PVR's Q1FY19 results (Downgrade to Neutral) - Good quarter but Popcorn blues…

Q1FY19 result highlights

• Exhibition segment: Rev. grew by 10.8% yoy led by 12.1% yoy growth in net box office rev, 23.3% yoy growth in F&B rev and 6.5% yoy growth in ad rev. Convenience fee fell by 29% yoy as Just Dial & Ticketnew were discontinued as ticketing partners while other op. income fell 50% yoy as it is not booking E-tax refunds from various state govt. (barring Rajasthan) on lack of clarity under GST regime.
• Strong exhibition segment metrics: ATP grew by 1.4% yoy to Rs217 (on a high base of +9.7% yoy) led by good content (Infinity War, Raazi, Race 3, Veere Di Wedding); footfalls rose by strong 8% yoy to 22.7m (note that Inox’s footfalls fell 1.2% yoy). Occupancy stood at 36% versus 35% yoy, SPH was up 8% yoy to Rs94 mostly through higher conversions; LTL footfalls up 1% yoy & LTL ATP rose by 2% yoy.
• Exhibition business EBITDA grew by 13.2% yoy to ~Rs1.31bn due to relatively better content despite Bahubali 2 in the base. Margins improved ~40bp to 19.3%. Adj. PAT stood at Rs497m (+21% yoy).
• Cons. Fin Performance: Rev at Rs6.96bn (1% beat) was up 9.4% yoy, slower than Exhibition segment growth as Others Segment (included Bowling Alleys biz in the base which was sold in Q2FY18) fell by 40% yoy. Cons. EBITDA grew 20% yoy to Rs1.37bn (9% beat) led by strong exhibition EBITDA performance. EBITDA margin improved 170 bps yoy to 19.7% (IDFCe: 18.2%). Adjusted PAT came in at Rs522m (+17.3% yoy; 19% beat) due to good EBITDA performance.

Key positives: Strong exhibition segment performance despite high base.

Key negatives: Weakness in Conv. Fees/Other Op. Income.

Impact on financials: Unchanged.

Valuations & view

PVRL’s execution has been flawless over the past as it continues to deliver industry leading operating metrics due to its presence in the best catchment areas across its markets. A strong content pipeline in FY19E sets the stage for strong box office and ad rev. performance for the year. However, the recent headwinds on F&B revenue (PIL hearing is still on), could possibly disrupt the entire multiplex business model (given the high gross margins enjoyed by F&B). PVR acknowledged that it will improve the value proposition of its F&B offerings. Given lack of clarity in this regard, we are keeping our estimates unchanged but lower our target multiple by 25% vs earlier arriving at a price target of Rs1,130 (10.5x F20E EV/EBITDA). Downgrade to Neutral.