PVR, Inox shares on a roll! What should investors do?

Shares of PVR and Inox Leisure were on a roll on Monday after the merger announcement between the two multiplex chains.

PVR Ltd (transferee company) on Sunday said its board of directors has approved a scheme of amalgamation of INOX (transferor company) into and with the company. The board of INOX also approved the merger scheme.

Shares of PVR zoomed 10 per cent to hit a new 52-week high of Rs 2,010.35, while the share price of Inox also jumped 20 per cent and hit the upper circuit to touch a new 52-week high of Rs 563.6.

"Any kind of surprise M&A activity, especially by consumer brands, is typically immediately cheered by the market participants and there is a spike in buying interest," Abhay Agarwal, founder and fund manager, Piper Serica told BusinessToday.In.

"However, in this case, the merged entity will have to work hard to repair its balance sheet and convince the lenders that it can generate enough free cash flows to sustain the debt taken during Covid lockdowns, he added.

"We expect that during the period that the merger takes effect and for a year thereafter the market valuation will stay in a narrow range. Those who believe that the merged entity will create a strong business can buy the shares for the long term. However, short-term traders looking for a quick upside may be disappointed," Agarwal said.

Santosh Meena, head of research at Swastika Investmart Limited, noted that the merger is a win-win situation for both the companies. However, it needs to get final approval from the Competition Commission of India (CCI) because it will be like a monopoly situation in multiplex industry.

He added that PVR is a bigger player and has diversified geographies that will help Inox to grow further. PVR has a debt issue while Inox is a cash-rich company, therefore the combined entity will have a better balance sheet. Stock prices of both the companies have already rallied therefore there is a risk of profit booking on news but the long term outlook is bullish.

"We have been bullish on both the players and we believe both are relatively insulated from some of the current challenges that domestic companies are facing from high commodity inflation and weak volumes, and should see resilient earnings in FY23 on the back of a strong slate of fresh content and pent-up demand," Nirmal Bang said in a report.

"Post-merger, we like both PVR and Inox and have ‘Buy’ rating on both the stocks with target prices of Rs 2,383 and Rs 594, respectively. The upside could be larger as we believe valuation multiples could expand beyond what we have baked in," it added.

Brokerage house Motilal Oswal has maintained its 'Neutral rating' on PVR with a target price of Rs 1,600.

The rich valuation it commanded historically was led by strong growth. The screen addition opportunity does provide an ability to continue its strong growth. However, OTT platforms pose a risk of shrinking the exclusive period, softening occupancies, and lower screen economics, it said.

Tanya Aneja