Multiplex companies, which were quite popular with the stock markets early last year, have fallen out of favour.
PVR Ltd, Shringar Cinemas Ltd and Inox Leisure Ltd have fallen between 33% and 47% in market value from their highs in early 2006. Adlabs Films Ltd and Shringar have done slightly better (Adlabs hit an all-time high this year), because of its presence in other businesses such as film processing and distribution.
PVR and Inox hit the markets in early 2006 and listed at a premium of 31% and 46%, respectively. The problem, however, was that at those prices, these companies were valued at more than 40 times forward earnings. The argument then was that rising income levels and increasing urbanization would lead to significant growth for multiplex companies. The growth premise is still not being questioned. In fact, PVR grew revenues by about 60% last fiscal, while Inox’s revenues rose 47% in the nine months till December 2006. Adlabs Films’ multiples business grew by about 168% last fiscal.
But the high growth opportunity has led to high capacity addition, and analysts such as Sushil Sharma of B&K Securities are estimating that this will lead to an oversupply situation in a few years’ time. What’s more, capital costs have increased in the past year, with spiralling real estate prices and hardening interest rates. Analysts now also appreciate the problem multiplex companies face in continually finding successful movies to screen. Once capacity addition stabilizes, these factors will start affecting growth. Currently, overall growth numbers are influenced by the rapid addition of new screens.
On the positive side, valuations have come down to about 15-18 times forward earnings, which leaves some room for upside in case of well-managed companies.
The Ashok Leyland Ltd stock has drifted down after its March quarter results, despite earnings per share rising 31%. Compared with the previous quarter, operating margins have improved. The company’s overall market share increased last year.
So what’s worrying investors? One reason for the decline in the stock is that it had been bid up in the days leading to the results, and investors are just booking profits after the good results.
The other is the nagging concern that because Ashok Leyland is in the highly cyclical commercial vehicles business, it will be hit by rising interest rates and any slowdown in the economy. Input costs, particularly steel prices, are likely to rise, squeezing margins. And finally, the company has lined up a huge amount of capital expenditure over the next few years—total capacity is expected to rise by 84% by FY 2010. Since this will be funded by debt, interest costs are expected to rise. Rs1,000 crore is to be spent on capex this fiscal. And in an environment of slowing demand, it may not be possible to pass on all the cost increases—they haven’t done it so far this fiscal.
The May production numbers show that while the company has done well in buses and tippers, it has not done as well in trucks.
Cutting a long story short, the upsides, such as the ban on overloading, higher productivity and more efficient working capital management, are already factored into the stock price.
At the same time, the downside too is protected and the stock is likely to be range-bound for some time.
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