Unlock 5.0: Analysts remain cautious on PVR, Inox Leisure despite relief

Unlock 5.0 guidelines saw stocks of multiplex operators, PVR and Inox Leisure whose businesses have been shut since March in the wake of Covid-19 lockdown, gain ground in trade on Thursday. The government on Wednesday allowed re-opening of cinema and multiplexes from October 15 albeit with 50 per cent capacity.

At the bourses, shares of Inox Leisure surged 17 per cent to Rs 318 on the BSE on the back of over four-fold jump in trading volumes while those of PVR rallied 15 per cent to Rs 1,395 on the BSE in the intra-day deals on Thursday. In comparison, the S&P BSE Sensex gained 1.5 per cent.

Despite the rise, analysts remain watchful on the road ahead for these stocks. G Chokkalingam, founder and managing director of Equinomics Research and Advisory, for instance, says the steady rise in Covid-19 infections, weak balance sheet, and shift to (over-the-top) OTT preference is likely to continue to cap the upside in these stocks.

“The rally in these stocks will fizzle out soon as the 50 per cent capacity may only translate into filling up to 20-30 per cent capacity. This is unlikely to make up for the losses already incurred in the past six months. However, in the absence of a vaccine against the virus, it is unlikely that people would venture out just for entertainment,” he says.

Mounting losses

According to the Multiplex Association of India (MAI), the film exhibition industry lost Rs 1,500 crore a month due to the closure of cinema halls. This implies that in six months, the sector lost revenues of Rs 9,000 crore. Moreover, maintenance costs of movie halls could shoot up by around 20-25 per cent in the post-Covid world.

Occupancy levels, which stood at 35-36 per cent on an average for multiplexes before the Covid-19 crisis, could settle at levels of around 25-30 per cent after the initial three to six months’ lapse following reopening. That said, an analysis by Anand Rathi pegged the number of movie-goers in India at 3 crore out of a total population of 1.3 billion.

"The challenges for the business are still significant considering corona cases have continued to rise. Also, for exhibition, business content is important. The content pipeline needs to be revisited. While opening up the business is positive, it is unlikely to kick start the business meaningfully as operational challenges will persist," says Naveen Kulkarni, chief investment officer at Axis Securities.

That apart, F&B and the ad segments commanded a gross margin of 98 per cent and 74 per cent for exhibitors, respectively. With a cap on occupancy, analysts believe profitability will see a big hit until these metrics normalize.

"We believe F&B revenue, which constitutes nearly 26 per cent and 28 per cent of top line for Inox and PVRL, respectively, will remain under pressure until concerns subside with the arrival of vaccine or cases becoming negligible. Further, the occupancy cap may remain longer than expected in cinemas, which, in turn, will have a direct negative impact on ad revenue," said a recent report by Elara Capital.

Further, exhaustion of savings for a majority of households and job losses will lead customers to avoid F&B consumption or spend much less in cinema halls despite disposable utensils, safety measures and sanitized kitchens, the report added.

Deepak Jasani, head of retail research at HDFC Securities, says that Multiplex owners would need more relaxations and containment in the virus cases to trigger a sustainable recovery. OTT, according to Jasani, has become a preferred mode of entertainment in the past few months, which is a structural shift in the entertainment industry. "While cinema-goers may prefer watching big ticket grand movies in theatres, low budget films may be watched on OTT and hence see lower footfall in multiplexes," he says.

According to reports, Inox has reduced its monthly fixed cost to Rs 12-13 crore from Rs 30-35 crore in pre-Covid-19 times, whereas PVR has reduced it by 75 per cent to Rs 35 crore. PVR raised Rs 300 crore through rights issue in July, while Inox sold treasury shares worth Rs 100 crore in mid-August. Additionally, the company has also got final approval from the board to raise another Rs 250 crore. While this will release pressure on their cash flow, near-term headwinds and stretched valuations make the stocks unattractive at current levels, analysts say.

Kulkarni of Axis Securities expects the sector to consolidate further, benefiting the leading listed entities. “However, near-term operational challenges are significant and valuations are not cheap. It would be wise to wait for better levels to enter these stocks,” he says.

Girish Pai, research analyst at Nirmal Bang has an ‘Accumulate’ rating on PVR with a target price of Rs 1,229, while those at Anand Rathi have ‘Hold’ rating on PVR and ‘Buy’ rating on Inox Leisure.