Content or, to call a spade a spade, the popularity of movies is the lifeblood of multiplex companies—PVR Ltd and Inox Leisure Ltd. These stocks have underperformed the benchmark Sensex so far this fiscal year (FY18).

One of the key parameters investors should follow for these stocks would be how Bollywood movies fare on the box office, considering these revenues account for a good proportion of ticketing revenues for these firms.

So what are the trends over the last 10 years?

One trend is that the big movies keep getting bigger. At least that’s what is shown in an analysis of box-office performance of the top 25 Bollywood movies, within which the top five movies are growing at a much faster pace than the next 20 movies (or 6-25 movies) over calendar years 2012 -2017 (CY12-17).

According to Kotak Institutional Equities, net box-office collections (NBOC) of the top five, the next 20 (or top 6-25 films) and top 25 Bollywood movies grew at a CAGR of 16%, 19% and 18%, respectively, over CY07-12 (see the chart alongside). CAGR is short for compound annual growth rate.

However, “We note that NBOC of movie #6 to 25 has remained flat over CY2012-17E; likely 5-6% Cagr in top 25 movies will be driven by 13% Cagr of top 5 movies," added the brokerage firm in a report on 12 September after estimating NBOC of a few movies that are yet to be released in 2017.

Kotak attributes this trend to (1) moviegoers watching fewer films in theatres, partly due to shorter windows between theatrical and TV/digital releases (four weeks in a few cases) and high inflation in ticket/food and beverage prices, and (2) piracy.

Bollywood contributes about 40% to the box office and the top 25 of the 200-250 Hindi movies released every year contribute 80% to the Hindi box office, says Kotak.

Investors should take these factors into account while placing their bets on the sector. Better content quality is the key here. Ultimately, it is good content that will compel audiences to hit the theatres.

Currently, PVR and Inox shares trade at about 41 times and 30 times estimated earnings, respectively, for FY18, based on Bloomberg data. PVR isn’t cheap. Additionally, better performance of Hollywood and regional movies could offer a silver lining to this picture.

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