ICRA revises PVR’s long-term rating due to inflow of Rs 500 cr via QIP

MUMBAI: ICRA has reaffirmed PVR’s long-term rating while revising the outlook from stable to positive following the completion of a Qualified Institutional Placement (QIP) in October 2019, with the same leading to an inflow of Rs. 500 crore.

A major part of these proceeds is expected to be utilised towards prepayment of existing debt obligations, with the balance to be used towards the settlement of milestone-based payments in relation to acquisition of SPI Cinemas and future capital expenditure requirements.

This prepayment, together with scheduled repayments, is expected to result in PVR’s debt level reducing to around Rs. 1,000 crore by the end of March 2020 as compared to Rs. 1,374 crore as on September 30, 2019.

With this reduction in debt, as well as the continued generation of healthy cash accruals from operations, PVR’s capital structure and debt coverage indicators are expected to witness a considerable improvement over the near term.

The ratings continue to factor in the healthy operating synergies between PVR and SPI Cinemas, post-acquisition of the latter by the former. The amalgamation of the two entities has also been approved by the NCLT in August 2019 with the effective appointed date of August 17, 2018.

With this acquisition, as well as PVR’s ongoing organic capital expenditure, the consolidated entity’s screen network has increased to 821 operational screens as on 15th December 2019, as compared with 748 screens as on 31st December 2018.

This has helped PVR to further strengthen its position as the market leader in the domestic film exhibition industry, particularly in the South Indian market, given SPI’s leading position in the region.

Additionally, the healthy occupancy of SPI’s multiplexes has contributed to further improvement in the already strong overall operating metrics and profitability of the consolidated entity. Operating profit increased to 19.05% in H1FY2020 as compared to 18.6% in H1FY20191.

ICRA noted that the ratings are, however, constrained by the aggressive ongoing expansion, which has partially been funded by debt in the past. Repayment obligations scheduled over the next two fiscals remain high, although ICRA draws comfort from PVR’s robust cash generation from operations, planned prepayment from QIP proceeds and its high financial flexibility.

ICRA notes that PVR is continuing to focus on expansion going forward, and plans to organically add 80-100 screens annually while evaluating additional inorganic growth opportunities as well. Any significant debt contracted to fund such growth may impact the credit profile of the company and will remain a key credit sensitivity.

Moreover, the content risk remains significant as good box office content will remain a critical determinant of the ability of the company to generate commensurate returns from the investments made.

PVR also continues to be exposed to risks associated with the movie business including piracy, regulatory risks, and substitution risk from competing distribution channels especially the fast-emerging OTT platforms. Going forward, the actual reduction in debt levels and consequent improvement in debt coverage and leverage indicators will be a key rating sensitivity. In addition, PVR’s ability to execute its planned Capex in a timely manner and generate adequate returns on the same will also remain an important credit monitorable.

PVR’s liquidity is expected to be supported by healthy cash accruals in excess of Rs. 450 crore per year. The inflow of Rs. 500 crore through QIP issue in Q2 FY2020 has further aided the liquidity position, with this amount planned to be partially utilised towards repayment/ prepayment of existing debt obligations, with the balance to be used towards the settlement of milestone-based payments in relation to acquisition of SPI Cinemas and other future capital expenditure requirements.

Also, given the cash receipt nature of the business, the working capital requirements remain limited. However, repayment obligations on the outstanding debt are expected to remain at a high level over the next two years, notwithstanding the prepayment of certain debt obligations from QIP proceeds. High cash accruals and significant financial flexibility, however, provide comfort.

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