scorecardresearchPVR, INOX Leisure merger: How should investors look at the development? 4 brokerages say this

PVR, INOX Leisure merger: How should investors look at the development? 4 brokerages say this

Updated: 28 Mar 2022, 03:09 PM IST
TL;DR.

  • With PVR currently operating 871 screens across 181 properties in 73 cities and INOX operating 675 screens across 160 properties in 72 cities.

The merger has surprised many analysts but the development was hailed by most of them as they believe it offers a synergy that is a long-term positive.

The merger has surprised many analysts but the development was hailed by most of them as they believe it offers a synergy that is a long-term positive.

Multiplex operating firms PVR and INOX Leisure have announced their merger which will give birth to a giant cinema operator with more than 1,500 screens across 109 cities.

In a regulatory filing on March 27, PVR said the board of directors of both the firms have approved an all-stock amalgamation of INOX with PVR.

The amalgamation is subject to the approval of the shareholders of PVR and INOX respectively, stock exchanges, SEBI, and other regulatory approvals. Upon obtaining all approvals, INOX will merge with PVR. Shareholders of INOX will receive shares of PVR in exchange for shares in INOX at the approved share exchange (swap) ratio, PVR said.

With PVR currently operating 871 screens across 181 properties in 73 cities and INOX operating 675 screens across 160 properties in 72 cities, the combined entity will become the largest film exhibition company in India operating 1546 screens across 341 properties across 109 cities.

What it means for investors?

The merger has surprised many analysts but the development was hailed by most of them as they believe it offers a synergy which is a long-term positive.

Global brokerage firm CLSA maintains buy calls on both INOX & PVR, underscoring the merger will offer compelling synergy.

CLSA is of the view that OTTs have limited risk to multiplexes in India and as PVR and INOX have seen a strong reopening, the merger is a good move in the right direction.

As per domestic brokerage firm JM Financial, this merger offers complementarity in geographies, substantial bargaining power across the value chain, some scope for ‘premiumisation’ especially with respect to INOX’s metrics, and likely cost synergies.

The brokerage believes with competition now limited in the space post-merger, the new entity can further strengthen existing operations and would look to expand into newer geographies such as tier 2 and 3 markets.

"Our DCF-based target price implies a target forward EV-EBITDA multiple of 14.4 times and 12.2 times. The merged entity would be a stronger one and could command a premium, given possibilities of synergies driving earnings upgrade," JM Financial said.

"The swap ratio favours Inox shareholders slightly, using current market caps as the benchmark. A 15 times target multiple on the combined EBITDA would yield a March 2023 target price of 2,300 per share for the post-merger PVR stock and 690 for INOX. In such a scenario, we see 47 percent upside on Inox and 28 percent upside on PVR against Friday’s close," said JM Financial.

Brokerage firm Motilal Oswal Financial Services has maintained its neutral rating on PVR after the merger with a target price of 1,600, valuing the stock at 12 times FY24 EBITDA.

"The rich valuation it commanded historically was led by strong growth. The screen addition opportunity does provide an ability to continue its strong growth. However, OTT platforms pose a risk of shrinking the exclusive period, softening occupancies, and lower screen economics," Motilal Oswal said.

On similar lines, brokerage firm Nirmal Bang pointed out that the Indian multiplex industry is an oligopoly (top four players control nearly 70 percent of screens) and believes it will remain so as entry barriers are quite formidable and there are no substitutes.

"PVR and INOX can deliver in the next 10 years at least 5-10 percent volume/footfall growth (new screen-driven, attracting both single-screen and new generation customers) per year, respectively, with rising in realisation of 4-5 percent. This will result in revenue CAGR of 10-15 percent with EBITDA/PAT growing a tad faster as the revenue mix turns margin rich," Nirmal Bang said.

"Post-merger, we like both PVR and INOX and have ‘buy’ rating on both the stocks with target prices of 2,383 and 594, respectively. The upside could be larger as we believe valuation multiples could expand beyond what we have baked in. We are looking at an entity which can deliver nearly 1800 crore in EBITDA by FY24E if there are no hiccups," said the brokerage.

Nirmal Bang has been bullish on both players and believes both are relatively insulated from some of the current challenges that domestic companies are facing from high commodity inflation and weak volumes and should see resilient earnings in FY23 on the back of a strong slate of fresh content and pent-up demand.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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First Published: 28 Mar 2022, 03:09 PM IST