• Movie theaters are still waiting for restrictions to be loosened so that they can welcome back audiences with safety measures
  • 18 shows have been purchased, 6 have been held, and 4 have been sold on PVR. Inox has 16 purchases, three holds, and a sale.

Multiplexes have been impacted by the pandemic for longer than expected. The Maharashtra government has recently allowed the state’s cinemas to reopen from 22 October, which is a huge relief for investors in these stocks. The exact number of seats in the halls is not yet decided, but protocol will be followed to prevent Coronavirus from spreading.

The sharp increase in shares prices is not surprising due to the fact that multiplex operators earn around 30% of total box office revenues in Maharashtra for Bollywood releases. Inox Leisure Ltd and PVR Ltd gained over 6% each on the NSE on Monday, surged to new 52-week highs. Occupancies should begin to return to normal soon, helped by new movies, pent-up demand, and the festive season.

Recoveries are slow

Inox Leisure and PVR will both be encouraged by this as more producers will rush to schedule releases. As there is a strong pipeline for both Hollywood and Bollywood movies, an affirmative response from a key revenue-generating state such as Maharashtra bodes well for these stocks and could lead to some re-rating,” explained Jinesh Joshi, research analyst at Prabhudas Lilladher.

Stocks in the multiplex sector were among the hardest hit by the pandemic in the consumer discretionary sector. The shares of these companies still trade at lower valuation multiples than many consumer-focused stocks, despite the gradual revival of the economy. Multiplex stock returns have been relatively modest compared to paint makers and other discretionary product companies over the past year.

Compared to consumer discretionary/retail names, PVR’s shares have underperformed among the ‘economy opening-up stocks due to structural uncertainty. Analysts at Kotak Institutional Equities said on 20 September that a modest re-rating in PVR’s value was unlikely once operations (especially occupancy) recovered and concerns eased.

The impact on earnings of this development, according to Joshi, is still too early to assess. Combined releases may result in increased revenue for both companies in some quarters. He stated that a full-scale earnings recovery is still some way off.

A second concern is the impact of revenue-sharing agreements with mall owners on the earnings performance of these multiplex operators. There is a belief among investors that after the first stage of reopening of theatres in Maharashtra, seating capacity was limited by 50%. Food consumption inside theatres was also prohibited. Analysts said that this time it will be interesting to see how these aspects play out.

Multiplexes are also worried by the rising popularity and consumption of over-the-top platforms among Indian consumers. The situation for investors has somewhat improved.

“Disney announced in September that all new movie releases for 2021, with no commitment beyond 2021, would premiere in theaters first, and then be distributed on any other distribution platforms after 30 to 45 days. In a report on 27 September, analysts at Nirmal Bang Securities Ltd said this should ease concerns over OTT eating into the theater business.

The Indian multiplex stock market bounces back despite empty theaters

India’s multiplex operators are pinning their hopes on cost reductions and sufficient liquidity to overcome the ongoing disruption caused by the box office window being closed for four months.

After being hit by a three-month run of losses when shopping malls, restaurants, and movies ceased to operate, PVR Ltd. and Inox Leisure Ltd. have rebounded about 50% since May. As restrictions ease, cinemas are preparing for audiences to return with safety measures, such as socially-distributed seating and sanitized auditoriums, and snacks made with more sanitary methods.

COVID-19 is expected to cause a lot of disruptions this fiscal year. In a note to clients, analysts Anurag Dayal and Amit Sachdeva of HSBC Securities and Capital Market India said they were encouraged by the initial response in other markets where cinemas reopened. They reiterated their buy rating on PVR and Inox.

There are 18 buys, six holds, and four sales for PVR. Bloomberg compiled recommendations for Inox, including 16 buys, three holds, and a sell. PVR and Inox have both outperformed their price targets, with PVR closing Friday at ₹1,309.65 versus a consensus of ₹1,208.56 and Inox closing Friday at ₹303.60 versus a consensus of ₹289.78.

As the world’s largest film producer, India has been resisting shifting the release of films online. Bollywood, as the industry is called, has made the most films in the world. Netflix, Disney, and Amazon gained subscribers when the prolonged stay-at-home order stimulated producers to go to their streaming platforms for new releases.

“Multiplexes represent an exponential growth opportunity,” the analysts wrote in the report. “We expect the buzz, experience, and exposure they provide to continue to make them a preferred choice for big launches throughout India.”

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