by Aakash Athawasya
Initial public offerings (IPOs) are all the rage. Who would have thought that FY21 would end with so many companies going public? You can check our coverage this week on the Jhunjhunwala backed Nazara Tech, as well as Kalyan Jewellers.
But for now, let's change the subject. In this week’s Analyticks we look at:
PVR, which is on a fundraising spree, but problems remain
IT services companies’ high PE and index outperformance
Screener: Brokers’ top Nifty 500 stock picks
Let’s dive in.
PVR’s silver screens aren’t back yet
While restaurants and retail outlets have partially recovered, cinemas have not. India’s largest cinema operator, PVR’s fundamentals, footfall, and stock price are far off pre-Covid levels. This is despite two rounds of fund raisings, reduction in rent payments, and lockdown restrictions being lifted in most states.
Fundraise and screen additions
PVR raised funds twice in FY21 to reduce its debt. In August 2020, as cinemas across the country were shuttered – PVR raised Rs 300 crore via a rights issue. Then, in February 2021, it raised Rs 800 crore by allotting 55.5 lakh equity shares to institutional investors via a qualified institutional placement (QIP). This infusion of Rs 1,100 crore is expected to reduce its net debt to Rs 500 crore by the end of FY21. However, the company’s balance sheet still has high debt.
PVR’s long-term borrowings stood at Rs 888 crore at the end of the September 2020 quarter. Short-term borrowings were Rs 144 crore, a 23% decline since March 2020. Its debt to equity ratio stands at 2.6 times as of Q3FY21.
This reduction of debt will allow PVR to ramp up the addition of screens. In Q3, the company was forced to close one cinema and ten screens in Jharkhand and Rajasthan as state governments did not allow cinema halls to reopen. In Q4, it opened nine screens across two cinemas in Uttar Pradesh and Karnataka. In FY 22-23, PVR will look to step up its screen additions, with a plan to add nearly 150 screens. However, with its debt position already high, and cash flows tight, the screen addition will likely result in another round of fundraising or piling on of additional debt.
No cash flows - and rental payments
In FY22, PVR will spend at least Rs 150 crore in capital expenditure (capex) for screen additions. This will be spent at a time when PVR’s burn rate is already very high to keep up with regular operations. PVR’s monthly cash burn rate was Rs 36 crore a month in Q3, which is 76% less than its pre-Covid monthly cash burn due to lower occupancy levels.
The management is hoping that its top line expands with rising occupancy levels as the pace of vaccinations increase and people feel comfortable venturing outside. However, moviegoers’ confidence in cinemas is yet to recover. Even industry stalwarts, like Disney CEO Bob Chapek, are unsure if movie releases can go back to the pre-pandemic levels of theatre first. That being said, even if PVR’s revenue rises it will likely not accrue to the bottom line.
At the end of Q3, PVR reported a net loss of Rs 49 crore, against a net profit of Rs 36 crore in the year-ago period. However, the net loss narrowed from Rs 184 crore in Q2. Its EBITDA loss was Rs 105 crore. Since April 2020, PVR has received a concession from mall operators for rental payments.
The bigger debt overhang is the leased properties. Long-term lease payment stood at Rs 3,437 crore at the end of the September 2020 quarter constituting 76% of long-term liabilities. In Q1 and Q2, PVR negotiated with mall operators to waive off rental payments in FY21. This nearly halved its fixed costs in FY21, compared to pre-Covid levels.
In the December 2020 quarter, some mall operators resumed charging rents. For the quarter, the company incurred Rs 48 crore in rental payments. Nirmal Bang in a note, said PVR’s fixed costs would increase by 36% QoQ in Q4, owing to rental waivers being removed.
Low occupancy and upcoming releases
Key regions for PVR are Karnataka, Haryana, Uttar Pradesh, and Delhi-NCR (33% of total cinemas). These regions do not have any restrictions on operations of cinema halls. Only Maharashtra (21% of total cinemas) has capped seating capacity at 50% till March 31. Even with operations steadily increasing, PVR’s occupancy rate has been around 6-7%, against a pre-Covid average of 36-40%. On the bright side, PVR’s movie pipeline looks stronger in Q1FY22 than it did in FY21. This is because of the upcoming release of Sooryavanshi, Bunty Aur Babli 2, and Thalaivi.
