PVR and Inox Leisure, India’s leading multiplex chains, have announced their merger.
Following the announcement, the share price of both companies skyrocketed as investors gave a big thumbs up.
These companies were the biggest winners on March 28, 2022. The share price of PVR and Inox rose by 10% and 20% respectively.
While you may be aware of this, you may not be aware that a publicly traded company is deeply involved in this merger and that you will likely benefit from it.
The company that didn’t make the news is GFL Ltd.
GFL (formerly known as Gujarat Flourochemicals) is part of the Inox group. It is the holding company of Inox Leisure.
GFL is Inox Leisure’s largest shareholder, owning 43.1% of the company as of December 2021.
Following the merger with PVR, GFL would have a 16.6% stake in the merged entity.
GFL should not be confused with Gujarat Fluorochemicals (GFCL), the chemical arm of the Inox group.
The company’s chemical activities were spun off in 2020. The resulting entity was GFCL (Gujarat Flourochemicals). The existing company was renamed GFL.
If you look closely at the market capitalization of GFL and its subsidiary Inox Leisure, you will see an anomaly.
Inox Leisure has a market cap of Rs 6,460 crore (as of March 31, 2022). Since GFL owns 43.1% of Inox Leisure, it should have a market cap of around Rs 2,750 crore.
However, the holding company has a market cap of just Rs 880 crore. This means that GFL trades below the total value of the assets it owns.
So here’s the thing.
GFL appears to be trading at a significant discount. In addition, the company will be a major stakeholder in what will become India’s largest multiplex chain.
Given all these facts, does GFL seem like a good investment? Is now the right time to invest in the company?
Before we answer these questions, you should know a few points that probably explain why GFL trades at a discount.
You see, GFL does not run its own business. It also does not interfere with the day-to-day operations of its subsidiaries.
Thus, the company has no control over its investments. The lack of control is probably one of the reasons GFL trades at a discount.
The other reason is uncertainty. GFL is a holding company. So dividends are a big part of income. This means that GFL’s performance is dependent on the performance of its subsidiaries.
This creates a lot of uncertainty about cash flow. And markets don’t like uncertainty about earnings. This is incorporated in the share price.
Now we come to why we think GFL can be a good investment…
The cinema industry in India is a fast growing business. Indians like to watch movies. On the supply side, India produces more movies per year than any other country in the world.
This is why many analysts have come up with glowing estimates for the industry. According to some estimates, the Indian film industry will grow at double digits in the next decade.
Another interesting fact is that the industry has been consolidating in recent years. The single screen cinemas are losing market share to multiplexes. And the pandemic has only accelerated this trend.
The merged entity, the largest multiplex chain with a network of more than 1,500 screens, will be the biggest beneficiary of this trend.
Another thing investors should consider is PVR’s premiumization efforts. PVR focuses on providing a luxurious experience to its customers.
PVR’s premium services account for 10-11% of total revenue and the company aims to increase this to 20% by 2025. We could see premiumization efforts continuing after the merger.
India is lagging behind other countries in terms of number of screens. The country has about 9,500 screens compared to 40,000 screens in the US and 70,000 screens in China.
According to management commentary, the merged entity will focus on adding more screens in the coming years. The move will certainly stimulate growth.
Many analysts believe that the merged entity would have greater pricing power on the revenue front and greater bargaining power on the cost front. The synergies would result in robust free cash flows, which bodes well for GFL.
Speaking of PVR and Inox, research analyst at Equitymaster Aditya Vora recently recorded a video about multiplex stocks.
In the tug-of-war between theaters and OTT, Aditya believes that theaters will prevail and create long-term wealth for investors. Watch the video for more details…
Video Link – Time to Buy Multiplex Stocks?
So, should you buy GFL right away?
While the merger has been confirmed as far as companies are concerned, it is yet to be approved by the Competition Commission of India (CCI). The CCI’s decision could be a roadblock to this deal. So keep that in mind.
If all goes smoothly, you can keep an eye on GFL, especially if you want dividend income.
However, proceed with caution. Go through the fundamentals of the company thoroughly, especially the balance sheet.
Have fun investing!
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
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