For multiplex operators, road to recovery likely to be longer

Rebound in Covid cases, OTT threat raise concerns

Shares of multiplex chain operators PVR and Inox Leisure have corrected in the range of 13-14 per cent from their January highs, as rising Covid-19 cases and the continuous threat from the rapid growth of over-the-top (OTT) platforms mount concerns over the pace of business recovery.

After a consistent reduction in new Covid cases over the past few months, Maharashtra, Punjab, Kerala, Chhattisgarh, and Madhya Pradesh have been witnessing a resurgence in new cases recently. This may hurt footfall, say analysts.

“Despite the opening up of theatres, it may take some more months to ease back into normal operations, until which the risk of lower occupancy may continue to put pressure on cash flows,” says brokerage firm Motilal Oswal Securities (MOSL) in a recent report.

Multiplexes and cinema halls were allowed to start operations only in October last year, even as most other sectors had resumed operations around June-july. Business remained muted as most movie-goers preferred to consume content from the safety of home.

OTT platforms, which were anyways growing at a brisk pace even before the pandemic, have seen a sharp increase in subscription in recent years on the back of increasing digital content and higher data penetration. According to MOSL, the size of India’s OTT subscription market is estimated to have more than trebled from ~1,340 crore in 2018 to ~4,150 crore in 2020. Paid subscribers have grown 2.5 times in the last year to 11 million; they are estimated to grow 50 per cent in 2021. Given the nature of the multiplex business and its sensitivity to occupancy rates, any limited softness due to competition from OTT platforms may have a severe and lasting impact on earnings and return profile, the report adds.

Still, there have been some positive developments for the industry in recent weeks. After months of negotiations, the government finally allowed movie exhibitors to operate screens at full capacity from February 1, with adherence to Covid-19 safety protocols. This is key for both PVR and Inox as a majority of their screens (64 per cent and 56 per cent, respectively) are functioning at 100 per cent occupancy, says HSBC in a February 23 report.

Additionally, many prominent production houses have announced release dates of their movies for this year. This is seen aiding the recovery in footfall. “Over 30 movies (Bollywood, Hollywood, pan-indian) have had their theatrical release dates confirmed over the last few weeks, including some bigbudget tentpole movies (such as Raadhe, 83, KGF Chapter2, RRR, Shamshera, and s) which should bring footfall back into the theatre, in our view,” the report adds.

Additionally, analysts believe the poor financial health of smaller/regional multiplex chains and single-screen operators may lead to further consolidation in the industry. “The maximum reduction in seat availability may happen in single screen, and the benefit of consolidation (via higher occupancy) can be higher for surviving single screens; but we expect good spillover benefit for multiplexes, as well. Our working shows 100 basis points higher occupancy for PVR and INOX to improve Ebitda by 9.1 per cent and 11.7 per cent, respectively,” says Sanjesh Jain, research analyst at ICICI Securities. Even after the recent correction, stock prices for the top two multiplex players are higher by 22- 26 per cent since the end of October. Valuations, therefore, seem to be factoring in most of the positives, say experts.

“We retain ‘hold’ rating on both names, as we believe there is still a fair amount of uncertainty on the extent of footfall recovery and the number of new Covid cases will keep valuations under check,” says Naval Sheth, research analyst at Emkay Global.

“In our view, nearing the release of films starting from April, there can be a catch-up trade, with the anticipation of strong footfall,” he adds.