Multiplexes face regional threat

High dependence on Tamil, Telugu cinema dents PVR’S Q3 profit; all eyes on Inox

Stocks of multiplexes — PVR and Inox Leisure (Inox) — have remained investors’ favourite in recent times. They were up 10-30 per cent i n the past six months until January 22, even as the overall consumption sentiment was low.

These gains were on the back of expectations t hat t he t wo cinema exhibitors would overcome the sagging consumption scenario and continue posting strong performance. However, PVR’S muted and lower-than-expected performance for the October-december 2019 quarter (third quarter, or Q3) has belied hopes, leading to a 1.1 per cent decline in its share price on Thursday, despite the Sensex rising 0.7 per cent and mid- cap and small- cap indices gaining 1 per cent each.

On a consolidated basis, while PVR’S revenue grew 8.6 per cent to ~915.7 crore, its profit before tax was down 34.5 per cent to ~58.3 crore, and net profit by about 30 per cent to ~36.3 crore, over the year-ago quarter. The profits were way lower than Bloomberg consensus estimates. Besides, a higher base in the year-ago quarter and dismal performance by the movie-ticket segment — which is over 50 per cent of PVR’S revenues — dragged down revenue growth.

PVR’S movie-ticket segment or box office collections grew by just 6 per cent year-on-year (YOY), compared to 25 per cent year- on-year growth during the April-september 2019 period. Though Bollywood and Hollywood content had strong box office performance, regional content, mainly Tamil and Telugu, was dismal in Q3. This led to a flattish footfall and a 220-basis point (bps, or bips) year-on-year contraction in occupancy rate. The contribution of regional content fell from 34 per cent a year ago to 23 per cent, amid poor performance of Tamil and Telugu content, which is 70 per cent of the overall regional content.

This clearly shows the importance of regional content on PVR’S revenue. This apart, slower growth in advertisement revenue amid lower advertising spends by clients, given the economic slowdown, further pulled down revenue growth. However, a 13-per cent growth in the food and beverage (F&B) segment provided some support.

The dismal show in top line percolated down to the operating l evel. Earnings before interest, tax, depreciation, and amortisation (Ebitda) margin of 19.5 per cent, adjusting for INDAS 116 (new lease accounting norms) remained almost flat at the year-ago level. On a reported basis, i.e., including INDAS 116 impact, the Ebitda margin in Q3 was up 1,407 bips YOY to 33.6 per cent.

Some analysts though see the Q3 showing as a blip. Jinesh Joshi, analyst at Prabhudas Lilladher, for instance, does not see any pressure for the box office and F&B segments as growth moderation in Q3 was mainly due to a higher base of last year. However, the improvement in regional content is something which will be keenly watched.

The management is also confident of a recovery in revenue growth in the March quarter due to robust content pipeline. It also highlighted that the Tamil and Telugu content has started the New Year on a strong note.

Advertising revenue growth, however, would remain under pressure due to the overall weak economy. An analyst from a domestic broking house also believes that the March quarter is likely to be better for PVR, in terms of footfall, and the multiplex sector would continue to remain a good growth story.

Now, the question is, will Inox be able to meet Street expectations for Q3? Rajiv Sharma, head of research at SBICAP, expects Inox’s Q3 revenue numbers to be in line and better than PVR as Inox has lower exposure to southern regional content. However, the jury is out on this. “Inox’s premium screen additions and valuation discount to PVR would support the former ’s stock even if there is a marginal miss in Q3,” adds Sharma. At 10x estimated enterprise value to Ebitda, the stock of Inox is currently trading at a 17 per cent discount to PVR.