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A man stands outside a multiplex after authorities closed cinemas as a precautionary measure against Covid-19 in Mumbai (Photo: AP)
A man stands outside a multiplex after authorities closed cinemas as a precautionary measure against Covid-19 in Mumbai (Photo: AP)

Long wait before multiplex stocks regain their hit stature with investors

  • There is uncertainty on whether the lockdown of 21 days ending 14 April will be extended, depending on the intensity of the Covid-19 spread
  • To be sure, once multiplexes resume operations, recovery is expected to be slow and occupancy levels may be lower initially

Just before the fears around Covid-19 hit the Street, multiplex stocks PVR Ltd and Inox Leisure Ltd were flying high. Now, with the lockdown, these stocks are badly hit. From their respective highs in February, these shares have declined by 41-43%.

There is uncertainty on whether the lockdown of 21 days ending 14 April will be extended, depending on the intensity of the Covid-19 spread.

However, even before the current shutdown was imposed, a few states had already announced a temporary shutdown of malls and cinema theatres. To that extent, the March quarter profits will be hit.

Expectations from the June quarter, too, are running low. The adjacent chart, based on estimates by Emkay Global Financial Services Ltd, shows the impact of the shutdown on earnings estimates for FY21.

If multiplexes close their operations for the entire June quarter, FY21 Ebitda (adjusted for Ind AS 116) of both PVR and Inox is expected to decline by 60-65% from Emkay’s pre-lockdown estimates. Ebitda is earnings before interest, tax, depreciation and amortization.

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The broking firm has assumed lower operating costs, keeping with the lower scale of operations. Rentals, one of the fixed cost components for multiplexes, would come off too, as the force majeure clause with malls would get invoked.

In a recent conference call with analysts, the PVR management said: “We are protected in most of our contracts, I would say 90%+ of our contracts have force majeure clauses, which allow us to suspend the rent and CAM payments in the period of our closure." CAM is short for common area maintenance.

To be sure, once multiplexes resume operations, recovery is expected to be slow and occupancy levels may be lower initially. This poses a threat.

“If occupancy rates are low when the government eventually allows multiplexes to restart theatres, these companies won’t be able to invoke the force majeure clause. This would mean rent expenses would be higher and revenues lower, posing a big risk to earnings," said an analyst, requesting anonymity.

Investors will also do well to factor in delays in new screen additions or average ticket price increases. Plus, with the Indian economy expected to grow at a slower pace, a revival in advertisement revenue for multiplexes could take a while.

These factors could well keep a check on expansion in valuations from a near- to medium-term perspective. “Meanwhile, the opportunity of consolidation is a big trigger as many multiplex chains will be available at fair valuations given the current scheme of things," said Karan Taurani, vice president (research analyst) at Elara Capital. “This will benefit Inox Leisure in particular, which is net debt free currently."

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