PVR Inox Ltd Q1 FY2023 Concall Summary

Key Takeaways

• V-shaped recovery underway: Q1 box office and admissions rebounded sharply, with management calling the debate on theatres vs streaming "put to rest" and forecasting full-year admissions better than FY20.
• SPH is the standout metric: Spend per head hit 54% of ATP (vs 28% historically), driven by F&B quality and promotions; management sees a path to 80% and, in some cinemas, SPH matching ATP.
• Ad revenue still a drag, but a timed recovery is promised: Q1 ad revenue ran 38% below pre-COVID; the company expects a step-up in Q2, a near-full recovery in Q3, and an exit above pre-COVID in Q4.
• The merger is on track: BSE and NSE no-objection letters are in hand; the NCLT filing is underway, with completion expected in 5 to 7 months.
• What to watch next quarter: Whether the eight-week theatrical window, reinstated 1 August, pulls forward the ad recovery and draws back the once-a-year moviegoer who has not yet returned.

The Recovery: What Returned and What Has Not

• Box office has already beaten 2019: First-half CY2022 gross box office was roughly ₹5,700 crores, slightly ahead of 2019, achieved despite January lost to Omicron and half of February impacted.
• Frequent moviegoers are back; casual audiences are not: Cinemas dependent on more frequent cinegoers are showing superior recovery, while a large number of people who come once or twice a year have not yet returned, leaving some catchments underperforming.
• Tier-I pockets lag where content missed: Tier-I and Tier-II cities have recovered similarly in aggregate, but affluent pockets within Tier-I have underwhelmed because films targeted the lowest common denominator and did not appeal to that sensibility.
• Hindi films are the swing factor: Big titles (Shamshera, Lal Singh Chaddha, Brahmastra, Vikram Vedha) are lined up, but management says it is too early to draw conclusions on Hindi film performance; Hollywood and Hindi production pipelines are still ramping up.
• The windowing reset removes a structural overhang: Effective 1 August 2022, the company reverted to the pre-COVID eight-week theatrical window, and management stated that producers have stopped direct-to-streaming and simultaneous releases.

Gianchandani: "It also reflects and it also puts the debate that whether people would come back to theaters, whether the consumer appeal of movie theaters has gone down. Streaming has taken away a lot of eyeballs that debate has been put to rest and that's reflecting in these four months admissions."

SPH and ATP: The Per-Head Economics

• SPH to ATP ratio jumped to 54%: The improvement from 28% historically was driven by food quality, hospitality, and F&B promotions that are working; management believes the ratio can keep notching up a few percentage points every year.
• SPH growth of 30% is seen as sustainable: Rent rebasing or revenue-share changes will not alter SPH, and the 30% growth trajectory can easily be maintained going forward.
• ATP is content-dependent: Without a mega blockbuster or tentpole, ATP could be depressed by ₹10-12 in a dull quarter, but whenever big films release, similar ATP growth can be recorded.
• Premiumisation supports both metrics: New properties average about 200 seats per screen (down from legacy levels), and premium formats (4DX, Playhouse, LUXE, Director's Cut) operate on smaller auditoriums, lifting per-patron revenue while bringing the blended seat count down.
• Ancillary revenue experiments are mixed: V-Pristine is doing about ₹30 lakhs per month and growing consistently; M Pop microwave popcorn is contributing positively to SPH as consumers buy at the cinema and consume at home; the Swiggy/Zomato initiative has been discouraging and will be reimagined post-merger.

Dutta: "We believe that this is really about the glass ceiling. There are still certain cinemas where we believe that the SPH could be matching our ATP."

Advertising: The Lagging Piece, With a Timetable

• Q1 ad revenue was 38% below pre-COVID: FMCG (15-17% of ad revenues) is taking time to recover, and telecom/handset spending has slowed due to import and chip shortages; new-age and retail advertisers are showing quicker turnaround.
• A phased recovery is promised: Q2 should get averages a lot better than pre-COVID Q1 numbers; Q3 will be largely in the hitting range of pre-COVID levels; by Q4 the company expects to exceed pre-COVID numbers.
• FMCG and telecom are expected back for the festive quarter: Management anticipates these categories will return in a big way in Q3 as they gear up for supplies around the festive season.

Costs, Portfolio and the Balance Sheet

• Rent-to-revenue ratio improved to 18%: Q1 rent was ₹180 crores on ₹1,000 crores of revenue; revenue growth is running stronger than rental growth, and the ratio should stay at this level or get lower over time.
• Rental cost on comparable properties is up 18-19%: 14% from three-year contractual escalations and 5% from revenue-share linked to strong revenues; there is no clawback.
• Electricity costs are down 4% vs pre-pandemic: Tight control on unit consumption and temporary state-government reliefs helped; costs will gradually rise with power cost increases.
• Headcount savings are being sustained: Limited increases in headcount mean that over a three-year period, cost increase is significantly lower than revenue growth.
• Portfolio churn is small and surgical: 39 screens have shut since June 2019 (23 Cineline leases not renewed, 16 other screens); 95-96% of the portfolio is prime and doing exceedingly well; future closures will not exceed 1% of the portfolio, with one or two properties replaced each year.
• Debt will not rise from here: The focus is to use operating cash flows to fund growth, and the entire capex for new screen additions will be funded through internal accruals and liquidity.

Sood: "I don't think that number is quite honestly any significant number. It will be not more than 1%..."

Screen Expansion and the Premium Shift

• New screens will tilt toward Tier-II and Tier-III: About a third of new screen additions will be in these markets, and the company is entering nine new cities during the year.
• Premium screen share to nearly double: Over the next five years, the share of premium screens could increase to 18-20% from the current 12%, driven by formats like 4DX, Playhouse, LUXE, and Director's Cut.
• IMAX formatting for domestic content is improving: The constraint of producers needing to deliver films 2-3 weeks in advance has eased considerably; both Hindi and non-Hindi producers are finishing films earlier and doing screenings for feedback.
• The franchisee model is still nascent: The company has not launched a full-scale franchisee model; it is focused first on reducing capex per screen and will talk more once a few screens are launched and opened.

The Merger and Strategic Initiatives

• NCLT filing is the next milestone: Both PVR and Inox Leisure have received no-objection certificates from BSE and NSE; the NCLT process typically takes 5 to 7 months.
• A subscription program is being readied for a big launch: A pilot was slowed by regulatory issues around recurring payments exceeding three months; those concerns have now been managed, and the company plans to launch in a big way.
• Market share is consolidating toward larger chains: The market share of larger chains with more consumer credibility has gone up vs pre-COVID; the number of smaller operators who exited is fairly small, less than 10% of overall screen count, mostly underperforming cinemas.

Gianchandani: "What we are seeing is that the consumer sentiment is to escape. People want to escape from news, people want to escape from this constant war or inflation or other worries which we have in the economy and they are finding cinemas still has the best platform to get this escapism... This year looks like we are going to have a V-shaped recovery, a very sharp bounce back."

Guidance & Commitments

Key Metrics