Multiplex stocks buck consumption slack as urban focus, content push growth

Most segments within the consumption space have reported a slowdown in volume growth in the March quarter. However, the multiplex segment has been an outlier, posting strong growth. Stocks of the two listed multiplex majors — PVR and Inox Leisure (Inox) — rallied 18-36 per cent in the last three months, outpacing the S&P BSE FMCG and the Nifty Consumption indices where gains were limited to about 2 per cent during this period. While analysts are uncertain about demand growth in the consumer space, they believe PVR and Inox should see more gain on the bourses given the growth opportunity.

Accounting for around 45-46 per cent of the total number of screens in the country, PVR and Inox dominate the Indian multiplex space. While the consumption space has slowed down mainly due to a rural slowdown, urban focus and content demand should augur well for the multiplex players. The urban exposure of these companies is largely skewed towards metropolitan/ tier-1 cities that account for around 70-80 per cent of  revenues.

According to Karan Taurani, analyst at Elara Capital tracking media companies, the pressure in the consumption space is not impacting the multiplex sector given its urban focus and the fact that disposable income is unlikely to be an issue for urban consumers. The multiplex is moving towards the studio-based model, resulting in good quality and big budget content. This should propel footfalls and occupancy rates given the expected screen additions.

In FY19, too, strong content performance boosted the box office collections of companies. A sharp rise in footfalls and occupancy rates helped ticket collections, which account for over 55 per cent of revenues. Despite the high base of FY19, the two companies are likely to witness 10-11 per cent annual growth in footfalls over FY19-21 and the occupancy rate would also be good. Moreover, rising regional content is giving additional growth lever to multiplexes. This, along with 5-7 per cent likely rise in average ticket rates, should boost revenues of the two companies going ahead.

The rise in footfalls is expected to translate to higher sale of food and beverages, further strengthening top line growth.  Food and beverage is the largest revenue segment for multiplex players after ticket sales. Experts say the regulatory hurdle for multiplexes’ food and beverages segment is likely to be behind. There could, however, be limited room to grow for the high-margin advertising segment.

“Slowdown in consumer staples could put some pressure on multiplexes’ advertising revenues. However, local businesses which have very little avenues for advertising would provide the support,” says Rajiv Sharma, co-head of research at SBICAP Securities, who also believes that multiplex is a structural story given the lower penetration. The number of screens in India is currently way below countries such as the US. Besides, Nirmal Bang’s May 2019 report says: “Structurally, expectations of a rise in relevant customer households which can afford this type of entertainment (currently at 8-11 per cent of the total, in our view) is going to drive demand.” Coupled with screen expansion, this should drive penetration into the tier II and tier III centres.

Also, any significant impact on multiplex business from digital platforms and the content available thereon seems unlikely given customers’ preference so far for the theatre experience rather than digital platforms. In fact, both PVR and Inox, during their March 2019 quarter earnings, had indicated that OTT (over-the-top or digital platform) were not having a negative impact on the consumption of multiplex content. However, the trends in OTT space will remain a risk for the multiplex majors going ahead.

Thus, the stocks offer good long-term investment opportunities, though sharp near-term upsides may not come about.