Detailed Rationale

CRISIL Ratings’ rating on the long term bank facility and debt instruments of PVR Limited (PVR) continues to be on ‘Rating Watch with Positive Implications’ and the rating of commercial paper is reaffirmed at ‘CRISIL A1+’. 

The watch continuation factors in pending approvals for proposed merger of PVR Ltd and INOX Leisure Ltd. CRISIL Ratings believes that amalgamation of these entities would help the merged entity to lead the multiplex sector with a significant scale and market share. Moreover, expected revenue and cost synergies post-merger should benefit operating efficiencies in both operational as well as capital expenditure. As a result, the business as well as financial risk profiles of the merged entity is expected to improve significantly. CRISIL Ratings will continue to closely monitor the said transaction and will remove the ratings from watch and take a final rating action once the transaction is concluded.

After strong operating performance seen in first quarter of fiscal 2023, the operating profits were constrained during the second quarter due to weak content performance, however performance for the second half of fiscal 2023 is expected to rebound given the festive season, strong content pipeline and increase in overall operating screen portfolio. Sustenance of healthy operating performance will remain a key monitorable.

The company’s liquidity continued to remain healthy with cash and bank balance and other liquid investments stood at above Rs 450 crore as on September 30, 2022. Healthy cash accruals along with strong liquidity position should sufficiently cover debt obligation and capital expenditure (capex) in fiscal 2023. Sustained improvement in revenue and operating margin, along with maintenance of healthy liquidity, will continue to be monitored.

The ratings continue to consider strong market position and established brand of PVR, improving operating efficiency, and healthy financial risk profile and liquidity. These strengths are partially offset by exposure to risks inherent in the film exhibition business.

Key Rating Drivers & Detailed Description

Strengths:

Strong market position and established brand: PVR is the largest multiplex operator in India, with strong brand equity. It had ~884 screens with operations in 178 locations across 77 cities as on December 2, 2022. PVR added ~246 screens through inorganic acquisitions since 2012 till date. Addition of screens from SPI Cinemas Pvt Ltd in August 2018 significantly improved the market position in south India and helped diversify content, as cinema from the region typically contributes over 35% to the overall box office collection. In fact, after the proposed merger with INOX, market position of the merged entity may improve significantly as it would be operating more than 1550 screens.

Improving operating efficiency: After reporting operating losses in fiscal 2021 and fiscal 2022, PVR reported operating profit (ex-Ind AS-116 adjustment) of Rs 188 crore in the first quarter of fiscal 2023 (operating margins of 19.1%). This is healthy when compared to operating margin of 17.6% in fiscal 2020 and 19.0% in fiscals 2019.

Moreover, key operating parameters such as ATP and spends per head SPH on food & beverages stood higher at Rs 250 and Rs 134 respectively, during the first quarter of fiscal 2023 as compared to Rs 204 and Rs 99 respectively, in fiscal 2020. Although the operating profits were constrained during the second quarter of this fiscal due to weak content performance, however performance for the second half of fiscal 2023 is expected to rebound given the festive season, strong content pipeline and increase in overall operating screen portfolio. Sustenance of healthy operating performance will remain a key monitorable. Moreover, post-merger, expected synergies should further benefit operating efficiency of the merged entity.

Healthy financial risk profile: Given a strong rebound in operating performance, the cash accruals should support the financial risk profile of the company. Debt is estimated to be around Rs 1350-1400 crore by end of fiscal 2023 with an operating profit estimate of Rs 600-650 crore. Therefore, the debt protection metrics are expected to remain healthy with interest cover of more than 4 times for the fiscal.

Moreover, company has a strong ability to raise funds from capital markets as was exhibited through Rs 1,100 crore of equity raised during fiscal 2021 and 2022 when the operations were impacted by the pandemic.

Weakness:

Exposure to risks inherent in the film exhibition business: Fluctuations in profitability, inherent in the film exhibition business, will continue to affect operations, though the impact should be cushioned marginally by the large scale of operations and diversified revenue. Multiplex players, given their high fixed costs, should remain dependent on occupancy, which is driven by the success of films. Other forms of entertainment and new content distribution platforms, including over-the-top, will continue to expose the company to challenges of sustaining profitability and growth.

Key Financial Indicators

Annexure – List of entities consolidated

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