The rising COVID-19 cases in the second wave of the pandemic in India, and the local restrictions being imposed due to it, are likely to cause severe challenges to the business operations of multiplexes, which are still recovering from the effects of the last lockdown.
The second wave is being tackled with a curtailment of operations in multiple states, with Maharashtra, the biggest contributor to the cinema business, closing operations till April 30. This is likely to cause a postponement of content, which in turn could hurt the occupancy rates, observes a recent report by Motilal Oswal on COVID-19 and the cinema industry.
Four to five states including Karnataka have only allowed operations at 50 per cent capacity.
The report observes that all the restrictions will certainly lead to the postponement of many large budget movies as a few scheduled releases in Apr 2021 have been deferred. This in turn is bound to impact occupancies in many regions due to a drop in content on offer. However, the situation may not have the same impact as in the last lockdown; content flow may not fully dry up this time as select small ticket movies may explore exhibition revenues before selling their distribution rights to the digital players. The Motilal report points out that markets in south and central India will continue to do better.
The report analyses PVR, one of the largest multiplexes chains in the country, and notes that while its cost management was commendable during lockdown, the resumption of cost, with restricted operations, could push break-even and revise down its FY 22E estimates.
The report highlights that PVR has cut costs on a quarterly basis by 60-70 per cent in the last year to Rs 1.1-1.2 billion as the management saved on rent and CAM (Common Area Maintenance) charges, which took up 35-40 per cent of fixed cost. The report highlights that continued restrictions on cinema operations is fueling the OTT market, which could put pressure on occupancies for the multiplex chains in the country.
For multiplexes, most rental negotiations were till March 2021. Now, with operations in many regions resuming, real estate costs could increase, which could pinch if the COVID-19 fears continue to keep occupancies low. Global references indicate that consumers will flock to cinema halls if they remain open, but restricted operations could stretch the break-even by a few quarters.
The Motilal report interestingly highlights that the continued restrictions on cinema operations are certainly fueling the OTT market, which is gaining a steady flow of good quality content, thus helping create a steady digital market. Once normalcy returns, the audience may flock to cinemas. Quoting industry statistics the Motilal report mentions that with just 32 million paid OTT subscribers out of a 700 million broadband subscriber universe, digital subscription and the advertising market is 40-50 per cent that of domestic cinemas. This is all fuelled by a sizable (more than 1,600 hours) original content compared to over 1,800 movies released in Cinemas. The report further says that OTTs with strong digital content flow, could put pressure on Cinema occupancies and being highly sensitive to occupancies, multiplexes could see a sharp earnings risk.
Analysts from Motilal Oswal say that the multiplex major PVR had seen a steady 30 per cent EBITDA growth in the last 10 years, which had led to a steady jump in its stock price. This was led by improving occupancies and steady new screen additions. However now with a higher base of screens, expectations of the pace of additions slowing in the near term, and pressure on occupancies, earnings growth could be significantly lower for the company. The recent rise in COVID-19 risk will certainly impact FY 22E earnings.
