collections.

Through organic and inorganic acquisitions, it has increased its screencount 3.4x - from 119 in FY10 to 402 now. The increase in number ofscreens and the concentration on F&B have led to 32% revenue CAGRover FY10-15.

Well diversified portfolio of screens

Fig 7 – In the last decade, 3 screens (avg) added monthly

Source: Company

Fig 8 – Organic and inorganic screen additions

Source: Company

6 9 1422 26 32

63 68 74 7996 101

25 3551

7691

119

239257

285310

372393

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Fig 9 – Cities as on Q2 FY16

Source: Company

Fig 10 – Properties as on Q2 FY16

Source: Company

North, 17

East, 8West, 19

South, 11North, 25

East, 17

West, 37

South, 22





Portfolio of own properties

Inox owns six properties, one uptown (at Nariman Point). Ownedproperties at prime locations enable savings on lease expenses, boosting itsEBITDA.

Fig 13 – Portfolio of owned propertiesCity / Property Screens Seats

Pune 4 1,316

Vadodara 4 1,318

Mumbai (Nariman Point) 5 1,323

Jaipur 2 787

Kolkata (Swabhumi) 4 1,022

Anand 3 624

Source: Company

Growth plans

In the last five years Inox averaged 28 screens added yearly. It plans to add50-60 every year to reach a network of 620 screens in the next 4-5 years.Inox’s new-screen pipeline is backed by agreements with mall developers.Insistent screen additions would give it better bargaining power withadvertisers and distributors, leading to higher revenues and better margins.

We expect over 50% of screen additions in tier-II and tier-III cities.

Inox has 4.35m Treasury shares (valued at ~ ` 1bn at CMP), which can beused to fund inorganic expansion growth plans.

Fig 14 – Comparison of screen additions of Inox and PVR


25

18

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19 21

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Inox S creen Addition PV R S creen Addition

(No. of screens)

Fig 11 – Screens as on Q2 FY16

Source: Company

Fig 12 – Seats as on Q2 FY16

Source: Company

North, 86

East, 67

West, 151

South, 89 North, 21,826

East, 17,698

West, 41,409

South, 21,852





Over FY11-15 Inox averaged 28 screens added vs, 41 by PVR. It haschalked out a growth plan of 50-60 screen addition every year. With theincrease in the number of screens, we expect its bargaining power withdistributors and advertisers to improve.

Fig 15 – Inox’s growth plan

H1 FY16 FY16 Pipeline, post- FY16

101 properties - -

393 screens 435 screens 620 screens

102,785 seats 111,414 seats 150,705 seats

FY 16 pipeline

Locations Screen Seats

Jorhat (Management contracts) 2 274

Bhiwadi (Management contracts) 4 754

Goa 4 1,020

Rajkot 3 450

Kolhapur 4 918

Aurangabad 3 961

Howrah 3 850

Vadodara 3 600

Thrissur 6 1,390

Bangalore 3 388

Cuttack 4 836

Chennai 8 1,700

Bengaluru 5 1,328

Total 52 11,469

Source: Company

Satyam acquisition to deepen penetration in N. India

Inox has been strong in the east; however, the key box-office markets ofthe north, west and south are dominated by PVR. Inox acquired Satyam todeepen its penetration in the northern markets, where most of thepopulation speaks Hindi. It acquired 38 operational screens (four in thepipeline) of Satyam Multiplex for an enterprise value of ` 2.2bn (equity

value of ` 1.8bn). Post-acquisition, it has 95 operational screens in thenorth, reducing the gap with PVR, which has 140 screens in the region.Management says that the average ticket price and EBITDA/screen ofsome of Satyam’s properties are the highest in the sector.

Poised for inorganic opportunities

With a debt-equity ratio of 0.33x, Inox has a strong balance sheet. It alsohas 4.3m Treasury shares, which can be used to raise funds for potentialacquisitions. At the ruling market price, this is worth ` 1bn-1.1bn. Ourstudy of the multiplex segment indicates that it may become unviable forsmaller multiplex operators to run screens due to the inherent risk of poorcontent and lower bargaining power with distributors and advertisingagencies. Also, they lack technology due to lower economies of scale.

We believe that smaller multiplexes are potential acquisitions by Inox in thenorth and west. In FY08 Inox acquired seven screens of 89 Cinemas, 95 ofFame Cinemas in FY11 and 38 of Satyam Cineplexes in FY15.





Focus on technology, service and ambience

Focus on technology

First to co-develop integrated ERP software

Ensures transparency with regulatory agencies and distributors through

daily performance-analysis reports Established a network operations centre (NOC) in Mumbai to enable

management to monitor information, real-time programming changesand dynamic on-screen advertising-scheduling.

