PVR-INOX Merger- unlocking future value

PVR Limited and INOX Leisure Limited's merger was finalised on February of this year, is this merger was done to increase synergy between firms and tackle the increase of OTT platforms in India or just to be a monopoly in the multiplex industry?

PVR-INOX Merger

1. Introduction

In February 2023, Two giant cinema players in India, PVR and INOX, merged together to form PVRINOX, to create the largest multiplex chain in India. It was done to benefit their both counterparts, as both entities was struggling to operate after COVID-29 hit India in 2020 and all cinema halls were closed as the result, which decreased their overall revenue.

2. About PVR:

PVR, formally known as Priya village roadshows is a multiplex chain based in Gurgaon, It was started in 1997 with first screen in saket, New Delhi by Mr. Ajay Bijli. The company started as a joint venture agreement between Priya Exhibitors Private Limited and Village Roadshow Limited in 1995 with 60:40 ratio

Before merger, PVR Operated 361 cinemas with 1,689 screens across India and Sri Lanka in 115 locations. It also operates its own film production unit under PVR-INOX Productions with debut in 2007 by successful movies like taaare zameen par and jaane tu ya jaane na

PVR currently provides 5 different types of picture experience, alongside normal screens, which includes-

·      PVR Gold Screen

·      PVR Superplex

·      PVR Playhouse

·      PVR 4DX

·      PVR ICE

Before the merger, PVR’s market share accounted to 33%, With more than 50% share in many tier-2 cities

3. About Inox:

Inox Leisure was an multiplex chain based in Mumbai, It was founded in 1999 by Mr. Pavan Jain, It was the subsidiary of Inox group of companies. It started its first multiplex in Pune in 2002, followed by Vadodara, followed by Goa, Kolkata and Mumbai the following years.

Inox operated 170 Multiplexes, with 722 screens in 74 different locations before merger. It had market share of around 20%

4. Purpose of Merger and Acquisition

PVR and INOX’s merger was aimed to increase the synergies of the combined entity, with focus on tacking the online entertainment giants such as Netflix and Amazon with combine force.

A potential merger would allow both the companies to grow at much faster pace, without harming one’s market. Before the merger, these giants were fighting against each other for market share which deviated their focus from change in entertainment industry who is changing in very fast pace.

Merger also created monopoly in the Indian theatres industry, which would help themselves to have high bargain power over the industry.

Merger would also aim to expand business to tier 1 and tier 2 cities and give modern multiplex experience to more cities and towns across India.

Merger would increase efficiency in administration in administration of the merged entity

Overall, the merger would focus upon increasing the overall experience of the cinema and to keep habit of people to watch movies on large screen.

Conditions of Merger-

1. After the merger, the newly opened theatre will be named PVR INOX

2. the share exchange ratio will be three shares of PVR for every 10 shares of INOX.

3. The PVR promoters will own 10.62% of the combined entity, while the INOX promoters will own 16.66%.

4. The appointment for directorship in the transferee company (PVR) would be as follows-

·      Mr. Pavan Kumar Jain shall be appointed as the non-executive non- independent director of the Transferee Company and shall be the Chairman of the Transferee Company;

·      Mr. Siddharth Jain shall be appointed as the non-executive non-

·      independent director of the Transferee Company;

·      Mr. Ajay Bijli shall be appointed as the executive managing director of the Transferee Company.

·      Mr. Sanjeev Kumar shall be appointed as the executive director of the Transferee Company,

5. Transferee company (PVR) would issue stock options to relevant eligible employees of Inox Limited under the old scheme.

5. Synergies

The merged entity would benefit from mutual competitive advantage and their merged entity would benefit with higher level of synergy.

The combined entity would have market share of 44% in multiplex industry of India. This would gradually benefit them of having high bargain power in the industry, which would help them decide prices and would eventually benefit them with increase in revenue and profits over the upcoming years

The merged entity would also benefit from pan-India presence. PVR has stronghold in north and south regions of India, with 871 screens, INOX is focused on the regions of east and western parts of India, with 675 screens. The presence of both entities at different regions would help them understand the markets broadly and mutually help them to expand more quickly in the respective markets with the shared knowledge both of them would have,

According to the report by JM Financial, there is decrease in the number of screens in India from past five years, with most of them belonging to single screen theatres. Currently, 70% of theatres in India are having single screens. PVR-INOX in future could benefit from the loss of market share by unorganised single screen theatres to increase their foothold in the markets of their respected area.

During the pandemic, when all the theatres are shut down, there is increase in demand for online content in India, which was then served by various OTT platforms, both Indian and International such as Netflix, Prime video, Disney+ Hotstar, SonyLiv and much more. The demand did. not fell after the pandemic which affected the business of the brick and mortar cinemas. PVR-INOX is expected to counter the challenges posed by the various OTT platforms and the after-effects of the pandemic. The merged entity will expand in smaller towns.

