GST cut on movie tickets to boost revenue growth of multiplex operators

Listed players PVR, Inox Leisure to benefit from higher footfalls, ad revenue

For a sector that was at the wrong end of multiple regulatory and legal worries, the cut in the goods and services tax (GST) on movie tickets is a welcome relief. On Saturday, the GST Council cut tax rates to 12 per cent on tickets priced below Rs 100 from 18 per cent earlier and to 18 per cent for tickets priced above that from 28 per cent. The stocks of multiplex operators PVR and Inox Leisure were up in early trade on Monday but displayed divergent trends at close with Inox gaining 3.4 per cent while PVR was down 1 per cent. 

The move is clearly a positive for the sector. Ticket prices are expected to fall by about 9 per cent as companies pass on the cut in rates to consumers. While this is expected to hit revenues per ticket, volume gains are expected to more than compensate for the same. Analysts at ICICI Securities believe that the move, which will make ticket prices more affordable, is expected to improve footfalls. Analysts also expect this to aid revenues. 

The lower GST rate for ticket prices above Rs 100 should also help increase the share of premium/super premium screen portfolio. Current super premium screens account for over 9 per cent of PVR’s portfolio, and the company has a target of taking this number to 20 per cent. Similarly, for Inox, the super premium segment accounts for just under 6 per cent of revenues, which the company wants to increase to 10 per cent in the next three years. Analysts at IDBI Capital, in an earlier report, indicated that growth of this format would enhance the brands of both companies and drive higher growth in average ticket prices, food and beverage spends and advertising revenues. 

In addition to this, gains for the multiplex players will come from higher food and beverage sales, given the expectations of a rise in footfall. Currently, this constitutes about 23-27 per cent of the overall revenues of the two companies. A higher revenue from this segment is critical as this is among the most profitable segments for the sector.

The key trigger for the sector going ahead will be any acquisition move by the leaders. 

The top four players currently account for about 72 per cent of all multiple screens. While PVR had recently acquired SPI Cinemas, it is reportedly in talks to acquire a north-focused multiplex chain, Wave Cinemas that has 46 screens. 

Given Inox’s proposed fund raising to the tune of Rs 1.6 billion, the firm is reportedly looking at a potential acquisition. The Street’s optimism on the stock could be the addition of new screens through the inorganic route. 

Despite the significant premium being paid by acquirers, analysts believe that consolidation is expected to continue. Analysts at CLSA believe that limited organic growth opportunities, synergy benefits, bargaining power with distributors and addressing geographical gaps are the key reasons for players opting for acquisitions. Consolidation has helped attract national advertisers, improving non-ticketing revenues, they maintain.

Analysts are bullish on both stocks, given the low penetration of screens in the country, higher share of multiplexes and rising proportion of spending per head. 

At the current price, PVR is trading at 30 times its FY20 earnings estimates, while Inox is available for 18 times. Given that the gap is being bridged between the two, analysts believe that 64 per cent premium for PVR may not be justified.