We initiate to Buy on PVR Limited with a 40% upside potential from current levels. Investment advice is based on company’s expertise in entertainment business, strong growth plans over next three years in other businesses, especially bowling and gaming, and strong domestic demand for entertainment along with rising income levels.

Results for FY09 were highly muted on number of accounts, primary being

1. Global Economic scenario and falling investor confidence.

2.Tussle between Distributors and producers.

3.Week movie line up this year, and

4.Another blockbuster year of IPL, eating into the share of other modes of entertainment, primarily outdoor entertainment Highlights:

1. PVR will invest Rs150 Crore in the exhibition business and will add 57 screens across 10 properties this fiscal, taking the total to 165 screens by end of FY09.

2. PVR has plans to invest approximately Rs 2.50 billion in the next 18 months to expand its exhibition, movie production and bowling to its businesses. 150 crores in exhibition business and remaining to be spent on movie production and bowling alley business.

3. Postponed plans to expand its food court business.

4. Funding won’t be a problem and would be done through preferential allotment and Equity dilution.

5. PVR launched the bowling alley as a joint venture with Thailand's Major Cineplex, which owns the premier Blu-O brand. PVR is now looking for a suitable location to launch Sub Zero in India, the Thai company's ice skating rink brand.

6. Company plans to set up 15 entertainment centres with bowling alleys and gaming zones by 2012. In 2009, the company would add two more centres. By 2012 contribution from this business will shoot up to 20%.

Result Analysis:

The company during the quarter ended March 2009 reported just 5% growth in net operating revenues at Rs 58.01 Crore. Ticket sales grew 19% at Rs 35.1 Crore, the F&B revenues grew 5% at Rs 10.97 Crore whereas the income from revenue sharing however fell 54% at Rs 2.29 Crore, and advertising & royalty income fell 6% at Rs 8.39 Crore.

For the quarter footfalls increased 2% at 3.75 million however average occupancy decreased to 27.3% from 31.9% in the corresponding quarter of the previous year. The average ticket price increased 6% at Rs 140. ATP of comparable properties was flat at Rs 133. The operating margins dipped 410 bps at 10.5% due to higher film distributor's share and F&B expenses Operating profits for the quarter hence fell 24% at Rs 6.11 Crore. Other Income for the quarter decreased 72% at Rs 42 lakh. After providing for the interest cost and the depreciation allowance which increased by 62% and 32% respectively the company posted gross PBT loss of Rs 1.22 Crore during the quarter under review. After providing for tax credit during the quarter, the net loss was Rs 1.11 Crore as compared to a net profit of Rs 2.70 Crore during the corresponding quarter of the previous year.

The consolidated top-line for the full year ended March 2009 increased by 32% to Rs 355.39 Crore as compared to the previous fiscal.

The Consolidated accounts comprise of the Parent Company (PVR Limited) and its subsidiaries, PVR Pictures Limited, CR Retail Malls (India) Private limited, Sunrise Infotainment Private Limited and PVR bluO Entertainment Limited.

The OPM fell by 500 bps to 14.2%. After providing for other finance expenses the bottom-line of the company posted a decline of 60% to Rs 8.71 Crore as compared to the previous fiscal.

We have projected 25% and 20% growth rate over next two years as company has huge projects lined up in its movie exhibition business and bowling alley business. Bowling alley business is likely to contribute 20% of its sales by 2012.

Addition of 50 screens in FY09, mostly under Entertainment Tax exemption, will provide a huge lift to its top line although bottom line can be strained for next 2-3 quarters. Blu-O division’s contribution is likely to grow from less than 1% in FY09 to 5% in FY10 and approximately 9% in FY11.

Valuations:

PVR is one of the strongest players among multiplex industry. We expect the screen count to increase from the current 108 screens to 171 screens in FY2011.

Currently the stocks is trading at 8.4x and 7x its FY 10E and FY11E earnings, which is at huge discount to both Industry as well as Index.

Also company had raised money in FY08 for its future expansion plans, thus providing itself a strong balance sheet. Company is trading at 0.9x and 0.8x its FY10E and FY 11E book value. Company is more than comfortable in its Cash Flow as its Operating cash flows are highly positive.

Company Description:

History:

PVR Ltd started as a joint venture between Village Road show Ltd., an Australian based company and Priya Exhibitors Private Limited (PEPL) in 1994 and was incorporated as Priya Village Road show Limited in 1995. PEPL was promoted by Raj Kumar Jaisinghani and Vasudev T.Ramnani in 1974 and started its business by opening “Priya” cinema in 1975. Priya cinema was upgraded in 1990 by Ajjay Bijli, PEPL purchased the entire shareholding of Village Road show in the company and the name of the company was changed to PVR Ltd.

Present scenario:

PVR is amongst the largest multiplex cinema operators in India. With its 17.8 million patrons, PVR having a dominant share at the box office with over 12% contribution to All India box office collections of leading releases. Integration into film production and distribution has enlarged the company’s offerings and helped it become an integrated industry player. PVR’s aggressive expansion plan could be major reason for the company into a higher growth on account of higher operational efficacy from its chain distribution and theatre collections

PVR Subsidiaries:

PVR Blu-O: is a joint venture with Thailand based a major Cineplex JV with proportional investment of 49:51.Subsidiary started its operation in the second week of March 2009 and operated for ~18 days in FY09... During its subsidiary grossed an income of Rs 6.8 mn and a net loss of Rs 3.6 mn, largely on account of opening Sunrise Infotainment Pvt. Ltd: is a wholly owned subsidiary of PVR Ltd and operating with the 6 screens multiplex. The subsidiary opened the multiplex on 16th May 2008 and became eligible for entertainment tax exemption on 22nd August 2008. For the year ended March 2009, the subsidiary grossed an income of Rs 146.3 mn and a net loss of Rs 26.3 mn.

CR Retail Malls (India) Pvt. Ltd: is a wholly owned subsidiary of PVR Ltd and operates the Mumbai's largest, seven screens, with a capacity of 1850 screens. Company has received 5 year tax exemption for the same. With this PVR now has 42% of its overall seat capacity and 39% of overall screen capacity under entertainment tax exemption. PVR Pictures is the film production and film distribution arm of the company.

PVR is a low Beta stock; with a beta 0.6.While the share has always been a laggard in terms of price movement and volumes compared to its peers and overall industry as well. However we believe that the stock is highly beaten down and presents a value buying opportunity for long term investors. Short term traders can also make a handsome profit of 20-25% over next one month as share can scale back to June highs of 140-150.

Investment Rational:

Apart from PVR Pictures, the rest of the subsidiaries commenced operations in FY09 and are getting stabilized. FY10 will also see a full year of operations of these subsidiaries and will boost the top line of the company, Inspire of a worst Q1 FY10. Some basic key points that deserve for upward movement in the price of this stock

1. Aggressive expansion plan

2.Rising consumer confidence and Robust Demand going forwards.

3. Delivering value by its subsidiary Short term traders can invest for a target of 120-140 in next 2 weeks

PVR is in a long term uptrend. The stocks 20 DMA & 50 DMA is above 200 DMA .So one could go long on the stock for a Target of 116-140 in next 3-4 months.