Before merger, the INOX have less revenue per capita compared to PVR. The merger would significantly increase their revenue with at par as that of PVR, Thus benefitting both the entities

6. Pre-merger Financials (2021-2022)

6.1. INOX Leisure Ltd.

Before the pandemic years, INOX was reporting a net positive net profit, with revenue growth of 12% YOY in FY 2019-20. However during that period, it suffered an decline of 88% in net profits from Rs. 133 Cr to Rs. 15 Cr in 2020. It was mainly seen due to higher claims of depreciation during year 2020.

But soon pandemic spread across India in 2020 and strict lockdown rules does not allowed theatres to open for a long periods of time. The revenues felt sharply to just 105 Crores which is drop of 94.5% from previous FY. With interest on loans to be paid and closed theatres to be maintained, INOX reported net loss in their statement for the first time which stood Rs. 337 Crores. Promotors, also at that year, sold holding of around 4.5% via QIP

Company’s major loss of that year was offset by decrease in retained earnings which stood 861 Crores in 2019 and 517 Crores at 2020, decrease of around 344 Crores or 40% decrease over the year.

The EPS stood at meagre 1.52 Rupees per share, The debt to equity ratio rose by 2.5 times to 0.2, against 0.08 reported in previous year. The current ratio also seen decrease due to increase in current liabilities, which stood at 0.35 times, against 0.41 in previous year. Due to bad results, the stock plummeted which resulted in decrease in overall enterprise value of the firm, which stood 2770 Crores against 3435 Crores previous year, decrease of 19.3% YoY, The book value per share also fell to Rs. 56.27 per share, against Rs. 60.56 previous year, decrease of 7.6% YoY

Coming to next year, In 2021, government relaxed the lockdown terms and started to open markets in phased manner. However for most of the year, theatres where closed due to uncertainties of covid-19 virus spread. After the theatres were opened, there was still some restrictions for theatres, such as middle seats should not be booked and restrictions on total occupancy of viewers. But the main issue was the lack of content. The movies were not produced during the pandemic or the movies were released to OTT platforms during pandemic or the producers were looking for right time to release the movie. Which affected the financials of INOX yet again but managed earnings of 684 Crores, which is increase of 5.5 times compared to FY 2020 but company still reported net losses of 240 Crores. The major reason still being the interest costs and higher depreciation of assets

Again the promotors sold the stock, around 3.8% that year. The retained earnings were increased a meagre 2 Crores to 519 Crores.

In year 2021-22, EPS stood at negative Rs 19.9 per share

It is seen that the company was financially sound before the pandemic, but started to struggle after the pandemic which coupled with the rise of OTT content in India.

6.2. PVR Limited

Pandemic’s effect was also seen in PVR’s financials, with decrease in revenue of around 93% in FY 2021 of Rs. 225 Crores compared to FY 2020.

Net profit also took a hit and PVR’s loss stood 723 Crores in FY 2021 compared to 30 Crores of net profit in FY 2020.

The major expense over that year being the maintenance cost of the closed theatres and the payment of interest on the borrowings. PVR took large sums of loans over the years at high rates of interests, whose repayment dates were neared during the FY 2021, where company has obligation to pay Rs. 413 Crores of Non convertible debentures in single year. Which could further burdened the company’s financial positions. to repay the loans, PVR again issues 500 Crores of NCDs in October 2020 with shorter maturity to repay the previously issued debentures.

Promotors, to tackle the financial issues, started to dilute their stakes by QIP route. Promotors sold 1.71% of stake in 2020 and again 1.48% in 2021

The next year, in 2021, company managed sales of over 1524 Crores, but managed to still have loss of over 478 Crores, mainly due to repayments of borrowings and payment of interest over it. The employee cost remained high overall with spends increasing to 256 Crores, but still low compared to pre-pandemic years.

PVR suffered the same as that of INOX and all other cinema companies. The revenue streams got shut down and theatres became liabilities to maintain.

7. Post merger financials-

The merge of PVR and INOX was effective from 6^th February 2023. Just after that, the company announced the final financials for year 2022-23, which has merged balance sheet for both PVR and INOX.

The revenue for the merged entity looked strong with sales of over 3625 Crores, thanks to the upliftment of restrictions on cinema halls and orders to open it on full occupancies.

The year 2022 also saw major releases of films, such as SS Rajamauli’s RRR, Prashant Neel’s KGF Chapter 2, which became Industry hit in kannada cinemas and all over India, Bramhastra, The Kashmir files and much more. The films got excellent response from audience and praised by critics. The box office collection soared which helped multiplexes to have high revenue.

However, with huge operating costs, the net income was still negative for the company. With net reported loss of 332 Crores. The company was seen to increase their revenue in other areas, such as food and beverages, where revenue increased to 419 Crores from 251 Crores last year

Now let’s compare the quarterly results after march 2023 quarter

In June 2023, sales stood at Rs. 1305 Crores, up by 14.1% QOQ and up 33% YOY. The operating margins also increased to 27%, from 23% last quarter but decreased by 8% YOY basis. The borrowings also increased this quarter and so the interest repayments. The company still reported loss of 108 Crores during this quarter but the losses contracted by 48.5% QOQ.