Even with room for the occupancy levels to rise and the strong movie pipeline, PVR’s problems remain. Debt remains high, free cash flows negative, rental payments only resuming and losses piling up.
IT services: Elevated PE keep investors guessing on future prospects
One sector that has adapted to the post-pandemic world quickly was the IT services sector. Initially, after India imposed lockdowns across the country, the top-listed 10 IT services stocks took a real beating when compared to the Nifty 50. Their rise post the March 2020 lows is something that has been nothing less than exuberant.
Among large-cap IT services companies, Infosys (Infy) has outperformed the Nifty 50 the most over the past year. Although Infy has benefited from the same boost in demand for services like cloud, cybersecurity, artificial intelligence, machine learning, among others, its stock performance is something to behold.
Infosys’ turnaround after Salil Parekh took over a few years ago is something investors have caught on to. The only IT company other than Infy that has outperformed the Nifty 50 by so much is Larsen & Toubro Infotech (L&T Infotech). It has been on a tear over the past 12 months, after witnessing lows during March 2020.
Although midcap IT stocks have outperformed the Nifty 50 by quite a lot, the L&T Group companies, L&T Infotech, Mindtree, and L&T Technology Services, have outperformed Tata Consultancy Services (TCS), HCL Technologies, and Tech Mahindra. The murmurs of a possible merger of the L&T group companies have had a lot of parts to play in the frenzy among investors to own these companies.
But what might leave investors a little nervous are the near stratospheric levels of the trailing twelve-month PE multiples of these 10 IT stocks. While the Nifty 50’s TTM PE itself is at elevated levels compared to its average, some companies like Coforge are trading at PE TTM levels that are above the benchmark index.
This is a sure-shot sign that IT stocks have completely run ahead of their fundamentals. If you are one of the investors who thinks that past performance has no bearing on future execution, then we need to also ponder over the return on equity of these 10 IT services companies.
Although all of these 10 companies have reported stellar RoE numbers over the past three years, none of these companies saw their stock prices run up so high in the past.
The implicit conclusion of the currently elevated stock prices conjure is one of a long demand growth for IT services. But even in the past when these companies saw a surge in demand for their services, their return to equity shareholders did not run up so fast. That is something investors must keep in mind before they make any decisions.
Screener: Top Nifty 500 picks by Brokerages
Stock picking is never easy, but some are better at it than others. This screener lists the Nifty 500 companies that brokerages have been upbeat about since January 2021.
The list shows 47 Nifty 500 companies which brokers are bullish on. The most popular industry is pharmaceuticals, with Sun Pharmaceutical Industries, Dr. Reddy's Laboratoratories, Lupin, Cadila Healthcare, Sanofi India, Natco Pharma, Eris Lifesciences, Indoco Remedies, and Dishman Carbogen Amcis each receiving an upgrade in Q4FY21 from analysts. Sun Pharmaceutical Industries, the largest listed domestic pharmaceutical company by market capitalization, received three upgrades from analysts, the most of any Nifty 500 company.
SKF India’s stock has the highest runway for growth of any Nifty 500 company. The industrial machinery maker’s stock has already jumped by 30% in 2021, but brokerages expect an upside of an additional 29%. ICICI Securities in a note, said SKF India will see a higher upside due to a recovery in industrial activity and a gradual uptick in auto-sales.
Betting on economic recovery, another stock that has caught brokerages’ eyes is Larsen & Toubro (L&T). HDFC Securities has set a target price of Rs 1,657, an upside of 15% against its market price. In Q3, L&T’s order book grew by Rs 73,200 crore, its highest ever quarterly order growth. This will further be enhanced by the government’s infrastructure push in FY22 and beyond.
SBI Life Insurance Company is the only life insurer that brokerages are expecting to perform well. In a note on the life insurance market, Prabhudas Lillader gave SBI Life a ‘Buy’ rating while maintaining a ‘Reduce’ rating on HDFC Life Insurance Company and ICICI Prudential Life Insurance Company, respectively. Nirmal Bang in a note said the expected outperformance of the public sector insurer is because of its higher share in the unit-linked insurance plan (ULIP) market.
You can search for brokerage reports for the company of your choice here.
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