Good Morning Toasters!

In today’s issue of the Morning Toast, we discuss:

• INOX + PVR Cinemas merger to create behemoth
• Sagar Cement refuels via Equity Fund-Raise
• News around the world
• An educational concept to keep you learning every day 🙂

Market Watch

Nifty: 17,222.00 | +69.00% (+0.40%)
FII Net Sold: INR 801.41 crore

Sensex: 57,593.49 | +232.29 (+0.40%)
DII Net Bought: INR 1,161.70 crore

Industry News

INOX + PVR Cinemas merger to create behemoth; what’s up and what do you need to know?

What’s Up?

• PVRL IN and INOX IN have announced a mega merger (financial contours below), that will result in the Number 1 & 2 players coming together to form what will likely be (if approvals are granted by CCI) the largest cinema operator in the country –
  • Consolidated screen # of 1546, implying a market share of 16% (single screens) and ~50% (multiplex screens, based on pre-pandemic count)
  • ~40-42% share of Net Box Office Collections (NBOC)
  • The merged entity will own real estate including 6 Malls & 1 Office Complex (at INOX level), giving the opportunity to divest & raise equity growth capital in the future
• At such a size & scale, the merged entity (assuming all approvals from CCI), will likely command strong negotiation powers across business partners and operations, while providing a healthy competitive play vs OTT emergence

Financial Contours, Potential Synergies & more 🙄

Financial + Merger Details

• The merger will follow a share swap ratio of 3 shares of PVR, for every 10 shares of INOX, with the implied share price of INOX at INR 550 (based on the Volume Weighted Average Price of PVR), which is an upside of 17% to the price of INOX at the time of announcement (INR 470)
• Post the merger, PVR’s Promoter family (Bijli) will own ~10.6%, while INOX Promoter Group will own 16.4%; Current MD of PVR will assume the role of MD of the PVR INOX with the current Non Executive Chairman of INOX assuming a similar role in the merged entity
• The combined entity will be rebranded as PVR INOX going forward, with all new cinemas opened to be instituted under this new brand, while old cinemas to continue under the current branding

Potential Synergies 

• The combined entity can potentially gain from increased revenue accretion via stronger negotiation powers across an advertisement, booking aggregators (Paytm, BookMyShow) and movie exhibitors (currently only offered by PVR)
• From a cost perspective, rent negotiations are likely to get positively impacted in the medium term, initially via extra power due to size & scale and subsequently through normalisation/rationalisation due to decreased competition for the same premium locations (PVR & Inox instead of PVR vs Inox)
• Likewise, Food & Beverage have consistently ranked as a high % of overall revenue contribution, with combined entity size & scale partially beneficial in negotiating with vendors to ultimately help in improving margin contribution

Challenges & more

• As per a Competition Commission of India (CCI) order dated 2017, merged entities with revenues <10Bn will be exempted from review and allowed to exist
• FY21 nos for PVR + INOX are in accordance with these rules, primarily on account of a suppressed industry environment (rmb, Covid-19 et al.) and therefore, CCI may take exception to this and accordingly challenge the merger
• In such a scenario, and taking a cue from past transactions involving PVR, the merged entity might be asked to exclude certain cinema chains from the transaction (think: PVR acquisition of DT Cinemas)

Finally? Valuations, Stock price et al.

• As per the management, the key rationale behind the merger is a shared view on the changing industry dynamics, brought upon by the growth of OTT platforms (high internet penetration, cheap data costs, ballooning presence of OTT studios)
• That, coupled with the advent of technology has pushed PVR & INOX to merge to best prepare the theatre chains to deal with the changing scenario
• The merged company’s Net Debt / EBITDA is <1x (in FY23), which provides a leaner balance sheet and thus a decent scope of expansion in the future (we believe)
• Currently, the merged entity trades at ~13x EV / EBITDA, which has the potential to re-rate (we believe) through efficient synergistic management, improving returns profile and an overall healthy growth environment
• Cinema & movies are one of the few genuine out of home entertainment options, even with the emergence of OTT platforms and with this merger PVR + INOX is well placed to address & capture that rhetoric

Keep a track?

