Wednesday 30 January 2008

Pyramid Saimara Theatres - Buy

Pyramid Saimara Theatres(PSTL) with a BUY rating and a 12 month target price of Rs 575 per share.

Investment positives

Ø Concentrating on south Indian exhibition sector: PSTL has got almost 45% of the "Quality screens" under its banner in Tamil Nadu and Andhra Pradesh. As screens in Tamil Nadu and Andhra Pradesh contribute 75% of the South Indian film box office collection, PSTL will benefit from its strategy of entering Tamil Nadu and Andhra Pradesh markets.

Ø Targeting tier I and II cities: The cheapest form of entertainment in Tier-I and -II cities is films. PSTL has targeted those cities with Class A and B theatres. Class A theatres would contribute 45% to the domestic box-office collection (BOC); Class B 41.8% in FY09. PSTL is the only theatre chain operating in Tier-I and -II cities in south of India and hence has the edge in scaling up the number of screens and capturing a major share of the market.

Ø PSTL's digital theatres would promote wider release: Wider release format would help producers milk a film in the first three weeks of release by distributing a large number of digitized copies via satellite and also curb piracy to a certain extent. This would create new "first release" theatres, which would fetch revenue from earlier "no-revenue" areas for PSTL and also get back some revenue from the piracy market to the main stream benefiting all stakeholders of the film industry.

Concerns

Ø Managing growth: PSTL is growing at an enormous speed in terms of screens. The company does not have any previous experience of gigantic scaling up of operations and managing a big size business.

Ø Dependence on "content": The film industry is highly dependent on the quality of films ("content"). If the quality of films released in the coming years does not suit audiences' taste, PSTL's net revenue would be hit. This is perceived as an industry risk and is applicable to all producers, distributors and exhibitors.

Valuation

Buy, with a target price of Rs 575: Our target price of Rs 575 is based on a sum-of-parts valuation. We value the domestic film exhibition (PSTL) business at Rs 405.1 a share (17x FY09E EPS of Rs 23.8); the film and TV content production (PSPL) business at Rs 53.5 (16x FY09E EPS of Rs 5.6); the content agglomeration and distribution business at Rs 87.3 (14x FY09E EPS of Rs 6.20); the joint-venture film-exhibition business in Malaysia (PSTL has a 51% stake) at Rs 4.50 (10x FY09E EPS of Rs 0.88); the US film exhibition business at Rs 8.40 (10x FY09E EPS of Rs 0.84); and In-theatre advertising business (a 51% stake in Dimple Cine) at Rs 16.4 (10x FY09E EPS of Rs 3.2).