Manu Rishi Guptha: PVR Cinemas – House Empty – Future Bleak

Reading Time: 7 minutes


Warren
Buffett’s seemingly most popular quote “Price is what You pay and Value is what
You get” doesn’t seem more destroyed or intrigues the patron more, when one
pays ~Rs300 / USD 4.5 for a 100 gms box of popcorn at an Indian multiplex, whereas in India 700 million people earn less than Rs 100 per day or say ~USD1.4 / day

But this
piece isn’t about the Indian Economy, its about the market darling – PVR
Cinemas.

Allow me to
place a disclaimer right here – I love PVR Cinemas, I along-with my wife and mother
almost never miss a movie at PVR and she loves the popcorn – being from the old
school. If I were to tell her that the ticket costs 2000 Rs a piece in Gold with green
tea (that she loves) (a Twinnings tea bag worth Rs 3 dipped in hot water sold
at some 80 times the cost) she might have a heart attack. But this is a secret
between PVR and me. Mom never gets to know of it.

The purpose
of this piece is to inform the gullible minority shareholder that while all the
institutions are dumpin the
 favourite PVR stock, You are being made the muppets and when the
music stops, you will have nowhere to run. 
Its pertinent to
mention that the shareholding of people with less than 20,000 shares has
shot up from 3.5 – 10.5% in a matter of just 9 months.

Lets analyse
the company that’s now more expensive than TESLA – already trading at
some 800 PE

PVR
generates an EBITDA of Rs 60 per patron / movie watcher

Sale of
F&B is Rs. 948crs or ~ 28.8% of total sales and 55% of Movie Sales Revenue
or Rs. 93/patron.

Cost of
F&B is 8% of sales thus 72.5% Profit Margin on Popcorn or say Rs. 67/Patron
comes from F&B

Which means
EBITDA Loss of Rs. 7/patron is generated by (Sale
of tickets + Advertisement Income + Convenience Fees + Other Operating Income)
the core business.the breakeven of PVR is at at 20%
occupancy and Average Occ that PVR enjoyed is 35% in precovid times (And achieved
an 18% EBIDTA and 0.8% PAT margin), One question that comes to mind is – if
capacity utilisation in the best of the times is 35% generating such abysmally
low PAT, what effect will a lower occupancy have on the P&L and the Balance
Sheet

And the
EBIDTA sucks because the promoters who own a mere 18.79% of this company draw a
cumulative salary (besides all other perks and privileges) of ~ 28 Crores that
is slightly more than the PAT of the company. A back of the envelope calculation pegs the EPS for promoters and family at approx Rs 32 per share while its a paltry Rs 4.95 for other shareholders.

It’s a shame – more so in India – because stockmarkets are shallow, lack depth,
and most shareholders have no access to genuine research on the basic and key metrics
of the company, intention of the management, and self centricity of the
promoters at the cost of minority shareholders.

PVR has been incurring ~ monthly expenses of 63 Cr (assuming 50% waiver on rent and CAM charges) so if this year is more or less a washout, it would have burnt approx. 750 Cr without any mentionable revenue in FY 2021) And that explains the short runway of the amount of Rs 300 Cr collected thru the rights (in Aug 2020) that might not have lasted beyond 5 months.

“The business is
under a grave irreversible threat”

Ask a producer of a film and he/she is under permanent nervousness till one week
after release of his movie – not knowing whether one would be able to recover costs, make
profit or lose the skin.

The immense
sense of freedom that most of the producers such as
Ronnie Lahiri have found by releasing
movies on OTT
is
heartening. Gulabo Sitabo was a great hit, made him the money and de-risked his
investment. Top OTT players are happy to buy movies at a cost + basis, thereby
de-risking the producers and the OTT players such as STAR, Amazon, Netflix have
pockets tens of times deeper than the size of Indian film industry at ~13800 Cr
(1.8 B USD) where the Bollywood is a mere ~1000-2000 Cr per annum

For the
record Amazon and Flipkart burn a combined sum just during their Diwali sale alone.

OTT is really the future because a family can watch a movie
in the convenience of ones Living room where the annual subscription of the
most expensive platform is less than the cost of “just one” movie with the family
at a multiplex. We haven’t yet discounted the pain of navigating the traffic,
parking, lack of social distancing, risk in the AC (after Corona) world where
the human psyche has got permanently mutated because of the present unexpected
vicissitudes. The brilliant analysis by Seetharaman
in The Ken sums up the dilemma and the zero
sum game for the cinema halls.    

No wonder
that the
sale
of large TVs and projectors that cost as little as Rs 10 K on amazon has shot
up
in the recent times because of the newfound freedom by the movie buffs.

Low budget
films, some of these dramatically
 awesome
in content and direction, that cannot afford a big budget theatre release have
found a new freedom and recognition and have been able to shed the risk bias of
the patron because the incremental cost of watching this movie is almost nil
for a family (if at all the same turns out to be a dud or below expectations).
Not that the wounds inflicted on the populace by Salman Khans
Tubelight
or Aamir Khans
Thugs
of Hindostan
 can ever be healed. And
on top of that the Rs 300 popcorns.

OTT reduces/almost-eliminates
piracy and provides a reach to the most under provided sections of society
where access might be a problem, but internet works at a good speed.

The demise of Cineworld with 9500 screens was a shock that had to down its
shutters on almost 90% of its business due to the pandemic. And the hunger of
retail shareholders to lap up the PVR stock seems unsatiable.

If this
virus – that has permeated such degrees of fear in the society is here to stay
for a foreseeable future then the future of multiplexes is in grave danger and that
explains why the institutions or the big boys of the stock markets are strategically
reducing their stake while holding the price at present levels and retail
muppets (shareholders) are hungrily buying the stock to take the retail
shareholding up from 3.55% in Dec 2019 to 10.32% by Sep 2020.

Unless
another equity infusion takes place, The PVR debt will continue to burgeon, for
many many years, to its peak of approx. 2100 Cr by Mar 2022

Its loss
might peak out at Rs 566 Cr by the end of this FY 2021

But the fact
remains that – at the CMP of 1250 and FY 21 fwd PE of ‘maybe’ 1000, this is the
most expensive stock on the planet beating Tesla dry and hollow and far ahead
of its global peers such as AMC, Cineworld, Cinemark and Cineplex most of which
have corrected by 60-90% while PVR is being distributed to the minority and
gullible retail shareholders.(As there is absolutely no
certainty on quantum and timing of full recovery, we have used Trailing numbers
to benchmark globally. Also, a size discount is applied)

Going by
these calculations and benchmarks, PVR (ceteris paribus) while deserving its
rich valuations should slide down to under 400 when its performance, reasonable
valuations meets to say hello to its eventual fate.

Minority shareholders singed by the narrative built around a stock always
almost are left holding a rotten tomato.

Looking fwd
to gain some confidence post this Virus, when I can again take my loving mom to
get her favorite popcorns at PVR – in the meanwhile sell the family silver to check-in
into PVR ‘only if’ there is no other show going on.

Also Read on FinMedium:  Bharti Airtel v/s Reliance Jio – Investometry

Co-authored with 
Ravi Sharma @caraviusharma ; https://www.linkedin.com/in/ca-ravi-u-sharma-65901b97/

 



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Manu Rishi Guptha

Manu Rishi Guptha

Manu is an Investor, Blogger, and a Professor of Fearlessness & Minimalism.
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