Focus on quality video and audio

Inox possesses quality, DCI-compliant 2K-digital-projection systemsfor all its screens

It has strong 3D capabilities, high-definition quality and a high framerate (up to 60 frames a second)

It is one of the early adopters of Dolby Atmos sound technology.

Focus on service and ambience

Focus on providing world-class ambience

Emphasis on safety, comfort and convenience.





Operating parameters to improve

ATP to rise slightly; ancillary revenue streams, the game-changer

In the past, PVR has commanded a premium to the average ticket price of

Inox because of the better location of the former’s properties (deeperpenetration in the north and west). With the Satyam acquisition, Inox hasexpanded its operations in north India, the higher-ATP market. However,it plans more than 50% screens in tier-II and -III cities, which may havelower pricing power than those of its other properties. Therefore, we factorin a 2% CAGR in ATP over FY15-18. The ATP is largely driven bycontent (regional movies command lower ticket prices than Bollywoodmovies; Hollywood movies are at a premium). We hope that better contentmay increase ATPs as seen in Q1 and Q2 FY16, providing the upside toour figures.

Fig 16 – ATP to register a 2% CAGR over FY15-18e


F&B revenue set to see a 31% CAGR over FY15-18e

In the past, spending per head for Inox lagged PVR due to the former’slower focus on this. Inox has a team exclusively focusing on planning F&Bofferings in order to increase spending per head (SPH). It aims to improveF&B ordering through the Internet and provides the option to pre-order,at a discount, a meal. It also extended menu offerings beyond thetraditional offerings to induce people to spend more. We expect F&B SPHto record an 11% CAGR over FY15-18e.

152

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( ` )

F&B SPH and Ad revenue perscreen to register 11% and 17%

CAGR (FY15-18e)

Fig 17 - F&B as % of gross box office collection


Fig 18 - F&B SPH at 11% CAGR (FY15-18e), with ~75% margins


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SPH Margins (RHS)





Ad revenue per screen to improve faster

Ad revenue per screen for Inox improved from ` 0.8m in FY11 to ` 2.5m inFY15. However, it lagged PVR’s performance because of fewer screens inthe key markets of Delhi, UP and Mumbai. Around 60% of Inox’scontracts with advertisers are on an annual basis, with ~70% of revenue

coming from on-screen displays, and 30% off-screen (advertising in lobbiesand surrounding areas). Inox has taken various steps to enhance adrevenues: (1) increasing ad-rates (2) focus on high-value, long term deals,and (3) flexi-prices: charging per footfall. The increase in its network ofscreens would enhance its bargaining power to charge higher advertisingrates. With occupancy levels of 30-32%, management indicated that thereis headroom to increase advertising revenues by 20-25%.

Fig 19 – Ad-revenue per screen to grow at a robust 17% (FY15-18e)


Occupancy rates to improve

Inox’s occupancy rate improved from 23% in FY11 to 28% in FY14,slipping to 25% in FY15 due to poor content, the FIFA World Cup andthe general elections. We expect occupancy rates to improve because ofscreens added in premier locations, increase in the number of shows andfewer seats per screen at the new properties. We expect occupancy toimprove from 28% in FY14 to ~30% in FY18e.

Fig 20 – Occupancy to improve to ~30% by FY18e


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Strong balance sheet, earnings outlook

We expect EPS to step up smartly—from ` 2.1 in FY15 to ` 14.3 inFY18e—assisted by more revenue from the higher number of screens andthe larger proportion of income from F&B and advertising, which

command significantly high margins (F&B: ~75%; advertising: ~92-95%).

Fig 21 – Segment-wise revenue as percent of revenue


Sales to register a 23% CAGR (FY15-18e)

We anticipate sales registering a 23% CAGR over FY15-18e, driven by (1)an increase in the number of screens—from 372 to 522, a 12% CAGR, (2)increased occupancy—from 25% to ~30%, (3) F&B and advertisingrevenue recording, respectively, 31% and 33% CAGRs, and (4) other

revenue at a 16% CAGR.

Fig 22 – Sales at 23% CAGR


EBITDA at a 37% CAGR (FY15-18e)

We expect EBITDA to improve, assisted by (1) operating leverage, since50-55% costs are fixed costs (rentals, employee costs, power and fuelexpenses do not rise proportionately with the increase in occupancy),(2)increase in the revenue from F&B and advertising, which bring,

respectively, 75% and 92-95% to gross profit, and (3) a slight increase inticket prices.

