After months of desperation, this week has brought good news for multiplexes. First, West Bengal allowed cinemas to reopen. Now, the Interior Ministry has said that multiplex cinemas can restart operations as of October 15 with 50% of their seating capacity. Unsurprisingly, investors are elated. Shares of PVR Ltd and Inox Leisure Ltd rose nearly 10% against NSE in early trading Thursday. Overall, these stocks are up 15-20% so far this week.
As India gradually opened up from its covid-19 lockdown, multiplexes are one of the last to be able to reopen, making the sector relatively more vulnerable. Development is sentimentally positive, but it is also only the first important step. In these times of pandemic, the risks for the multiplex sector are greater, since consumer behavior is unpredictable, which generates uncertainties about how demand would develop.
Karan Taurani, Analyst, Elara Securities (India) Pvt. Ltd said: “Cinema is a high operating leverage business and advertising / food and beverage revenue will take longer to recover to pre-covid levels.” Taurani added: “Other risks include increased distributor involvement and a period of – best) services.” The lower window risk is to allow the producer to make more money from digital / satellite rights so that they can offset lower charges in times of covid.
According to Taurani, “they will be compensatory measures that the producers will ask for before releasing the film, since they have waited so long for its premiere and since the pre-covid box office will take a little longer to return.” because occupancy is expected to be less in the first months, as people remain indoors to protect themselves from the virus.
Abneesh Roy, analyst at Edelweiss Securities Ltd says: “The challenges will be consumers, the need for promotions on ticket prices, IPL, content, rental negotiations, etc.”
Note that Maharashtra has extended its closure until the end of October and state cinemas will not open this month. This can limit the posting of content, as Maharashtra accounts for a significant portion of box office revenues.
According to Roy, “the key thing to watch will be the rental negotiations that were on hold because there was no business. For the lockdown phase, the rent is likely to be zero. “
It is true that both Inox and PVR have a reasonable liquidity cushion to face the difficult patch in the short term. PVR has completed a rights issue of Rs300 crore, while Inox’s board has approved a capital fundraiser of approximately Rs250 crore. Still, revenue should flow to at least reduce losses in the early stages after operations start.
In short, as multiplexes begin to show reset operations, there are many unknown variables. It goes without saying that dealing with these factors will be challenging. Understandably, despite the sharp jump in stock prices this week, PVR and Inox stocks are still 37-41% from their pre-covid highs in February.
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