How Can We Value PVR INOX ? 1Y Revenue Growth 63%, But 1Y Stock Price -5%!
A fundamental valuation of PVR INOX
Hi 👋🏻,
“Do we still go to movie theatres?” is an interesting question.
At least, I go rarely.
I think this whole year, I have been to a theatre only once.
But PVR INOX’s revenue has gone up from Rs 1329 to Rs 6107 between 2022 and 2024!! I think I am the only one who does not go to a movie theatre 😅.
Anyway, let us try to understand a bit about PVR INOX, and how can we value it.
I will try my best here to explain things in as much detail as possible.
If you love reading about valuations of companies and indices, do consider subscribing, or referring me to a friend who might like reading it
Note: I am not a registered advisor or agent. Anything I write in these posts are purely for your entertainment and educational purposes. Nothing in this post is an advice for you to make an investment in any stock. You are free to download the Excel and play around with it.
You can read about my Zomato valuation here
Stock Performance
PVR INOX has lost around 8% from its listing price, and to say that PVR INOX has faced difficulties would be stating the obvious.
Covid waves have hammered the company financials a lot, and it is still finding its footing since last 3 years.
However, the last 3 years revenue growth has been substantial.
FY22 - Revenue: Rs 1329 Cr
FY23 - Revenue: Rs 3751 Cr
FY24 - Revenue: Rs 6107 Cr
The merger of PVR with INOX did play a major role in improving the revenues, but I believe the movie theatre business is improving its dynamics in the background as well.
Latest Management Direction
The management has provided a direction in which they see the business to evolve in future, and the experiments they wish to do as well.
Summing major points up:
PVR is looking to diversify its revenue streams by venturing into pre-ticketed food and beverage (F&B) business, partnering with Devyani International, known for brands like KFC, Costa Coffee, Pizza Hut etc.
PVR wishes to introduce some kind of branded food courts in the malls, to enhance their revenue and customer experience together with Devyani international
It is focusing on an asset-light model, shifting towards higher percentage revenue share deals with landlords/malls owners to reduce upfront capital investments.
The company is strategically closing down screens that have reached the end of their life cycles or are in non-performing malls to optimize performance and redirect consumers to newer locations.
PVR is evaluating an FOCO (Franchisee-Owned Company-Operated) model to reduce capital intensity, with investments by development partners.
The company is optimistic about the robust pipeline of movies post-elections, expecting a turnaround in box office performance and consumer demand from June onwards.
How should we value a company?
There are two ways to value a non-finance company:
Free cash flow to Equity (shareholders)
Free cash flow to the Firm (company)
Let us see how to understand what is “Free Cashflow To Firm (FCFF)” today.
All beings operate with a very simple framework: “What will I get out of it?”.
A company gets “whatever” remains after cost of production and reinvestment needs are fulfilled.
This is what free cashflow to a company is in a nutshell.
What does this mean?
Suppose you are a pottery company (remember you are a company: I am humanizing a company here)
You make 1 pot, daily. That is it. Nothing fancy.
What is your cost of production?
Well, cost of mud and cost of water.
What is your reinvestment?
Well, you must have a pottery wheel on which the pots are made. What if it requires an upgrade? Or What if you require a new pottery wheel with a robot which knows how to make pots?
This is reinvestment in business.
So, once your cost of production and reinvestments are handled, whatever is left is your “What will I get out of it”, or “Free cashflow to the firm”.
Now, the FCFF (of today) and FCFF (of tomorrow) have different value. Why?
Consider this simple example.
The pot you make today can immediately store water. The pot you make tomorrow will be able to store water tomorrow, but you have the machinery ready today.
So this idea that you have the machinery ready and will be able to make more pots tomorrow has some value today.
Since, it is just an idea today and not a reality, the value of reality > value of idea, and hence the pot you make today are more valuable than the pot you will make tomorrow.
Similarly, the FCFF(today) has more value than FCFF(tomorrow).
Value of a company is the summation of all such FCFFs of tomorrow till infinity, discounted or divided by a factor as shown in Fig 2
This factor r is called cost of capital.
Once we have the value of the company, we get value of equity by
subtracting value of debt
adding any cash in bank
adding value of cross holding in other companies, if any
subtracting minority interest on our books, if we have acquired another company
subtracting value of ESOPs
Once we have value of equity, we divide by the number of shares outstanding to get value per share.
Valuing PVR INOX
Now that we know how to value a company, let us start with basics.
We will assume a 10Y valuation window, and will assume terminal year post the 10th year. (Watch a YouTube video by Prof. Damodaran on Terminal value here)
Based on the management discussion, we will make the following assumptions:
Last 1y revenue growth was 60%, we will assume that for next 5 years revenues will grow by 20% per year, and then taper the growth to India’s risk-free rate by the terminal year. (Read here about risk-free rate).
The revenue growth may be more than 20% too, but we will have to make an assumption to proceed here. My assumption is that they were able to do a lot of optimizations last year, and they might do a few in future. However, getting 60% growth next year would be a task.
We have the latest operating profit margin at 30-31%, we will assume that in the long run the margins would stabilize around 25% ( I assumed they should reach this value by 7th year or so)
The company using FOCO and asset light model will be able to milk more revenues from same capital base i.e. Book Value of Equity and Book value of Debt. This will decrease its reinvestment needs. Now, we could have reinvestment as % of operating profit, or we could use sales to capital ratio.
If we know the revenues (which we do from point 1), we can calculate capital needed to be reinvested in the company, if we know the ratio. The higher the ratio, the lower the reinvestment required.
From point 3, we know that for PVR management wishes to milk more revenues by going in Food court business and asset light model, therefore I assumed that sales to capital ratio for 1-5 year would be 1.0 (an improvement from current 0.4) and 5-10 year would be around 1.7. I took the reference help from Fig 3 for US and Global data.
For cost of capital, I calculated using CAPM model, and taking the beta for entertainment industry. I calculated the cost of capital in USD and converted it to INR using expected inflation data( or simply add 2% to COC in USD , 2% is expected differential inflation)
I assumed in terminal year, the Return on Capital would be 12% just few % points above the terminal cost of capital of 10.5%, because of their brand.
Putting all 5 points together, I calculated the value of equity.
Fig 4 and Fig 5 sums up the calculation which I have done.
I am also attaching the Excel working for your perusal. You can play around with the assumptions, based on your best estimation.
A better way would be to carry out Monte Carlo simulation by varying revenue growth and operating margin values. We should be able to get a range of value per share.
However, I don’t have access to such a package at the moment.
The important sheets here would be:
The Input Sheet
Cost of Capital worksheet
Valuation output sheet
I hope you found this article useful.
If you did, do consider subscribing by clicking the button below.