The significance of F&B (food and beverages) revenues for multiplexes cannot be underestimated. Inox Leisure Ltd’s June quarter results reiterate that fact. F&B revenues contributed as much as 27% to the company’s total revenues, growing a smart 26% over the same period last year.

Performance on advertisements was encouraging too. Revenue from ads increased by a fifth compared to last year’s June quarter. These two segments compensated for the muted show from net box-office revenues, which were flattish year-on-year. Footfalls and occupancy rates declined. It is quite possible that investors did not expect more from box-office revenues for the June quarter. That’s because the heavyweight Baahubali 2: The Conclusion was present in the June 2017 quarter. Inox maintains that the top five films accounted for 46% of June 2018 gross box-office collection. This measure was 63% for last year’s June quarter.

Still, the company managed to eke out a 54 basis points expansion in Ebitda (earnings before interest, tax, depreciation and amortization) margin to 20.1%. A basis point is 0.01%. Net profit increased by 15% year-on-year to 37 crore, helped by a small decline in finance costs.

The company has added 20 screens this fiscal year, which is impressive considering only 25 screens were added in all of FY18. For the rest of this year, Inox plans to add 39 more screens.

However, investors have other matters weighing on their minds. After the company announced its June quarter results on Tuesday, the stock dropped to a new 52-week low.

The movie content pipeline doesn’t appear spectacular in the near term. But at the moment, no one cares about that. Regulatory uncertainties are looming. On 13 July, the Maharashtra food and civil supplies minister said moviegoers can carry their own food inside multiplexes in the state. Inox’s shares have dropped by 21% since then. If this rule gets implemented, then F&B revenues that multiplex firms earn can take a knock. The Bombay high court is scheduled to hear this matter on Wednesday.

It’s worth mentioning here that margins of the F&B segment are high. For Inox, F&B gross margin came in at 75.6% last quarter. And that is why the way the F&B issue shapes is crucial for investors. So far, companies haven’t received any formal communication on the matter.

“Regulatory risks remain a key concern for Indian multiplexes," wrote Jaykumar Doshi of Kotak Institutional Equities in a PVR Ltd report on 16 July. This is because state governments have the power to cap ticket prices and impose a local body tax over the 28% goods and services tax, added Doshi.

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