Moreover, the Street seems to have taken the worst case scenario into account as far as the impact on multiplexes is concerned. Analysts at ICICI Securities indicate if half of the F&B revenues in Maharashtra were to be at risk, the impact on the overall revenue would be under 4 per cent but much higher (13-14 per cent) on the operating profit, given higher profit margins of the segment. However, most analysts say the impact on F&B revenues would not be as much, as multiplexes move to reduce food prices and hike volumes, which will offset some of the loss. However, for now, all these are still assumptions.
A permanent closure to this issue through the legal route with a favourable verdict will lead to a valuation re-rating for the sector, which remains an oligopoly (70 per cent of the screens are controlled by just four players). Pai of Nirmal Bang Institutional Equities believes the litigation against multiplex operators will not stand legal scrutiny, as the film exhibition is not an essential service and is, thus, taxed at the highest goods and services tax (GST) rate of 28 per cent. Additionally, there are issues related to security, impact on other segments of the entertainment industry and hygiene/ ambience, which will be difficult for state governments to overcome in the courts.
In addition to changes in the F&B pricing and mix, multiplexes have a couple of avenues, including increasing advertisement and ticket prices, which account for 11 per cent and 60 per cent of the revenue, respectively, to offset the potential impact on this business.
On the operations side, the companies reported a strong June quarter, led by aggressive expansion and a strong movie pipeline. While revenues improved 7-9 per cent over a year on the back of a 20 per cent-plus jump in F&B revenues, the overall spends per head have also increased. Box office collections, especially for PVR, were strong at 12 per cent, aided by a 2 per cent increase in ticket prices and 8 per cent rise in footfalls. Analysts at Edelweiss say future revenue for the company will be supported by aggressive screen expansion and a strong movie line-up. Brokerages also have a ‘buy’ rating on Inox, as they believe the valuation gap between PVR and Inox will reduce, given that the smaller company is addressing issues related to weakness in the F&B and advertisement segments.
However, if there is a negative verdict in Maharashtra, the impact will be felt more on PVR than Inox. While PVR has 157 screens in Maharashtra (a quarter of all its screens) compared to 24 per cent for Inox, the share of F&B revenue in the turnover is much higher for PVR at 27 per cent compared to 22 per cent for Inox. The other risk is: other states might follow suit after an unfavourable verdict for multiplexes.