Near-term uncertainty in demand, costs to keep PVR stock under pressure

While lower costs are positive, cash burn may remain high even after resumption

PVR’s June quarter performance was drab, on expected lines, as cinemas remaining closed during the lockdown.

India’s largest multiplex operator reported revenues of Rs 12.6 crore from movie production and distribution, food and beverage, and other income. Though costs have reduced, a collapse in revenues translated into a loss of Rs 116 crore at the operating level. With no clarity over re-opening of cinemas, following a washout in the September quarter too, focus has shifted to controlling costs in the near term. After a 72-per cent decline in fixed costs in the June quarter, thanks to cost savings on employees and rentals, the company indicated a further fall in fixed costs for the July-September quarter.

Rents account for the lion’s share in fixed costs, at 30-34 per cent. The firm is seeking a waiver on rentals and lower common area maintenance during the lockdown. Given the rationalisation in workforce and salary cuts of up to 50 per cent, employee costs are expected to reduce to Rs 13 crore a month, compared to Rs 23 crore in Q1.

 

 

The reduction in costs is a positive, but whether it will be enough to meet fixed costs will depend on occupancy levels — especially in the initial months after reopening.

A bigger challenge for multiplexes is structural in nature, given over-the-top (OTT) platforms have soared in popularity and producers have released a few movies on those, too. The company, however, believes theatres are the preferred distribution platforms as they generate 60-70 per cent of revenues. They also expect theatres to be the destination of choice for out-of-home entertainment, which could pick up pace once the curbs are lifted and consumer confidence revives.

Given the positive feedback from countries that have allowed theatres to open and have a lengthy content pipeline, PVR expects demand in India to revive as operations normalise.

Though the recent rights issue and access to funds should help take care of the near-term cash burn, there are multiple challenges that the sector faces, owing to uncertainty on the demand and cost fronts. Investors are, therefore, advised to give multiplex stocks a miss.