Capping ticket prices could lead to derating of multiplex stocks

So far only 3 states have imposed cap on ticket prices, but this could change

The decision by the Karnataka government to cap movie ticket prices at Rs 200 is negative for listed multiplex chains, PVR and Inox Leisure. The two stocks corrected 3-3.5 per cent on Wednesday when the move was announced. Karnataka accounts for about 15 per cent of revenues for PVR and 13 per cent of its total screen count, while the number is under 10 per cent for Inox on both parameters. Karnataka becomes the third state in the country to impose such a cap, the other two being Andhra Pradesh and Tamil Nadu. 

The worry for the Street is the impact these kind of moves may have on multiplexes if Karnataka's example is followed by other states and the metros. It is estimated that Mumbai and NCR region account for about 30 per cent of ticket revenues for the larger multiplexes and the impact is more given the focus on higher sales of premium tickets in these areas. An analyst at a local brokerage believes that it could lead to derating of the sector given that multiplex business has a high fixed-cost component and a capping of prices will impact revenues as well as margins. 

For multiplexes there are couple of ways the move impacts their financials. First is that average ticket prices (ATP) will come down. In the case of PVR, average ticket prices in Karnataka were at Rs 220, and will have to be brought down to the new ceiling. It also impacts margins as Karnataka’s ATP is higher than the company’s overall ticket price average of Rs 199. The revenue impact of the move for PVR is pegged at around 5 per cent while operating profit margin impact will be about 6 per cent, believes an analyst at a domestic brokerage. While 60 per cent of the revenues from Karnataka is ticket revenues, the rest comes from advertisement and food and beverages.

The sector is expected to ask for a rollback of the price cap especially those in the premium categories such as IMAX has Gold class exempted from the cap. This is the case in Andhra Pradesh which has capped the rates for movie tickets while exempting the premium class of tickets. Edelweiss Securities believes that though lower prices would have a 9-10 per cent impact on ticket revenues, it could help improve footfalls in the Karnataka market where occupancy is 42 per cent. This could also help bring in higher food and beverage revenues, they add. Other brokerages, however, say that occupancies are driven by content and not necessarily prices and multiplex owners would have kept the prices at a lower level if it helped to keep occupancies higher. Well, the jury is out on this.

Inox is trading at 25 times its FY18 estimates, while PVR (which has risen 40 per cent since the start of the year) is trading at 36 times its price to earnings ratio, indicating that valuations are not cheap.