Multiplex - Live to fight another day... - ICICI Securities

'It's no surprise that we love films in India. India has the highest viewing of films on Netflix globally and over the last year, 80% of our members in India chose to watch a film every week' - Netflix India

Multiplexes are beneficiaries of rising income levels and spend on entertainment and family outing. They have evolved from being just movie theatres to that plus restaurants. Investors are concerned about the rise of streaming apps and direct digital releases of movies, we think India market is different and digital does not impact multiplex prospects. In fact, Covid could turn into a blessing in disguise for strong theatre chains that benefit from consolidation and rise in occupancy on normalisation. We remain positive on the sector and initiate coverage on PVR (target price: Rs,1679) and INOX (target price: Rs424) with BUY rating on both.

- Live to fight... and win! Rapid adoption of streaming apps and direct release of movies on digital platforms has raised questions on theatre chain prospects. We outline two case studies that summarise our thoughts and alleviate apprehensions.

Case study-1: a) The US is the biggest cinema market with box office collection at >US$11bn in CY19 and in the range of US$11bn-12bn for past five years. This is despite the rise in penetration of apps such as Netflix and Disney+. Number of screens has also grown and Hollywood has released more movies. b) Aggression of direct movie release on digital platforms by two key studios - Warner Bros and Disney - is aimed to drive higher users on their apps where Netflix dominates. c) India movie studios are fragmented and very few of them have credible streaming apps, while ARPUs in India are way too low to justify such investments.

Case study-2: a) PVR and INOX have outperformed Domino's and McDonald's in India in past six years on all parameters: 1) store (screen) growth, 2) sales growth per store, 3) growth in EBITDA per store. b) Our comparison between multiplexes and food companies is valid as they compete for the same discretionary wallet spend by consumers and family outdoor time. Penetration of PVR and INOX is much lower, thus providing headroom for growth.

- Supply-side economics still does not justify direct movie release on digital. Profit maximisation for movie producers, particularly big-budget movies, are function of domestic and international box office collections, and selling TV, digital and music rights. Direct to digital would be considered on cost-plus basis, which does not provide opportunity for profit maximisation for quality movie producers. In India, domestic net box office collection (NBOC) contribute 67% of total revenues for films, and in FY20 NBOC for the top 10 movies was 212% of budget.

- Surviving screens should benefit from higher occupancy. The number of seats in industry is likely to decline due to shutdown of a few screens post-Covid. Our analysis movie releases from Apr'21 looks strong (assuming it happens as expected) with many big-budget movies releasing at regular intervals. This should help drive higher average occupancy for surviving screens in FY22E. Further, occupancy has high sensitivity to profitability, and our analysis (based on FY20 numbers) shows that 100bps rise in occupancy increases EBITDA by 9.1% and 11.7% for PVR and INOX.

Source : Equity Bulls

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