New movies, pent-up demand and festive season are expected to improve occupancies
The reopening of cinemas in the revenue-generating state of Maharashtra will buoy sentiments
The pandemic-induced interruption for multiplexes has lasted longer than anticipated. However, in a major relief for investors in these stocks, the Maharashtra government has allowed cinemas in the state to reopen from 22 October. Details on seating capacity is yet to be announced, but halls will be required to follow necessary protocols to prevent the spread of coronavirus.
Since multiplex operators fetch around 30% of total box office revenues from Maharashtra for Bollywood releases, the sharp rise in stock prices isn’t surprising. Shares of PVR Ltd and Inox Leisure Ltd rallied more than 6% each intraday on the NSE on Monday, surging to new 52-week highs. Expectations are that occupancies would now get normalized, aided by new movies, pent-up demand and festive season.
“This is sentimentally positive for both PVR and Inox Leisure as many more producers would rush to schedule releases. Since the content pipeline for both Bollywood and Hollywood movies is robust, a go-ahead by a key revenue generating state like Maharashtra bodes well for these stocks and could lead to some re-rating of valuations," said Jinesh Joshi, research analyst at Prabhudas Lilladher.
Within the consumer discretionary sector, multiplex stocks were among the worst hit by the pandemic. Despite the gradual reopening of the economy, these shares still trade at lower valuation multiples than many consumer-focused stocks. In the past one year, while shares of paint makers and other discretionary product firms have risen sharply, multiplex stocks have given relatively modest returns of around 30-40%.
“PVR’s stock has de-rated versus consumer discretionary/retail names and is a laggard among the ‘economy opening-up’ stocks largely due to uncertainty around structural risks. We do not rule out modest re-rating in PVR’s valuation as operating metrics (especially occupancy) recover fully and concerns ease," analysts at Kotak Institutional Equities said in a report on 20 September.
Nonetheless, according to Joshi, it is too early to gauge the earnings impact of this development. “We could see some quarters of bunched-up releases leading to higher revenues for both companies. As far as Q2 is concerned, the earnings performance of both these companies would be better than Q1, which was a washout. However, a full-fledged earnings recovery to pre-pandemic levels is still away," he said.
Secondly, earnings performance of these multiplex operators would also depend on factors such as revenue-sharing agreements with mall owners. Investors would reckon that post the first wave when theatres reopened in Maharashtra, there was a 50% limit in seating capacity. Also, consumption of food items wasn’t allowed inside cinemas. So, it remains to be seen as to how these aspects pan out this time, analysts said.
Also, the rising popularity and consumption of over-the-top (OTT) platforms among Indian consumers is also seen as a potential risk for multiplexes. But there is some relief for investors there.
“Disney in early September announced that all new movie releases in 2021—no commitments beyond 2021—would go to theatres first and then to other distribution platforms after a window of 30-45 days or more. This should assuage concerns around OTT eating into the theatrical business," analysts at Nirmal Bang Securities Ltd said in a report on 27 September.