Ticket price cap may lead to derating of multiplex stocks

So far, only 3 states have imposed a cap on ticket prices, but this could change if more states follow suit

The decision by the Karnataka government to cap movie ticket prices at ~200 is a negative for the listed multiplex chains of PVR and Inox Leisure. The two stocks corrected 3-3.5 per cent on Wednesday when the move was announced. Karnataka accounts for about 15 per cent of revenues for PVR and 13 per cent of its total screen count while the number is under 10 per cent for Inox on both parameters. Karnataka becomes the third state in the country with the other two being Andhra Pradesh and Tamil Nadu which have capped ticket prices.

The worry for the Street is the impact this kind of move may have on multiplexes if the Karnataka example is followed by other states, especially metros. It is estimated that Mumbai and the NCR region account for about 30 per cent of ticket revenues for the larger multiplexes and the impact is more given the focus on higher sales of premium tickets in these areas. An analyst at a local brokerage believes it could lead to derating of the sector, given that multiplex business has a high fixed cost component and a capping of prices will impact revenues as well as margins.

For multiplexes, there are couple of ways the move impacts their financials. First, average ticket prices (ATP) will come down. In the case of PVR, ATP in Karnataka was at ~220, and will have to be brought down to the new ceiling. It also impacts margins as Karnataka’s ATP is higher than the company’s overall ticket price average of ~199. The revenue impact of the move for PVR is pegged at around five per cent while the impact on operating profit margin will be about six per cent, believes an analyst at a domestic brokerage. While 60 per cent of the revenues from Karnataka are ticket revenues, the rest comes from advertisement and food and beverages.

The sector is expected to ask for a rollback of the price cap, or exemption for those in the premium categories, such as IMAX’s Gold Class. This is the case in Andhra Pradesh which has capped the rates for movie tickets while exempting the premium class of tickets. Edelweiss Securities believes that though lower prices would have a 9-10 per cent impact on ticket revenues, it could help improve footfalls in the Karnataka market where occupancy is 42 per cent. This could also help bring in higher food and beverage revenues, they add. Other brokerages, however, say that occupancies are driven by content and not necessarily prices and multiplex owners would have kept the prices at a lower level if it helped to keep occupancies higher. Well, the jury is out on this.

Inox is trading at 25 times its FY18 estimates, while PVR (which has risen 40 per cent since the start of the year) is trading at 36 times its price-to-earnings ratio, indicating that valuations are not cheap.