Investors would do well to keep Q4 expectations low, given the below-than-expected box-office collections
The sharp fall in PVR and Inox Leisure’s shares suggests that investors are taking into account a good share of the risks
From being solid hits with investors, shares of multiplex companies, PVR Ltd and Inox Leisure Ltd, have lost their edge. Stocks of both companies have declined as much as 22-26% from their 52-week trading highs on the National Stock Exchange on 25 February. That’s just six trading days.
Not without reason. Covid-19 cases have been detected in India and investors worry that if the virus spreads, footfalls in multiplexes will be adversely affected. Sure, the exact impact is difficult to gauge at the moment but there is uncertainty and we all know stock markets don’t like ambiguity.
Of course, the sharp fall in PVR and Inox Leisure’s shares suggests that investors are taking into account a good share of the risks.
According to Urmil Shah, research analyst at IDBI Capital Markets and Securities Ltd, PVR shares trade at an EV/Ebitda of 9.8 times for FY22 based on Tuesday’s closing price. This is about 5% higher than the EV/Ebitda of 9.3 times seen at the time of F&B (food and beverage) issue in July-August 2018.
Two years ago, valuations of multiplex firms had corrected when PILs were filed in states including Maharashtra to allow outside food and regulate F&B prices at multiplexes.
EV stands for enterprise value. Ebitda is earnings before interest, tax, depreciation and amortization.
Inox Leisure shares trade at EV/Ebitda of 7.6 times for FY22 based on Tuesday’s closing price. This about 15% higher than the EV/Ebitda of 6.4 times seen at the time of F&B issue in July-August 2018. According to Shah, these multiplex valuations imply about 24-25% discount to the median one-year forward EV/Ebitda of 13 times in the last five years. On Wednesday, PVR and Inox shares further fell by 2-4%.
“We believe if the virus were to spread rapidly in India there is high probability that Q1FY21 will take a big hit in terms of Box Office, which eventually will impact FY21 performance as a whole, which is slated to grow 13% year-on-year in 9MFY21 based on Hindi content pipeline visibility as of now," said Karan Taurani, an analyst at Elara Capital Ltd.
Meanwhile, both companies are adding new screens to their portfolio, which will eventually add to revenues in the long run. In the near term, investors would do well to keep expectations low, as the March quarter outlook too is not rosy, given the below-than-expected box-office collections.
As such, the fear factor surrounding Covid-19 would drive sentiment for shares of multiplex firms. “In the worst case, the impact would be for short-term and not structural which the F&B issue could have been. However, the news flow on detection of further infections is likely to weight on valuation in the near term," said IDBI Capital’s Shah.