Event update: PVR (Neutral) - Convenience fee renewal biggest blockbuster till date...

Event

In a filing to the exchanges, PVR Ltd. (PVRL) has informed that it has renewed its contract with BookMyShow.com (BMS) and PayTM, online ticketing aggregators, for a period of 3 years for a total consideration of Rs4.1bn which includes minimum guarantee (MG) towards convenience fee and refundable security deposit. ~Rs3.5bn would be received upfront, and the balance by end FY19E. Our interaction with the management suggests that bulk of the Rs4.1bn is MG towards convenience fee and would be booked in the P&L over 3 years.

A very positive deal

Online platforms charge 10% as convenience fee (CF) on overall ticket price and under the new deal it appears that bulk of the CF will be passed on to PVR (say ~80%). BMS and PayTM are sharing bulk of the CF with PVR because most of the traffic on their platform is driven by multiplexes and they are able to cross-sell other products (plays, events, activities, F&B, etc.) to this audience. BMS would look as this deal as cost of acquisition of its own customer.

Out of the Rs4.1bn we believe Rs3.7bn is MG on account of convenience fee (CF) and Rs0.4bn is refundable security deposit. Over FY16-18 (three years), PVR booked CF of Rs1.5bn and now it has a MG of Rs3.7bn over the next three years. In Q1FY19, 55% of PVR’s footfalls were through online booking channels and this proportion continues to increase led by increase internet adoption. There is a material increase in our earnings as we account for the new CF deal; our FY19E/FY20E EBITDA is upgraded by 4.1%/8.5% and FY19E/20E PAT is upgraded by 12%/21%! PAT upgrade is higher as the upfront payment of Rs3.5bn will lead to lowering of net-debt and hence interest payout. RoEs too see a material upgrade for FY19E/20E at 17.9%/18.8% (vs 16.1%/16.0% earlier).

Valuation

With significant upgrade in EBITDA, our price target increases to Rs1,303 (vs Rs1,130 earlier) as we continue to value PVRL at 10.5x FY20E EV/EBITDA. We have always been a believer in PVRL's business model but had downgraded it to Neutral given uncertainty around F&B revenue. While we appreciate its nimbleness in terms of price-value corrections across its F&B offerings (introduced happy hours with discounts up to 40% etc); however, we remain Neutral till further clarity on court judgement on PIL/Govt. policy on F&B. If there is no negative regulatory action on F&B, target valuation multiple could be upgraded by ~20%.