PVR Cinemas in India — Already been a multibagger; Can it be now?

Often your best stock picks are the results of just being observant.

PVR Cinemas, a joint venture between Priya Exhibitors Private Limited and Village Roadshow Limited started its operations in India in June 1997 as a film-entertainment company.

PVR (Ticker NSE: PVR) trades at ₹1457.00 at the time of writing this blog. Used to quote at around ₹200.0 when its long time bull run started around October, 2012, the time when I was leaving my high school. The Entertainment (Movie Theatre) industry had started picking up momentum and there was a gradual shift of movie buffs’ destination from local theatres to state of the art (at that time) multiplexes — the place where PVR had already started gaining substantial market share. We (my family also loves movies) too were part of the shift. I regret that at that time I was not very much interested in Finance and Stock market and failed to grab the multibagger when I had already sort of figured it. Otherwise today, I would have been blabbering about it everywhere :).

The story doesn’t end there. Not identifying PVR Cinemas was not my only big (note — ‘big’) mistake. I am a petrol head and used to follow the automobile industry since I was a small kid. Lower class Indian population was slowly ascending into middle class, middle class to upper middle class and so on. The increase in buying capacity of Indians was the usual follow up. Talk about the automobile industry- Maruti Suzuki had been, is and will be the market leader for the foreseeable future. I knew it… Facepalm! Maruti Suzuki used to trade at ₹1100 around June 2012. The time when I started exploring capital market the ticker was at ₹4900 around August 2016. I knew I had missed it.

Maruti Suzuki had been, is and will be the market leader for the foreseeable future. I knew it… Facepalm!

It still doesn’t end here. Missing my second no brainer stock pick was not a silly step compared to what I did after that. Knowing that I had missed two grand opportunities, I started to look for other growth stocks, failing to realize that Maruti was STILL in growth stage. I am writing this blog because now it is quoted at ₹6,266.15.

Coming back to the topic, I wish not to miss PVR now as I still look PVR as a growth stock, because of some very basic / fundamental reasons.

Drivers of Industry

  • The middle and upper middle class are the major drivers of movie theatre industry. [Source]
Source : http://www.kkr.com/global-perspectives/publications/india-shifting-landscape
  • In India, movie goers are still on the younger side, while it has been observed in developed markets that this steadily shifts to upper groups and the new generation are the new entrants [Source].
  • PVR is the market leader in this segment.
  • Increase in the average spend per ticket and food & beverages. [Source]

Porter’s Five Forces

  • Threat of New Entrants (Low) — It is difficult for a new firm to establish and compete with PVR.
  • Threat of Substitute (Medium) — In India, people prefer watching movies in theatres with friends / family. Renting or buying a blu-ray and experiencing it on home theatre has not picked up yet. Piracy is a long term concern for the industry. Although having a significant impact, but cannot be considered as a barrier.
  • Bargaining Power of Sellers (Low) — Movie theatres / Exhibitors enter in a lease or profit sharing contract with the distributors. Leasing was popular in former times when movies were distributed on reels. With the advent of digitisation, movies are distributed digitally and the profit sharing model is more popular where theatres split their net profit with the distributors. The percentage of distributor’s cut reduces on a week-to-week basis. Since the profits of a distributor are directly dependent on exhibitors , a distributor won’t step back in limiting the number of theatres his movies are shown.
  • Market Competition (Medium) — Inox and Big Cinemas are the competitors in the industry but hard to overtake given the movie experience offered by PVR.
  • Bargaining Power of Buyers (Low) — A typical movie goer would pay a premium to go to a PVR hall rather than a cheap one.

What the ‘Future’ Predicts

  • Future Prices don’t show an uptrend — 1,507.00(Current, 7 Apr ‘17) vs 1516.65(27 Apr ‘17) vs 1525.70(25 May ‘17) vs 1440.85(29 Jun ‘17)

Income & Expenses

  • Further breaking down Income Statement of the firm for the period 2015–16 to gain some new insights.
  • The main sources of income are Movie Tickets (57%) followed by Food & Beverages (26.7%) and advertisements (11.3%)
Income Sources
  • At first glance, it looks like the movie tickets accounts for the major chunk of net profit but due to distributor fees and profit sharing agreement, a significant chunk of the profit is eaten by distributors.
Profit Margin (Gross)
  • While it is evident that earnings from food & beverages are more worthwhile but can’t argue much since it is a chicken and egg problem. More the number of patrons, more is the effect on secondary earnings.
  • Expenses have the following distribution

Health of the Company

  • Having a 28% increase in revenues year-on-year and debt-to-equity of 0.8, the firm looks promising in the future. Earnings per share for the financial year 2015–16 is 26.34 with total number of patrons growing at a rate of 30% annualised.

Conclusion

PVR is trading at a high premium (P/E Ratio of 80) as it has shown great returns in the past and assures growth. Ajay Bijli, CEO aims 1000 screens across India (552 at present) by the year 2020.

Buy, Sell or Hold — I, personally would go for a long position and hold it for a period of 3–5 years to achieve substantial gains.


I am a CFA Level 1 Candidate appearing in the month of June ’17. Software Developer by profession, exploring the exciting field of Finance.