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Multiplexes: Outlining the re-rating path hereonwards

Multiplexes are now back in business (literally) as Maharashtra cinemas are due to re-open from Oct 22nd. Almost concurrent to this announcement, the release dates of two big Bollywood releases were finalised - ‘Sooryavanshi’ on Nov 4th (Diwali weekend) and ‘83’ on Dec 24th (Christmas weekend); there would now be 10 Bollywood releases in Dec-Q itself – a sharp contrast to FY21 when not a single big Bollywood movie released during the five postlockdown months when cinemas were allowed to function. This is quite on expected lines, though. With both PVR, Inox Leisure now significantly off the lower levels seen during the earlier part of the second wave, we took a fresh look at the investment case.

One interesting parallel, using other retail-based businesses, is that stocks like Titan and Jubilant Foodworks that have witnessed near-complete recovery towards end-FY21 and gains from sectorconsolidation are now quoting at significant premium to their pre-pandemic trading multiples. In contrast, multiplexes, where on-ground recovery is yet to play out, are still quoting at significant discount.

We expect near-total recovery for multiplexes in 4QFY22 (relaxation of restrictions, improved consumer sentiments and importantly, normalisation of movie-release calendar), which coupled with on-going consolidation, could also drive a rerating of the kind seen in some of the above-mentioned businesses. Our DCF-based analysis also suggests that current multiples are still well-below the fair value despite the recent rally. Between the two, we continue to prefer Inox over PVR given the former’s focus on efficient capital-allocation and a debt-free BS.

* Theatrical releases provide a much better platform for success vs OTT; cost-efficiencies to further aid profitability for multiplexes: In our view, intrinsic profitability for multiplexes should surpass the levels seen before the pandemic aided by some retention of the costsavings effected over the course of the past 12-16m as well as normalisation of theatre occupancies.

One perceived risk to occupancies has been the increased OTT penetration but the experience of past 12m made it abundantly clear that movies released directly on OTT (including some big Bollywood movies) have received pretty lacklustre response from audience cf. movies released in theatres pre-lockdown.

This was also evident in comparison of Hollywood movies like ‘F9: The Fast Saga’ and ‘Black Widow’ – the global collections of the former were nearly 2x the latter as ‘F9’ had an exclusive theatrical release while ‘Black Widow’ had a simultaneous release in theatres and OTT. Given the theatrical release remains the best way to monetise movie content, we expect content producers to revert back to theatrical windows which should help drive occupancies to pre-pandemic levels over a period of time.

* Re-rating is a distinct possibility once recovery plays out – sector-consolidation could further help profitability; we prefer Inox over PVR: We have done a comparison of valuation multiples for retailers across segments. We note that businesses like Jubilant Foodworks (Dominos) and Titan that have seen near-total recovery (or outpaced preCovid revenue) at end-FY21 are now quoting at a premium to their pre-Covid trading multiples. In our view, these players have also benefitted from the decisive shift to organised segment in their respective categories.

Similarly, cinemas are also witnessing consolidation with many single-screen cinemas (>10%, as per some media articles) staring at closures. This is expected to further benefit future profitability and negotiating power of multiplexes, in our view. While we expect both PVR and Inox to benefit considerably, Inox remains our favoured pick given its efficient capital-allocation practices and a strong BS. Even after the recent rally, the Inox stock is not even completely capturing the number of screens that it already has under operation, notwithstanding the favourable prospects for future growth.

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