Multiplex companies look attractive post correction; PVR, Inox Leisure gain

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Multiplex operators PVR and Inox Leisure were among the top gainers in the BSE 500 index on Friday, appreciating 7-14.5 per cent. The gains came after PVR entered into a three-year deal with ticketing aggregators bookmyshow and PayTM for a convenience fee of Rs4.1 billion, most of which it will receive upfront as advance payment in FY19. Analysts estimate that the incremental convenience fee would offset the profit impact due to lower food & beverage (F&B) revenues. Despite the surge, experts say, these companies look attractive, given their long-term prospects and the sharp decline in their share prices in recent weeks. The latest gains follow a steep correction of 20-24 per cent in the two stocks on worries that these companies might not be able to offset losses from the food and beverage (F&B) segment if they lose the ongoing litigation in courts.
Multiplex chains are challenging various state governments’ decisions on allowing outside food into cinema theatres. While so far there have been only two judgments on this issue (one against multiplex operators in Jammu and Kashmir, and the other in their favour in Madhya Pradesh), verdict in the key state of Maharashtra is keenly awaited. Analysts at Edelweiss Securities believe the favourable judgment in Madhya Pradesh will strengthen the case of multiplexes in Maharashtra.

While there is uncertainty, given the overhang related to the entry of outside food into theatres, Girish Pai, head of research at Nirmal Bang Institutional Equities, says the 20-25 per cent correction in the stock price creates an attractive entry point for investors with a long-term view. Chirag Shah of CLSA, too, says asset valuations are now attractive, especially in view of high entry barriers, a consolidated industry structure, and large untapped potential.

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.