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PVR at no. 2 on global multiplex valuation charts

Economic Times:  September, 2016

Mumbai: The stock of India's largest multiplex company PVR has appreciated by 80% in the past six months, making it the second most expensive multiplex stock globally after the US-based Carmike Cinemas. According to data complied from Bloomberg Industry Classification System, PVR's trailing price earnings multiple (P/E) is 49.4 compared with the average of 32.6 for global theatre operators. Carmike Cinemas's P/E is 78.5.

PVR had a smooth ride on the bourses in the past three years thanks to the revenue-enhancing factors such as increasing market share, organic screen expansion at strategic locations, and timely acquisitions. While some analysts believe that most factors that could trigger high earnings' growth have already been reflected in the company's valuation, others continue to remain bullish on the stock even at the current valuation.

According to Naval Seth, media and entertainment analyst at EmkayBSE 0.45 % brokerage, the acquisition of DT Cinemas and the expected margin benefit after the implementation of the Goods and Services Tax (GST) are buoying PVR's stock. "The operating margins of multiplexes are expected to improve by 400-450 basis points after the implementation of GST," he said.

Abneesh Roy, associate director, research, institutional equities at EdelweissBSE -3.57 % Capital said, "Factors such as room for growth in advertising revenue, pricing power in terms of average ticket prices, high occupancy rates and its positioning as a lifestyle and urban consumption brand work in favour of the company."

On the other hand, some analysts point out that there is hardly any fresh trigger for further appreciation in the company's stock. An analyst with a leading brokerage who wished to be unnamed said, "PVR is not a complete consumption story given its dependence on capital expenditure. Unlike a typical well-established consumer goods company, PVR would need to invest consistently to expand in markets beyond metros. Also, the return on capital employed generated by multiplex companies is lower than consumer goods companies. Hence, the company's current valuation seems to be high."

Another analyst covering the sector added that the company's stock is overly-priced. "Given the weak financial performance over the past two quarters, which may as well be repeated in the September quarter, the bullish trend in the stock price looks unwarranted."

The company had a debt of around Rs 696 crore in March 2016. About 20% of operating margin before depreciation (EBITDA) was utilised to pay interest. To expand further, the company may have to issue more debt or dilute equity. The promoter stake is at 26% at present. In addition, the inorganic route of expansion will not be easy given that the Competition Commission of India (CCI) had asked the company to offload some of the properties before acquiring DT Cinemas.

Though these factors are likely to limit the company's ability to grow revenue and profits in the short term, its leadership position in the domestic multiplex segment is a major positive factor in the long term. While investors with short horizon may find it appropriate to book profit in the counter at the current stock price, long term investors may make fresh purchases on dips.