Impact of COVID-19 not as bad for exhibitors, Key risks – what works against exhibitors
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Smaller films made at a budget of Rs 5 to 10 Crore goes directly on digital as producers/distributors may opt for this due to uncertainty; expect Box Office to get negatively impacted by 2 – 3% as only movies for April / May release may do this.
Large big budget films at stake may postpone release due to the current market Situation (COVID-19) which may impact schedules of large film stars.
Addressing the risks – what works in favour of exhibitors
Cost saving at various other variable cost heads is a big trigger as it will avoid a situation of loss for FY21.
In fact, even after factoring a 2 months shut down EBITDA is slated to grow 4% YoY for FY21
Expect a big pent up demand as more larger movies released back to back which will drive occupancy in cinemas.
Regional multiplex chains which have always commanded a premium, may come down to realistic valuations if the shut down were to exceed beyond 2 weeks.
Current situation and financial impact – Inox Leisure
Sharp drop in footfalls for Exhibitors
With the outbreak of coronavirus in India, all state governments except AP have been shut for entire month of March’2020. Exhibitors have witnessed a sharp drop in footfalls overall & expect the occupancies to drop significantly to 10% levels upto mid-May’2020. Further with the postponement of big ticket movies, we believe the box office revenues to remain muted for the next 2 – 2.5 months until the starrer release of Salman Khan on Eid (23-24th May,2020) when large players within the industry expect revival in revenues. Ad revenues too are expected to witness a significant decline over FY21. Overall impact of the entire incident for Inox remains at INR 100-110 Crores.
Savings in fixed costs & overall financial impact
Currently the fixed operating cost/month stands at INR 75 – 80 Crores comprising majorly of INR 32 – 33 Crore of rental cost, INR 20 Crore of manpower & employee costs and INR 10 – 12 Croress of electricity costs. Management believes that the rental costs will reduce down to INR 4 – 5 Crores, since 95% of the properties contract consists of a Force majeure whereby rent liability for the 2-2.5 months would be saved. Further, security costs, serving band & housekeeping costs too are expected to reduce significantly as the manpower is not on Inox payroll and no liability would arise in months of closure. Inox being a net debt free(excluding Ind-AS impact) company by end of FY20, management believes minimal impact on the PAT given the savings in interest costs.
Delay in screen openings & execution
New screen additions for FY21 is expected to witness a significant drop with delays in licensing for 14 screens and 35 screens (95% completion level) expected to be launched in Q1FY21 might see postponement in execution.
Based on the above impact, we have expect screen additions for FY20 to drop to 56 screens from 65 screens expected earlier, footfalls to decline by 6% in FY21 and overall ad revenue decline of 15% YoY in FY21. On the expenses savings, we expect the security/housekeeping costs savings of ~INR 16crs and INR 50crs rental cost savings in FY21 based on a 2.5-3 months impact
Impact on PVR
Our channel checks indicate that PVR too has a force majeure clause for almost all of its rented properties, which will lead to a big amount of cost saving. Further, other expenses of PVR like security, electricity are too variable in nature which will be curbed due to cinema closure; PVR also has a higher variable component in the salary expenses item which will be reduced towards the end of year due to this uncertain event.
Earnings downgrade risks overdone at current valuations
Overall, we don’t expect an EBITDA downgrade of over 10% for both the exhibitors even if cinema were to shut down for 2-2.5 months; we also believe that occupancy will shoot up once cinemas open after 2 months (as a worst case scenario assumption) on the back of people wanting to move out of home for entertainment avenues and multiple large budget films lined up every Friday instead of a normal situation where in the larger releases are limited to holiday (long weekends). Over and above this, the bigger opportunity lies within the exhibition ecosystem where in multiple small multiplex chains and single screens who are not able to survive the 2 month closure can become an acquisition target which will intensify consolidation and benefit market leaders like PVR/Inox which have over 40% market share in Hindi Box Office collection.
The stocks have corrected by almost 50% over the last three weeks and we believe a large portion of this is primarily panic selling(sentiment based), if the above were to be true and the situation does now go worse for more than 2 months. We do expect valuation multiples do get negatively impacted by 15% due to this event and earnings downgrade in the near term, and put together the earnings impact of 10% – which implies an upside of almost 25% on these stocks in the near term itself (adjusting for the de-rating and downgrade). We maintain our positive stance at current levels for the exhibitors as PVR/Inox are trading at 9.5x/ 6.5x based on FY22 EV/EBITDA which in our view is inexpensive based on the above impact analysis built by us.