PVR INOX : WHY ITS STRUGGLING ?

Whenever one has to go for a movie, where does one go? Obviously, PVR, am I right? I don't know about the others, but I will talk about myself. Yes, PVR has changed the way we used to watch movies in old Gaiety Galaxy, Metro, Chandan, Suncity, etc., in Mumbai city. Now almost all the screens are taken by PVR or will be taken by them.

Now let us understand, if we take 2015 as the base year, the total number of PVR screens across the country has just gone one side up. Only 2020, 2021, and 2022 saw a real impact slowdown due to COVID.

At the time of the merger between PVR and INOX, which was finalized on February 6, 2023, PVR took over 722 screens from INOX. This merger created the largest multiplex chain in India, combining PVR's existing screen count with INOX's to form a total of approximately 1,683 screens across the newly formed entity at that time.

So we see that significant jump from COVID to 2023, but from 2023 to 2024, they just saw a small jump, i.e., in 2023 they had 1,747 screens, and in 2024 they had 1,749 screens only.

City-wise, the number of screens is split, with Mumbai having the highest, followed by Bengaluru and Chennai, and so on.

Below is the revenue-wise split between the cities. There are some strange observations, even in some cities where the number of screens is higher, but the revenue is less than in cities which have fewer screens, like Bengaluru, Pune, etc.

That means there are some screens which are non-performing for them, and that can be a cause of concern.

So we are seeing some 70 screens across the country that may be going to shut down, due to not performing and not being profitable.

Let's dive into the chart of PVR INOX LTD.

PVR was one of the multi-x return investments for the investors. The stock, from 186 in 2013, made a high of 2000 plus by 2020.

As we all know, 2020 to 2023 was the COVID period. From the start of 2020 till date, January 2025,

nearly 4 years, the stock has not been able to come out of shock.

Even after the merger and becoming a monopoly in this business, the stock has shown negative returns over the past 4 years. The stock has come down nearly 48% from its all-time high.

This proves that not all monopoly businesses are a blind entry.

There are a lot of factors that changed in these 4 years that caused the stock to underperform. Let us see below.

Above is the Net Profit graph. The company, from 2013 till 2019, enjoyed handsome growth in profits, as the COVID impact is clearly seen on them. The management was able to generate good profits with few screens in hand. After COVID and the merger with INOX, the number of screens almost doubled, which will also impact fixed and variable expenses. In my opinion, they were not able to handle this properly.

Above is the Expenses graph, which is clearly seen. If we compare it with Net Profit, at the start of the years from 2013 till 2019, the Net Profit was able to take care of the Expenses. It was when Covid hit that the Income touched rock bottom and even went negative, but the Expenses have zoomed sky high and are multiplying at a rapid pace.

You don't need to be a great analyst to see such a strong change in earnings and expenses behavior; it's simple business sense, RIGHT?

If one just focuses on borrowings, from 2013 till 2018 the borrowings kept rising in a systematic manner, putting no pressure on the company. It's from 2019 to 2024 that the borrowing just increased significantly; this is due to the high lease liability they have to pay for the premium locations they hold across the country.

Due to the high increase in borrowing and negative net income, which has pushed the pressure on interest, from 2020 the interest has increased from 128cr to 807cr.

They are in a good situation as their operating income can take care of the interest cost, but for how long is the question.

Debt Repayment: The company repaid significant amounts of long-term and short-term borrowings in both years, contributing to the negative cash flow. For example, in 2023, they repaid ₹42,163 lakhs in long-term borrowings and ₹57,559 lakhs in short-term borrowings.

Lease Liability Repayment: Lease liabilities represent a significant portion of the negative cash flow, with ₹70,439 lakhs repaid in 2023 and ₹10,547 lakhs in 2024. These payments include principal and interest on leases.

The large negative number in financing activity for 2024 is primarily due to the merger with INOX Leisure Limited, effective January 1, 2023. This merger resulted in increased debt and lease liabilities, which in turn led to higher repayments and a larger negative cash flow from financing activities.

While the company reported losses in both 2023 and 2024, they are focused on profitable growth by improving unit-level economics and adding new screens.7 They are also taking steps to reduce debt, as evidenced by a net debt reduction of ₹1,364 million in 2024. It's important to note that the 2023 and 2024 figures are not directly comparable due to the merger with INOX. WILL PVRINOX GO BACK TO IT'S OLD GLORY EVER?

I will take the 2024 transcript and the 2023 and 2024 annual reports, and give some points. The rest is your call.

1) Downplaying the Impact of Competition and Macroeconomic Factors: While acknowledging the rise of OTT platforms, management tends to minimize their impact on theatrical attendance. Similarly, they downplay the broader slowdown in urban consumption, attributing lower occupancy primarily to content-related factors. This might indicate an overconfident assessment of their ability to navigate competitive and macroeconomic headwinds. 2) Downplaying the Impact of Screen Closures on Margins: While acknowledging that closed screens were mostly loss-making, management minimizes their impact on overall profitability. In the January call2, they state that the closures are a one-time exercise and their impact on margins would not be significant. However, analysts repeatedly question the profitability of newly opened screens and the potential for margin improvement through closures, suggesting that the management might be understating the potential financial benefits of their rationalization strategy. 3)"No Ad" Experiment: Management expresses optimism about their experiment of offering "no-ad" shows, claiming positive early signs. However, they later admit that it is too early to draw conclusions, needing more time to assess the results. This suggests potential overenthusiasm about the experiment's success in its initial stages. 4) "Passport" Loyalty Program: The management highlights the positive response to the revamped "Passport" program. However, analysts question its efficacy in driving consistent footfalls and "democratizing" content consumption, suggesting that the management's expectations of its impact might be inflated. 5) India's Booming Multiplex Industry: PVR INOX is operating in a favorable market, with India's multiplex industry projected for robust growth driven by a young population, increasing disposable incomes, and a strong affinity for theatrical entertainment. 6) Merger Synergies and Cost Optimization: The merger with INOX Leisure Limited offers substantial potential for cost synergies and operational efficiencies. PVR INOX is actively working towards realizing these benefits, which should positively impact their financial performance. 7) Focus on "Capital-Light" Model: The transition towards a capital-light growth strategy should improve return on capital employed and free up resources for debt reduction and other investments. 8) Over-Reliance on Blockbusters: The success of a few blockbuster films has masked the underlying challenge of attracting consistent footfalls for a wider range of content. 9) Profitability Concerns and Debt Burden: Despite revenue recovery, profitability remains a concern, with lower margins compared to pre-pandemic levels. The company's high debt levels, further amplified by the INOX merger, add pressure on their financial performance. 10) Execution Risks and Management Overconfidence: The transcripts reveal instances where the management's pronouncements and estimates appear overconfident, particularly regarding occupancy recovery, capex reduction timelines, and the effectiveness of strategic initiatives.This raises questions about their ability to execute their plans effectively. Overall, while PVR INOX is taking steps in the right direction, the path to fully regaining its former glory is fraught with obstacles. The company's future success hinges on its ability to address the persistent occupancy challenges, execute its capital-light strategy effectively, improve profitability, and manage its debt burden. Additionally, the management's ability to temper their overconfidence and make realistic assessments of the industry landscape will be crucial for navigating the uncertainties and driving sustainable growth. 11) Recently, PVRINOX has gone 100% cashless, and we have to see how it will impact the earnings in the F&B segment.

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