Despite restarting ops, covid makes it tough to predict how demand pans out for multiplexes
Both firms have liquidity cushion to ride the near-term rough patch; revenue visibility is still low
After months of despair, this week has brought good news for multiplexes. First, West Bengal permitted cinemas to reopen. Now, the Union ministry of home affairs has said multiplexes can restart operations in areas outside containment zones from 15 October with 50% of their seating capacity.
Unsurprisingly, investors are elated. Shares of PVR Ltd and Inox Leisure Ltd saw a relief rally, increasing by 6-7% on Thursday. Overall, these stocks have now increased 12-18% this week.
Multiplexes are one of the last to be allowed to re-open as India gradually lifted restrictions imposed to contain the covid-19 pandemic. The development is sentimentally positive, but is also just the first important step. In these times, risks for the multiplex sector are high, as consumer behaviour is unpredictable leading to uncertainties on how demand would pan out.
“Cinema is a high operating leverage business and advertising/ food and beverage revenues will take the longest to come back to pre-covid levels," said Karan Taurani, analyst, Elara Securities (India) Pvt. Ltd. “Other risks include higher distributor share, lower window period for OTT (over-the-top) services," he said.
The lower window risk (smaller time gap between movie release in theatres and OTT) is to enable producers make more money from digital and satellite rights so that it can compensate for lower collections during the covid-19 pandemic. “These are going to be compensatory measures that producers will ask for before releasing the film as they have waited so long for a release and as pre-covid Box Office collections will take little longer to come back," Taurani said. This is also because occupancies are expected to be lower in the initial few months as people stay indoors to protect themselves from coronavirus.
Some challenges include getting consumers and the need for promotions in ticket pricing, says Abneesh Roy, analyst at Edelweiss Securities Ltd. It also needs to be seen how movie content plays out. Maharashtra has extended its lockdown till October-end and theatres in the state will not reopen this month. This may limit content releases, as Maharashtra accounts for a sizeable chunk of box office collections. “Key thing to watch will be rent negotiations which were on a pause as there was no business. For the lockdown phase, rent is likely to be zero," said Roy.
Both Inox and PVR have a reasonable liquidity cushion to ride the near-term difficult patch. Even so, adequate revenues need to flow in to soften the blow a bit in the initial phases after operations resume.
Thus, as multiplexes resume operations, there are a lot of unknown variables. Coping with these factors will be challenging. Understandably, despite the sharp jump in stock prices this week, PVR and Inox stocks are still 38-42% away from their pre-covid highs in February.