Recently, PVR-INOX reported its results for September quarter of FY 2023-24. Where the revenue increased 53% QoQ and massive 191% YoY, and reported positive Net income in 3 quarters, with profit of Rs. 166 Crores. This increase is contributed by three back to back blockbuster releases of Jawaan (1140 Cr), Jailer (349 Cr), and Oppenheimer (150 Cr) which massively contributed to the sales of tickets on box office and refreshments.  

8. Pre merger financial ratios

8.1. INOX Leisure Limited

During pandemic times, in FY 2020-21, net profit margin decreased to massive negative 318%, which was 0.78% the year before. The subsequent losses made all profit margin negative where return on capital employed stood at negative 27.31%, which was decrease of 158% YoY, the return on net worth also plummeted and stood at negative 52.76%, compared to positive 2.4% previous year. The current ratio increased to 0.21 from 0.18 and asset turnover ratio decreased to 0.15 from 2.13, mainly due to poor sales of the company. EPS Stood at negative Rs. 30 per share, compared to Rs. 1.45 per share previous year. The book value also decreased to Rs. 56 per share compared to Rs. 60.32 previous year.

Now comping to FY 2021-22, net pro. fit margins improved and stood at negative 35%, but still company was at loss. Return on net worth improve slightly and stood at negative 34%, return on capital employed was much improved to just negative 7% compared to negative 27% a year before. EPS also improved to negative Rs. 19.56 per share. The book value fairly remained same to Rs.56.46 per share.

8.2. PVR Limited

With financials plummeting during the pandemic times, thus the ratios, with net profit margin decreased by massive negative 320% in FY 2020-21, which suggests that for every Re. 1 of sales, PVR was losing Rs. 3.2, with massive losses, profitability ratios hit the most and we can see negative Return on net worth (RoNW) and Return on Capital employed (RoCE). For solvency ratios, current ratio increased to 0.38 against 0.26 previous year, Debt to Equity decreased to 0.6 from 0.75 previous year which is mainly due to QIP of shares later that year. For debt coverage ratios, interest coverage ratio was negative 0.85, mainly due to loss in net income. This suggested that current profits were not adequate to even pay of interest on debts of the company, all turnover ratios also took a massive hit, with most important asset turnover ratio plummeting to 0.08 from 1.39 previous year, due to poor sales recorded same year. EPS, or earnings per share decreased to massive negative Rs. 119 per share from positive Rs. 5.87 previous year. However, BVPS or book value per share increased to Rs. 301 per share from Rs. 284 per share previous year, this increase is contributed to the increase in cash equivalents of company, which increased 120% to Rs.764 Cr against Rs. 320 Cr previous year

Next year, in FY 2021-22, financials did get better due to opening of movie theatres in phases. The net profit margin stood negative but very low compared to previous FY, with negative 39% compared to 320% previous FY. Return on capital employed stood at negative 6% and Return on net worth at negative 34.46% which was a massive increase compared to previous year. For solvency ratios, the current ratio decreased 4% to 0.34 against 0.38 previous year, mainly due to increase in inventories as theatres started opening again. The debt to equity also increased to 1.08 from 0.6 which was due to increase in long term debts by the company, which increased its overall debt. Interest coverage ratio also improved to negative 0.36, followed by asset turnover ratio which increased to 0.42, due to increase in revenue by the company. EPS also increased to negative 78.42 and book value decreased to Rs. 227 per share, mainly due to assets fairly remained same and current liabilities increased. 

9. Stock Price Movement

Till its inception in 2006, the stock has seen increase in growth from Rs. 286 to Rs. 2089 in pre-pandemic year, A CAGR of 15.26% in period of 14 years. PVR if bought at IPO time was seen as good investment in an long run.

The stock has seen one side rally from 2011 till February of 2023 when the pandemic started. PVR and INOX were one of the most hit stock in the market, due to euphoria and uncertainty of pandemic and almost all the revenue from their theatres, which got shut down. The stock plummeted from High of Rs. 2089 to the low of Rs. 707 in period of three months, wealth erosion of almost 66% in 3 months at the peak.

After the low of Rs. 707, stock has seen steadily growth. In coming year, The stock nearly doubled and again in next year, it seen new all time high of Rs. 2207, when there were news about the potential merger of PVR and INOX

However, the merger did not garnered much growth after all time high, soon share price started falling again and went downtrend, till levels of Rs. 1361.

After their robust results of June quarter, stock price started moving again, making high of Rs. 1875.

Today (8^th November 2023), stock price stood at Rs. 1671, up 4.8% from its short term low of Rs.1593. The stock was seen following the 100 day moving average where it jumped while briefly touching that levels.

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