75% 73% 73% 69% 66% 66% 64% 61%

16% 18% 19%19% 19% 20% 21% 23%

5% 5% 4%6% 8% 8% 9% 10%

5% 5% 4% 7% 7% 6% 6% 6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

(%)

GBOC F&B Advertising Others

3

67

89

12

14

17

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

4

8

12

16

20

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

( ` bn)

Sales Growth (RHS)





Better return ratios; gearing well within comfort zone

We expect the EPS to improve—from ` 2.1 in FY15 to ` 14.3 in FY18e. The better margins augur well for the company’s return ratios. We expectthe RoE to climb to 15% (from 3.9%). Inox had net debt-to-equity of 0.3xin FY15 and we expect this to go down to 0 by FY18e. Also, it has

Treasury shares of 4.35m (valued at ~ ` 1bn at current market prices), which can be diluted for inorganic growth opportunities.

Fig 25 – Low gearing; return ratios to improve


Asset-turnover ratios

With the better sales mix and lower capex needs in tier-2 and tier-3 cities, we expect the asset-turnover ratios to improve considerably.

-0.2

7.0 6.5

10.4

3.9

10.3

12.7

15.00.8

0.6

0.8

0.6

0.30.3

0.1

0.00.0

0.1

0.2

0.3

0.4

0.50.6

0.7

0.8

0.9

-2

0

2

4

6

810

12

14

16

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

(x)(%)

RoE Gearing (RHS)

Fig 23 – EBITDA margin to expand 520bps over FY15-18e


Fig 24 – EBITDA to register a 37% CAGR (FY15-18e)


8.3

11.3

12.8

14.0

12.1

15.716.3

16.7

9.6

13.0

14.8

16.0

13.7

18.018.5 18.9

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

EBITDA margins on Gross Revenues EBITDA margins on Net Revenues

(%)

308

729980

1,220 1,228

2,133

2,625

3,184

-20%

0%

20%

40%

60%

80%

100%

120%

140%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

(%)( ` m)

EBITDA Growth (RHS)





Fig 26 – Healthy asset turns


Fig 27 – Revenue assumptions

FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e

Screens 239 257 285 310 372 422 472 522

Average operating screens (excl.management screens)

216 224 244 274 323 380 430 480

Footfalls (m) 25.8 30.7 35.3 38.6 41.1 53.3 60.3 67.3

ATP ( ` ) 152 156 160 156 164 167 171 174

F&B SPH (gross, ` ) 41 44 47 49 55 61 68 76

Advertising / screen ( ` m) 0.8 1.3 1.4 1.8 2.5 2.75 3.3 3.96

Other revenue / screen ( ` m) 0.8 1.3 1.4 2.3 2.2 2.2 2.3 2.3


0.5

0.70.9

0.9 0.91.0

1.1

1.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

(x)





