By Aashman Sharma

India Ratings and Research (Ind-Ra) has affirmed PVR Limited’s Long-Term Issuer Rating at ‘IND AA’ while resolving the Rating Watch Negative (RWN). The Outlook is Negative. The instrument-wise rating is as follows:
 

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based facility

-

-

-

INR650

IND AA/Negative/IND A1+

Affirmed; off RWN

Analytical Approach: Ind-Ra has continued to take a consolidated view of PVR and its subsidiaries while arriving at the rating, due to the close strategic and operational linkages among them.

The affirmation and resolution of RWN reflects the gradual lifting of COVID-19 lockdown regulations under the Ministry of Home Affairs Unlock 5.0 guidelines, which has allowed roughly 90% of the company’s cinemas to reopen upon receiving approvals from the state and local governments.

The Negative Outlook, however, reflects Ind-Ra’s expectation of PVR’s credit profile weakening over the next three-to-five months, if occupancy levels remain muted. Furthermore, any erosion in the liquidity profile remains a key monitorable.

The affirmation reflects the company’s proactive approach towards managing its liquidity profile in FY21. The affirmation further factors in PVR’s strong business profile, supported by its market leadership in the underpenetrated Indian movie exhibition market, and moderate-but-healthy growth in key operational metrics such as admittances, average ticket price and spend per head. PVR’s financial profile is supported by strong revenue growth and a robust margin profile, leading to healthy cash flow from operations and return on capital employed. PVR’s financial profile is further bolstered by its rights issue of INR3 billion completed in 2QFY21, supporting the company’s liquidity profile. Furthermore, upon receiving board approval in 3QFY21, PVR has the option to raise a further INR8 billion to augment the liquidity profile. 

KEY RATING DRIVERS

Strong Business Profile and Market Leader Position: PVR leads India’s multiplex industry with presence across 71 cities where it has 175 cinemas and 835 screens, as of end-2QFY21 2020. This makes PVR the largest multiplex chain in India with a screen market share of 28% (as of FY20). Ind-Ra expects PVR to maintain its market share, given the high entry barriers in the movie exhibition industry, primarily the lack of real estate for new developers to open cinemas. Further, the other entry barriers include regulatory approvals; early-mover advantage of incumbents; large scale and the resultant relationships with distributors and producers. PVR’s multiplex network is evenly spread-out over north, south and west India, thereby isolating it from any geographic disturbances. While PVR’s overarching strategy was to reach 1,000 screens by FY23, its near-term capex plans have been put on hold owing to the lockdown, to conserve liquidity. The agency believes the pandemic could lead to greater consolidation in the industry, benefiting the largest players such as PVR. The management believes PVR will cross 1,000 screens in the next two-to-three years.  

Healthy Operating Metrics with Diversified Earnings: In FY20, PVR reported 11% yoy growth in its revenue and a slight dip in its EBITDA to INR34.1 billion (FY19: INR30.9 billion) and INR5.8 billion (INR5.9 billion), due to a slight increase in admittances to 101.7 million (99.3 million). The company’s EBITDA margin contracted to 16.9% in FY20 (FY19: 19%) on account of the lockdown that halted revenue inflow while expenses continued to be incurred. PVR’s reduced but solid profitability in FY20 resulted in strong credit metrics. The gross interest coverage (operating EBITDA/gross interest expenses) declined to 3.8x in FY20 (FY19: 4.6x) on account of the fall in EBITDA. However, the net leverage (debt less cash/operating EBITDA) improved to 1.7x in FY20 (FY19: 2.1x), largely due to large cash balances of INR3.2 billion in March 2020. The gross debt, at FYE20, remained stable at INR12.9 billion (FYE19: INR12.8 billion).

PVR’s total screens and seats rose 11% and 7% yoy in FY20 to 845 screens and 181,000 seats, respectively, due to the acquisition of SPI Cinema in August 2018, a key competitor in south India. This acquisition has given PVR a strong foothold in south India, thus giving it greater exposure to regional cinema and diversifying earnings. Other key operating metrics in FY20 such as average ticket price and net box-office collection (NBOC) stood at INR204 (FY19: INR207) and INR17.3 billion (FY19: INR16.3 billion).

Rights Issue to Bolster Liquidity Profile: PVR completed a rights issue of INR3 billion in 2QFY21, bolstering   its liquidity profile. The rights issue highlights PVR’s successful track record in raising funds from the equity markets, following an INR5 billion qualified institutional placement completed in October 2019. PVR’s ability to raise funds provides comfort that any liquidity gaps can be plugged by tapping equity markets.

Liquidity Indicator - Adequate: PVR generated strong, stable cash flow from operations of INR6.7 billion in FY20 (FY19: INR3.7 billion), against the annual capex of INR3.9 billion (INR4.3 billion). However, PVR has a negative working capital cycle and roughly INR1.5 billion of unutilised working capital lines, which are only occasionally utilised to plug any short-term cash flow mismatches. PVR has established links to both equity and debt capital markets, having recently concluded a rights issue, and as of 2QFY20, the company had outstanding non-convertible debentures of INR3.6 billion. Repayment risk remains limited for the company given it availed of the Reserve Bank of India-led moratorium and has sufficient liquidity avenues available. The company’s available liquidity lines total INR5.5 billion, including cash on the balance sheet and available working capital lines. The agency believes a return of occupancies should boost operational cash flows and support the liquidity profile. 

