PVR Inox shares: F&O unwinding? Arbitrage funds behind recent selloff, says JM Financial

A 26 per cent drop in PVR Inox Ltd shares in the past one month puzzled a few investors. Weak expectations around Q3 results appeared a plausible explanation. But JM Financial believes the real reason for the selloff on PVR Inox was a technical one. It said most of the recent selling in PVR Inox shares was led by arbitrage funds and a few factors explain the trend.

It noted that PVR Inox is going off F&O segment on February 28, prompting unwinding. It said future-cash spread had increased in October, likely on expectations of a strong Q3 but that did not pan out.

Arbitrage funds typically buy a stock in cash segment and sell its future contracts to net the spread. PVR-Inox’s spread was elevated in October, likely on the expectations of a strong Q3. Barring Pushpa 2, the box office collections of other movies did not lived up to their billings. That, along with broader market correction, narrowed the spread, JM Financial explained.

Besides, PVR-Inox’s exclusion from F&O triggered unwinding of this trade, resulting in sharp correction in the stock.

"Arbitrage funds’ holding in the stock has fallen under 1 per cent now, limiting incremental unwinding. Spread has shrunk too. Be that as it may, the fall presents an attractive entry level in the stock," it said.

Its reverse DCF analysis for PVR Inox indicates that the prevailing market price is implying long-term occupancy of 24.5 per cent, similar to FY25 occupancy estimates.

"We find it pessimistic. Strong movie pipeline of 2025 and absence of specific headwinds (General Elections, T20 world cup) should improve footfall. PVR-Inox’s slower new screen addition should aid occupancies too. Moreover, a shift towards asset-light model (FOCO) means cash flow growth should exceed top-line’s, supporting valuations. We have baked 3Q expectations and build a more gradual recovery versus earlier," it said.

The brokerage has revised its target price downgrades to Rs 1,600 from Rs 1,980 but that still implies an upside of 47 per cent, it said.

JM Financial has built weaker than expected Q3 estimates. It has also lowered its new screen addition assumptions driving 8-10 per cent revenue and 15-16 per cent Ebitda estimates for FY25-27.

"We estimate that CMP implies 24.5 per cent occupancy over next 10 years, conservative in our view. A 1 per cent change in occupancy has a 17 per cent sensitivity to our target price. Strong 2025 should drive up occupancy, and stock," it said.