Fig 28 – Income statement ( m)Y/E: March FY14 FY15 FY16e FY17e FY18e

Net revenues 7,628 8,954 11,848 14,196 16,835

Other Op revenues - - - - -

Revenues 7,628 8,954 11,848 14,196 16,835

Growth (%) 15.0 17.4 32.3 19.8 18.6

Material cost -466 -495 -695 -881 -1,101

Employee cost -496 -658 -814 -979 -1,136

Manufacturing cost - - - - -

Marketing cost -82 -98 -116 -131 -146

Administrative cost -1,372 -1,758 -2,169 -2,589 -3,048

Energy cost -586 -725 -919 -1,112 -1,328

Other cost -1,171 -1,497 -1,692 -2,054 -2,530

Distributors cost -2,235 -2,493 -3,311 -3,825 -4,359

EBITDA 1,220 1,228 2,133 2,625 3,184

Growth (%) 24.4 0.7 73.7 23.1 21.3

EBITDA margin (%) 16.0 13.7 18.0 18.5 18.9

Other income 89 83 87 114 143Operating profit 1,309 1,310 2,219 2,740 3,327

Depreciation -507 -758 -852 -957 -1,061

EBIT 802 552 1,367 1,783 2,266

Interest cost -276 -386 -286 -288 -237

PBT 526 166 1,081 1,496 2,030

Tax -153 40 -346 -479 -649

Effective tax rate 29.0 -24.4 32.0 32.0 32.0

PAT 373 206 735 1,017 1,380

Minority interest - - - - -

Associate profit - - - - -

Consol PAT 373 206 735 1,017 1,380

Growth (%) 78.2 -44.7 256.3 38.3 35.7PAT margin (%) 4.9 2.3 6.2 7.2 8.2

Extra-ordinary income -4 -6 - - -

Dividends (incl Tax) - - - - -

Transferred to reserves 369 200 735 1,017 1,380

Per share data

FDEPS ( ` ) 3.9 2.1 7.6 10.5 14.3

DPS ( ` ) - - - - -

Adj BV ( ` ) 40.5 70.1 77.7 88.3 102.6

CEPS ( ` ) 9.1 10.0 16.5 20.5 25.3

Valuation ratio

P/E (x) 63.4 114.7 32.2 23.3 17.2

P/adj BV (x) 6.1 3.5 3.2 2.8 2.4P/C (x) 26.9 24.5 14.9 12.0 9.7

Dividend Yield (%) - - - - -

EV/S (x) 3.4 2.9 2.2 1.8 1.4

EV/E (x) 21.5 21.3 12.1 9.6 7.6

Quality ratio

Dividend Payout (%) - - - - -

Other income/PBT (%) 17.0 49.8 8.0 7.6 7.0

Interest cover (x) 2.9 1.4 4.8 6.2 9.6

Operating CF/EBITDA (x) 0.7 0.1 0.7 0.7 0.7






Fig 29 – Balance sheet (

m)Y/E: March FY14 FY15 FY16e FY17e FY18e

Equity 961 962 962 962 962

Reserves 2,948 5,800 6,536 7,553 8,933

Minority interests - - - - -

Less: Misc Exp - - - - -

Net worth 3,909 6,762 7,497 8,514 9,894

Equity (% of CE) 59.0 71.8 71.8 76.0 82.9

LT debt 2,148 2,005 2,305 2,205 -

ST debt 273 407 397 247 1,802

DTL (net) 290 243 243 243 243

Total debt 2,712 2,655 2,945 2,695 2,045

Net D/E (x) 0.6 0.3 0.3 0.1 0.0


Gross block 8,437 11,443 12,693 13,943 15,193

Acc depreciation -2,576 -3,620 -4,473 -5,429 -6,490

Net block 5,861 7,822 8,220 8,514 8,703

CWIP 485 511 511 511 511

Fixed assets 6,347 8,333 8,731 9,024 9,214


Cash equivalents 166 134 694 1,118 1,584

Inventories 86 76 95 114 136

Debtors 334 623 639 734 866

Loans & advances 1,571 1,920 2,103 2,270 2,437

Other current assets 41 57 57 57 57

Current assets 2,197 2,811 3,588 4,293 5,080

Creditors -720 -893 -1,083 -1,272 -1,476

Provisions -252 -216 -234 -253 -272

Other current liabilities -988 -689 -631 -654 -678

Current liabilities -1,960 -1,798 -1,948 -2,179 -2,425

Net current assets 237 1,013 1,640 2,114 2,655


FA/CE (%) 95.9 88.5 83.6 80.5 77.2

Investments/CE (%) 0.1 0.1 0.1 0.1 0.1

Liquid assets/CE (%) 2.9 2.1 7.3 10.5 13.8

Working capital/CE (%) 1.1 9.3 9.1 8.9 9.0


Fig 30 – Cash flow statement ( m)Y/E: March FY14 FY15 FY16e FY17e FY18e

Cash profit 880 965 1,588 1,974 2,441

Chg in WC 18 -807 -68 -50 -75

Operating CF 898 158 1,520 1,923 2,366

Capex -903 -2,745 -1,250 -1,250 -1,250

Free CF -5 -2,587 270 673 1,116

Equity 294 2,652 - 0 -

Debt -326 -57 290 -250 -650

Investments -26 -34 - - -

Dividends - - - - -

Misc inflows -4 -6 - - -

Net change in cash -68 -31 560 424 466

Opening cash 233 166 134 694 1,118

Closing cash 166 134 694 1,118 1,584






Fig 31 – Ratio analysis @ 245Y/E: March FY14 FY15 FY16e FY17e FY18e

Dupont analysis

Margins (%) 10.5 6.2 11.5 12.6 13.5

Capital turn (x) 1.2 1.1 1.2 1.3 1.5

RoCE (%) 12.4 6.9 13.8 16.5 19.6

Leverage factor(x) 1.8 1.5 1.4 1.4 1.3

Interest burden (x) 0.7 0.3 0.8 0.8 0.9

Tax burden (x) 0.7 1.2 0.7 0.7 0.7

Consol factor (x) 1.0 1.0 1.0 1.0 1.0

RoE (%) 10.4 3.9 10.3 12.7 15.0

Working capital (Days)