Measures Implemented to Combat COVID-19 Risk: The multiplex sector has been adversely hit by the outbreak of COVID-19 and the resultant lockdown, resulting in the group shutting down all its screens across the country. PVR responded by sharply reducing its cost base to conserve liquidity. The key steps taken in this regard include: invoking force majeure clause leading to suspension of rent and common area maintenance payments till the multiplexes are closed as well as a significant reduction in rental expenses post the reopening of cinemas; decreasing the wage bill by nearly 60% due to compensation reduction implemented across the organisation, and reducing operational expenses (e.g. electricity and repair and maintenance charges) substantially. Ind-Ra shall continue to monitor the situation and its resultant impact on PVR’s liquidity and financial position.

Proven Track Record: PVR's network has expanded to over 821 screens by end-2QFY21 from just 100 screens in 2008, while its revenue and EBITDA were resolute in FY20. Although India has surpassed developing countries in the number of screens, at 10,000 screens, it remains under-penetrated as compared to the US (41,000 screens) and China (55,000). With rising disposable incomes and urbanisation, Ind-Ra believes cinema screens, especially multiplex screens, will continue to grow in India, and PVR is well placed to ride this trend, given its strong track record of operating pan-India, established brand and diversified exposure to national and regional cinema. PVR’s management team has significant experience in the multiplex field, and enjoy strong relationships with both movie producers and mall developers.

Capital-Intensive Business: PVR has expanded its screen network via a combination of organic and inorganic growth and plans to expand to 1,000 screens in the next few years. Setting up and operating a multiplex business is capital intensive given the initial set-up capex as well as refurbishment costs, which typically kick in six to eight years after a multiplex begins operations. Given India’s under-penetration in terms of screens (versus other countries), Ind-Ra believes the company has sufficient scope to continue to invest and grow screen footprint for the next many years. Thus, the agency expects the group’s investment to remain elevated. While the company’s cash flows are sufficient to meet the capex requirement, any weak operating performance could necessitate raising of further debt to support the growth plans.

Exposure to Potentially-Volatile Box Office Performance: PVR's chief sources of revenue are NBOC from cinema goers, food and beverage revenue and advertisement revenue. Strong performance of films screened in multiplexes is a key factor for driving footfalls, which drives strong NBOC and food and beverage sales. While consistent footfalls and high occupancy levels lead to strong advertisement revenues, a weak movie pipeline or overall macroeconomic slowdown could result in weak advertisement revenue growth. While the box office collections depend on a strong pipeline of films being released over a particular period, PVR benefits from having exposure to Bollywood, Hollywood and regional cinema, which derisks revenues, should a particular segment have a weak performance.

Potential Risk from Over-The-Top Players: In recent years, over-the-top content has grown strongly and is now competing, to a certain extent, with traditional cinema. However, this poses a limited immediate threat, given the low internet penetration in India and the multiplex experience remaining an integral and affordable entertainment option in India. Furthermore, developed markets, which have significantly higher internet penetration, have continued to witness strong box office collections, despite strong growth from digital platforms. Therefore, the agency believes the growth in the overall content pie should augur strong NBOC for PVR.


RATING SENSITIVITIES

A positive rating action could result from:

- the normalisation of key operational parameters such as occupancy, average ticket prices, and spend per head to pre-COVID-19 levels, while maintaining the market share

a recovery in profitability and continued stable debt levels leading to a higher visibility of the net leverage (excluding rent capitalisation) sustaining below 2x. 

A negative rating action could result from:

- a slower-than-expected ramp-up in the occupancy, average ticket prices, and spend per head, and/or failure to achieve the intended cost optimisation, leading to lower profitability on sustained basis

- a higher-than-expected capex or debt-funded acquisition or weak profitability leading to the net leverage (excluding rent capitalisation) exceeding and sustaining above 2x. 


COMPANY PROFILE

PVR was set up in 1995 as a joint venture before starting operations in 1997 at its first screen in Saket (Delhi). The company’s screen network has now spread across India (mainly north, south and west) with about 11% of the screen portfolio classified as premium portfolio.

FINANCIAL SUMMARY

Financials (INR billion)

FY20

FY19

Revenue

34.1

30.9

EBITDA

5.8

5.9

EBITDA margin (%)

16.9

19.0

Interest expense

1.5

1.3

Total debt

12.9

12.8

Source: PVR


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating/Outlook

20 March 2020

Issuer rating

Long-term

-

IND AA/Negative

IND AA/RWN

Term loan

Long-term

INR650

IND AA/Negative/IND A1+

IND AA/RWN/IND A1+/RWN


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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Analyst Names

  • Primary Analyst

    Aashman Sharma

    Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001783

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121