Strong Content Pipeline In March Helps Report A Healthy Growth Quarter
Inox Leisure (INOL IN) reported revenue of INR 3,177mn vs our estimates of INR 3,333mn. This is a 3x jump vs last year, up 7.2% QoQ, on the back of a significant recovery in revenue backed by good content and 100% occupancy allowed throughout the country.
INOL reported an operating profit (including IND AS impact) of INR 780mn, down 7% QoQ vs a loss of INR 401mn in Q4FY21 and down 29% vs pre-pandemic levels (Q4FY20). March 2022 witnessed a strong recovery in sales as the business resumed normalcy, which led to an increase in overall expenses with exhibition costs and other expenses being close to pre-pandemic levels.
Box office momentum was good in April 2022 vs pre-COVID levels, helped by KGF 2.0, which has reported a box office collection of INR 3.4bn (Hindi version) to date; the recently released Hindi films, such as Jersey, Attack, Runway 34 and Heropanti-2 have been a disappointment, due to poor content and competition from the likes of KGF 2.0 (large-scale film). We believe May-June with Hindi film releases, such as Jayeshbhai Jordaar, Bhool Bhoolaiya 2, Prithviraj and Jug Jug Jiyo, will determine growth prospects in Q1FY23.
We expect Hindi box office revenue growth of 60% in Q1FY23E vs pre-COVID levels despite the failure of recently released Hindi films. We believe metrics like ATP and SPH too will sustain at 8% and 10% higher growth, respectively, vs pre-COVID levels, which too is factored into our estimates; a surge in these metrics was driven by large-scale content (Hollywood films and RRR). Ad revenue recovery remains a key monitorable for FY24, which can be a metric to drive potential upgrades and EBITDA, as the latter recovered at 37% despite half of Q4FY22 being shut due to Omicron. This indicates a strong content pipeline has led to ad revenue recovery closer to 70%; we too assume a 70% ad revenue recovery for FY23E. We currently estimate an EBITDA recovery of 91% for FY23E, due to ad. revenue not recovering completely.
Valuation:
We sustain our estimates and believe the merger with PVR will lead to potential synergy benefits around ad revenue, convenience fee, and employee expenses. In our view, the merger may have more synergies, such as rentals over the medium to long term. INOL is currently trading at a fair valuation of 15.3x FY23E EV/ABITDA and 10.3x FY24E EV/EBITDA. We reiterate Buy with a TP of INR 575 based on 11.5x one-year forward EV/EBITDA (based on the approved swap ratio of 3:10 for PVR-INOL merger. We believe the INOL TP has the potential to be upgraded to INR 690 if the merger goes through.
*The author is Karan Taurani, SVP – Research Analyst (Media, Internet & Consumer Discretionary), Elara Capital