Inventories 4 3 3 3 3

Debtors 16 25 20 19 19

Loans & advances 75 78 65 58 53

Other CA 2 2 2 1 1

Creditors -34 -36 -33 -33 -32

Provisions -12 -9 -7 -7 -6

Other CL -47 -28 -19 -17 -15

Net WC 3 36 29 26 23

Other ratios

Op CF/Rev (%) 11.8 1.8 12.8 13.5 14.1

FCF/Rev (%) -0.1 -28.9 2.3 4.7 6.6

Intangibles/GB (%) - 14.4 13.0 11.8 10.9

Intangibles/CE (%) - 17.5 15.8 14.7 13.8

Revenue/GB (x) 0.9 0.8 0.9 1.0 1.1

Revenue/FA (x) 1.2 1.1 1.4 1.6 1.8

CWIP/GB (x) 0.1 0.0 0.0 0.0 0.0






Valuation

We expect revenue and profit to register CAGRs over FY15-18e of,respectively, 23% and 90%, driven by the increase in the number ofscreens, better content, greater occupancy and higher margins. We expect

the company’s return ratios to improve with increase in asset utilisation andimproved operating margins. We value the company on the basis of FY18eEV/EBITDA and assign a 9.4x multiple to arrive at a price target of ` 308.Global players are trading at a multiple of ~8x and we believe our valuationis justified driven by better revenue and profit growth and attractiveinorganic growth opportunities.

Fig 32 – Valued at 9.4x FY18e EV/EBITDAEBITDA ( ` m) 3,184

Target EV/EBITDA (x) 9.4

EV ( ` m) 29,934

Net debt ( ` m) 218Market cap ( ` m) 29,715

Shares os (m) 96.5

Target price ( ` ) 308

CMP ( ` ) 245

Upside 26%


Risks

A weak content pipeline

Slow development of malls could affect our screen expansionestimates. Rise in rental costs could eat into operating profit

Change in revenue-sharing agreement between exhibitors anddistributors

Increase in piracy and threat from alternative modes of entertainment:IPL, music concerts, etc.

Adverse tax regimes.





Company Background & Management

Company background

Incorporated in 1999 and headquartered in Mumbai, Inox is the second-

largest (after PVR) multiplex operator in India. It operates 102 propertiesand 402 screens in 55 cities. It has a 21% share of multiplex screens inIndia and an 8% share of domestic box-office collections. It is a subsidiaryof Gujarat Flurochemicals, a part of the Inox group.

Since the launch of its multiplex in Goa in CY04, that venue has been thescene of the prestigious International Film Festival of India every year. Ithas insistently scaled up through organic and inorganic expansion in thelast decade, from two properties (eight screens) in FY03 to 101 properties(393 screens) in Q2 FY16. On average, over the last decade it has addedaverage three screens monthly.

Fig 33 – Promoter group, Management and BoardPavan Jain - Chairman, Inox group A chemical engineer from IIT, New Delhi, and industrialist with over38 years’ experienceMore than 22 years’ experience as managing director of Inox Ai rProducts, which grew from a single-plant business to one of theleading industrial gas operators in India. Has been the driving forcebehind the group’s diversification to various industries such asrefrigerant gases, chemicals, cryogenic engineering, entertainmentand renewable energy

Siddharth Jain - Director Graduated from the University of Michigan, Ann Arbor, with a B.Sc.in Mechanical Engineering, has an MBA from INSEAD, France, andseven years’ work experience in various management positions

Deepak Asher - Director A commerce and law graduate, and Fellow of the Institute ofChartered Accountants of India and an Associate Member of theInstitute of Cost and Works Accountants of India. Has more than 25

years’ experience in corporate finance and business strategy. Ispresident of the Multiplex Association of India and member of theFICCI Entertainment Committee. In 2002, he won the TheatreWorld Newsmaker of the Year Award for contribution to themultiplex sector

Alok Tandon - Chief Executive Officer Has been associated with the company since its inception in 2001.A qualified engineer, he has more than 25 years’ varied workexperience in companies such as Hoechst, and ITC – Hotel divisionand the Oberoi group. Has been instrumental in executingcompany’s expansion plans and strengthening the Inox brand on anational scale, making it the first choice in the business of cinemaexhibition in India

Source: Company




Annexure

Entertainment Tax rates (State Wise)

State Entertainment Tax on Net (%)

Delhi 40Haryana 30

Karnataka 30

Uttar Pradesh 66

Andhra Pradesh 25

Maharashtra (Mumbai) 45

Madhya Pradesh 20

Maharashtra (others) 40

Gujarat 25

Punjab 25

Rajasthan 30

West Bengal 30

Kerala (Kochi) 20

Uttrakhand 30

Assam 25

Kerala (others) 25

Jharkhand 30

Tamil Nadu 43

Chhattisgarh 30

Source: Industry

anand rathi- india film exhibition –blockbuster year

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