Event update: PVR (Upgrade to Outperformer) - GST down, outlook improves…

Event:

The Government of India has lowered the GST on movie tickets priced above Rs100 to 18% (from 28% currently) and below Rs100 to 12% (from 18% currently). The new rates are applicable from 1 January 2019.

Impact:

As per the anti-profiteering clause of the GST regime, all multiplexes and single screen theatres are expected to pass on the benefits to end consumers, thus reducing the cost of film entertainment for viewers. We expect listed players to pass on the benefit immediately. This is expected to be earnings neutral for the multiplexes as net ATP does not change.

However, given the dynamic nature of multiplex pricing (varies by day, time of the day, content, language, 3D etc.), we believe multiplexes will try and go back to the gross pricing prevalent before the reduction of GST, over the next 12-18 months. If indeed PVRL manages to do so, then its FY21E EBITDA/PAT will see an upgrade of 11.3%/22.8%.

Our View:

As the multiplexes are already under severe scrutiny for perceived higher F&B prices, we believe it may not be easy for them to completely capture the benefit of lower GST rates through higher prices. In our model we are building that they will be able to capture half the benefits and hence our FY20E/FY21E EBITDA and PAT are revised upward by 3.6%/5.7% and 7.7%/12% respectively. We are not building in an improvement in occupancies as we believe the key driver for the same is content and not ticket pricing. We also note that with GST rates brought down, there is an increased risk of states/local municipal bodies levying LBT (as was done in TN and later in MP).

We had downgraded PVRL a notch (to Neutral) given the risk to its F&B revenue and thus overall profitability. However, over the past couple of months this risk has subsided and now with GST rates brought down (coupled with better convenience fee and good acquisition of SPI Cinemas), we believe PVRL is in a very good spot to post strong earnings growth over the next few years. Our new price target is Rs1,774 as we roll-forward our valuation multiple to FY21E (11x EV/EBITDA); Upgrade to Outperformer.