Unlock 5.0: Street cautious about prospects of multiplexes, hotels

Low occupancies, capacity restrictions and safety concerns could make it difficult to reach breakeven levels

Multiplex operators and hotels were major gainers in trade on Thursday, following the Union Ministry of Home Affairs’ announcement of further relaxations.

The new guidelines (Unlock 5.0), which will be applicable from October 15, allow the opening up of cinemas, entertainment parks, and business-to-business exhibitions.

While the lockdown in containment zones has been extended till October 31, restrictions on social, sports, and entertainment gatherings outside these zones have been lifted. The Maharashtra government has also allowed hotels and restaurants to be opened with 50 per cent capacity.

Most analysts believe Unlock 5.0 benefits sectors such as multiplexes — which are opening after seven months of closure — the most.

Independent analyst Ambareesh Baliga believes the hotel and entertainment segments will benefit, even as occupancies aren’t expected to revive to pre-Covid levels soon.

He expects occupancies at 50-60 per cent of pre-Covid levels, with hotels faring better than multiplexes. Higher occupancies in hotels will be led business travel, with leisure travel following suit gradually, he adds.

Other analysts, too, believe Unlock 5.0 will lead to a gradual increase in occupancy as the fear of infection recedes.

Suyog Kulkarini of Reliance Securities says: “The opening up of cinemas and hotels with limited capacity is a big relief as it will start the process of revenue generation, which had stalled for months.”

The break-even occupancy level for the multiplex industry is pegged at 20-30 per cent, though it varies for the hospitality sector depending on the segment that the restaurant and hotel caters to.

Indian Hotels indicated a break-even occupancy level of 40 per cent, with food and beverage units operating at 100 per cent capacity.

The key triggers for the multiplex sector is the line-up of big budget movies that could drive demand. Further, the perception of safety measures taken by multiplex chains is a key factor. For the hospitality sector, H2FY21 will be driven by innovative ‘staycation’ models and the wedding season, says Kulkarni.

Others, however, are skeptical. G Chokkalingam of Equinomics Research and Advisory says: “I don’t think the unlock guidelines can improve occupancy in a significant manner, as the majority will not take risks. The best-case scenario could see occupancies reach 30-40 per cent of pre-Covid levels.”

In addition to concerns over viewing content in a closed environment, analysts have also highlighted structural growth issues for multiplex chains owing to the soaring popularity of over-the-top applications, especially during the lockdown.

While stocks of market leaders in the respective categories have risen sharply on hopes that the pandemic will lead to a shake-out and help bigger firms gain share, there is lack of clarity on the benefits.

Chokkalingam says: “Market leaders will only get higher valuations if they record growth. Till a solution in the form of a vaccine comes, accumulated losses will lead to increased stress on the balance sheet.”

Investors should, therefore, be cautious about companies in these two sectors and stick to zero-debt and cash-rich firms in sectors such as chemicals, pharmaceuticals, and IT — all of which have shown resilience.