The Bijli brothers, Ajay Bijli and Sanjeev Kumar, have made a blockbuster start to the new year. Private equity (PE) firm Warburg Pincus has bought a 14% stake in PVR, the country’s largest multiplex chain, for Rs.820 crore through an open market transaction. Following the transaction, PVR, which operates 562 screens across 48 cities, has been valued at Rs.5,860 crore. Following the deal, the stock surged 12% in five trading sessions to Rs.1,291 a share, which is now trading at 27x estimated FY18 earnings. The company’s market cap currently stands at Rs.6,038 crore.
The PE major bought the stake from existing investor Multiples Alternate Asset Management, which sold 9%, and the promoters, who sold close to 5%. Following the transaction, the Renuka Ramnath-owned Multiples will retain 14% in PVR, while the promoters will still remain the largest shareholder with 20% stake against the 25.25% held previously. Earlier, in September 2016, Bijli and Kumar were allotted close to 62.19 lakh and 38.12 lakh shares under an amalgamation scheme, thus taking their stakes to 15.5% and 8.73%, respectively. Multiples had first invested Rs.153 crore in 2012 to buy a 15.8% stake in the firm, followed by an additional 2.6% stake in 2016. The other notable investors in the multiplex chain include the CDC, the Canada Pension Plan Investment Board, and the Dutch pension fund manager, PGGM.
As against 500 screens in FY16, PVR is expected to end the current fiscal with 600 screens, following the addition of 44 screens in second half of FY17. PVR had acquired the DLF-owned DT Cinema, which owns 32 screens, for Rs.433 crore. The multiplex major is also adding 50-55 screens annually through the organic route. However, post the acquisition of DT Cinema, PVR's utilisation rate dropped from 35% in FY16 to 30%.
At current valuation, the stock seems to have captured a good part of the near-term earnings growth. Analysts are expecting 21% revenue CAGR and 29% net profit CAGR over FY16-19, driven by better margins which are expected to improve back to 35-36% in FY18. “We expect overall operating margins to improve from 17.7% in FY16 to 19% in FY19, mainly driven by synergies from DT Cinemas’ integration," mentions Niket Shah, who tracks the company at Motilal Oswal Securities.
The demonetisation impact, too, is likely to be negated, following the success of Dangal, which clocked Rs.372 crore in box-office collections. Also, advertising, food & beverages (F&B) have shown healthy growth. For instance in Q2FY17, PVR’s average ticket priced increased by 8% to Rs.202. The average F&B spend per person surged 22% followed by advertising and others growing at 44%.
Given that the box office revenue is expected to grow at an average annual rate of 10.9% from $1.64 billion in 2015 to 2020, PVR is best placed to encash on the India growth story. With close to Rs.294 crore in their personal kitty from the Warburg deal, the script for the Bijli brothers is already playing to perfection.