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Making its way to normalcy

Incorporated in 1999 and part of the INOX Group, INOX Leisure Ltd. (INOX) is the second-largest multiplex chain operator in India. The company’s screen additions have grown multi-fold over the past 10 years, from 91 screens in FY09 to 667 screens currently (Q3FY22 end) having a wide presence in ~70 cities with a seating capacity of 1,50,000+. In terms of revenue of FY20, the net box office collection (NBOC) contributes ~58%, Food & Beverages contributes ~26%, Advertising ~9% and other operating revenue 7%.

Investment Rationale

* Less stringent lockdown and vaccination drive to help multiplex operators regain normalcy: The multiplex industry has possibly been one of the most affected due to the COVID-19 pandemic for nearly six quarters. However, accelerated vaccination drive (~169 cr doses administered) and less severity of the current Omicron variant have resulted in less stringent lockdown restrictions from states amid the ongoing third wave. We remain constructive on multiplex industry growth prospects as less stringent restrictions and faster unlocking would help the business to return to normalcy much faster. The concerns over OTT (over-the-top) platforms taking over multiplex are largely overplayed as we believe it would be difficult for OTT platforms to afford big-budget films on a repeated basis. In our view, both theatres and OTT platforms would co-exist. Moreover, a healthy recovery in the operating matrix for both INOX and PVR in Q3FY22 after six quarters of shutdown re-instates our confidence in the long term sustainability of the multiplex business.

* INOX to lead consolidation: The pandemic squeezed the liquidity position of multiplex players as there was no revenue generation during this period. However, despite the pandemic, INOX continued its focus on adding screens and has added 41 screens in CY21, taking its total screens to 667. We believe leading players like INOX are better placed and would lead the consolidation of the industry due to its strong pan India presence, comfortable liquidity position and net-debt free balance sheet.

Outlook & Valuation

The easing restrictions from state governments coupled with a promising content lineup and strong pent-up demand would aid recovery for the multiplex industry. We like INOX in this space given its focus on enhancing the consumer experience, continued emphasis on expansion, effort on increasing spending per head, and increasing footfalls. The COVID-19 pandemic can aid further consolidation for the multiplex industry as small exhibitors would suffer due to a stressed liquidity position. INOX has been the front runner in the past and we expect the same trend to continue post normalization. We recommend a Buy on the stock and arrive at a target price of Rs. 495 (target EV/EBITDA multiple of 13x). Some of the key risks to our estimates include a) resurgence in COVID cases and b) slower than expected revival in footfalls.

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