Occupancy uptick, content pipeline drive multiplex stocks' rally

More state governments could join Maharashtra in easing restrictions ahead of the festive season

Multiplex stocks gained 6-8 per cent in Monday’s trade after Maharashtra eased restrictions on movie exhibition, with other states expected to follow suit. Maharashtra has allowed theatres to operate at full capacity from October 22 and will join other states like Karnataka and Rajasthan, which have allowed 100 per cent occupancy.

While PVR gained 5.7 per cent, Inox Leisure surged 8.1 per cent on Monday. Analysts highlight that multiplexes weren’t rerated as much as other “unlock” themes, and valuations were at a discount to earlier levels. 

Currently, most states have occupancy (50-60 per cent) or timing or staff vaccination restrictions. The Maharashtra government’s decision is a key near-term trigger ahead of the festival season as the state accounts for 25-30 per cent of box office collections for Hindi movies. It accounts for 18 per cent of PVR’s 849 screens and 20 per cent of Inox’s 648 screens.

Given the lull in movie releases over a year and a half, there is a large content pipeline, including big budget movies which are slated for release over the next couple of quarters. With 80 per cent of the eligible population expected to be vaccinated by the end of CY21, brokerages expect occupancies to increase as more states ease restrictions.

While single screens are giving way to multiplexes (about 20 per cent of single screens in north and west India could shut permanently, according to Elara Securities), consolidation within multiplexes may be the other trigger for listed entities.

Abneesh Roy and Amritasai Sista of Edelweiss Research believe that Carnival may make room for PVR and Inox. “The fourth-largest multiplex operator is struggling from high debt and this could reduce competitive intensity for the top 2 players. Carnival’s current debt is estimated at upwards of Rs 700 crore,” they say. 

While movies will continue to be released on over-the-top or OTT platforms, the theatrical release of big budget movies and rising occupancy levels as vaccinations gather pace should help multiplexes. Jaykumar Doshi of Kotak Institutional Equities says: “Disney’s decision to discontinue simultaneous theatrical and digital release of movies validates relevance of theatres and alleviates concerns around structural risk from OTT.”

While ticket collections are the biggest revenue source for the sector, the Street will keep an eye on the sales trends in the advertising and food/beverage (F&B) segments, given their impact on profitability. Premiumisation efforts and higher share of F&B are improving realisations for multiplex operators. The share of F&B to spend per head for PVR, for example, increased from 36 per cent six years ago to 55 per cent in FY21. 

While this trend is positive, analysts expect top-line recovery to be gradual. Karan Taurani and Viren Deshpande of Elara Securities expect overall revenues to revert to 80 per cent of pre-Covid (FY20 levels) in FY23, with further recovery in FY24. They, however, expect advertising revenues to take the longest to recover due to high exposure to local advertising, whereas other revenue metrics of F&B and convenience fee will follow the footfall recovery trend. 

Given the expected gradual recovery and the risk of new outbreak, investors should await improvement in operating metrics, including occupancies before considering the two companies.