Around the World 🌎

• Oil prices refuse to concede –  An embargo made on the purchase of Russian crude is hurting major energy companies and commodity-trading houses around the globe, but especially in Europe. With 2 million barrels (a fourth of Russian output) being disrupted per day, exports have fallen to their lowest in eight months. Brent crude rose 9% last week to settle at $117 a barrel. Moscow however is offering India a significant discount at $20 a barrel – an offer that would help India calm rising fuel prices and inflation in general. Every 10% increase in crude prices impacts inflation by ~ 40 bps and GDP by ~ 20bps
• Softbank to let go of its crown jewel – Chinese tech stocks have seen huge turmoil in the past weeks mainly due to Beijing’s clampdown on the sector among other geopolitical issues, and is forcing Softbank to sell of its huge stake in its single largest investment of Alibaba Group Holding Ltd. The U.S.-listed Chinese stocks index has fallen 52% over the past 12 months, and Softbank is seeing a major constraint of capital. Softbank is also nearing its self-imposed debt limit of a loan-to-value ratio of 25% due to these falling valuations and has used Alibaba stock to settle its contracts in the past

Company News

Sagar Cement refuels via Equity Fund-Raise; What’s up and What do you need to know?

The Deal

• The board of Sagar Cements approved a preferential allotment of 13.2 Mn shares to an affiliate of Premji Investment, at a price of INR 265 / share, totaling INR 3.5 Bn
• The transaction is subject to regulatory approval, while the company will also hold an EGM to get board approval; independently, Premji Invest will also work with the company to appoint best-in-class advisors / independent directors to improve corporate governance standards
• After the issuance, Premji will hold ~10.1% of the company, with the Promoter stake dropping from ~50.3% to ~45.2%

Use of Proceeds & more

• The company will utilise the capital for organic & inorganic expansions and general corporate purposes; in the last 6 years, Sagar has raised ~INR4.6 Bn in capital (via multiple modes) with a view toward expansions
• The company has in the past set targets to double capacity every decade, with the current goal of touching ~10 Mt capacity by FY25E, from the present 8.3 Mt
• As a precursor to this announcement, the company had mentioned in their Q3FY22 earnings call plans to unveil the next phase of growth/expansion for the company in the coming quarters
• The company’s net debt stood at INR 9.7 Bn as of Dec’21, with the Net Debt to EBITDA likely to decline from ~3x to 1.9x post the allotment of shares; the likelihood of this number shuffling post inorganic acquisitions are made by the company in search of growth

Recent Quarterly Performance & More

• Revenues increased by 13% YoY / declined 6% QoQ to INR 3.7 Bn, on the back of a volume increase of 18% YoY, implying a capacity utilisation of 59%; realisations for the company dipped by 3% (industry wide phenomenon)
• Cost inflation was bearing during the quarter, with the company taking a price hike of INR 30-40 per bad across its key market in the South, largely to pass on cost inflation
• The company has completed ~40% of its capacity expansion to 8.3 Mt in Jan’22 and has guided (key to note here) for a strong cyclical upturn in the coming quarters
• Likewise, as per the management, de-risking the core business via an improved/diversified product portfolio, coupled with multiple plants to service wide locations are expected to bear fruition in the near term
• Premji Invest is a marquee private & public investor, and taking on a ~10% position does add credence to the management guidance (we think)

Keep a track for Q1FY23 numbers?

What else caught our eye? 👀

Yatra Online Ltd. to join the stock market

• Yatra Online Ltd. has filed for its draft prospectus for an IPO that includes a fresh issue of shares worth Rs. 750 Cr
• The funds will be used to accelerate their organic growth plans, and explore inorganic growth opportunities now that the industry is recovering post the pandemic hit
• The issue also has an OFS component, and it might also take the private placement route for an additional issue of up to Rs. 145 Cr

A boost for the EV ecosystem

• Behemoth Adani Total Gas has decided to foray into the EV segment by launching its first electric charging station in Ahmedabad
• The plan is a further 1500+ stations with a wider objective of providing newer green fuel to the large customer base of India
• It also has an expansion plan ready to move beyond this target ‘based on the demand generation and momentum building of the EV ecosystem in the country.’

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Educational Topic of the day

Average True Range (ATR)

Average True Range (ATR) is the average of true ranges over the specified period. ATR measures volatility, taking into account any gaps in the price movement.

Typically, the ATR calculation is based on 14 periods, which can be intraday, daily, weekly, or monthly. To measure recent volatility, use a shorter average, such as 2 to 10 periods. For longer-term volatility, use 20 to 50 periods.