Multiplexes May 22, 2020 Tough times but “this too shall pass”… This is the third part of our “Covid-19 impact on Multiplex” themed report. Rating & Target price (|) We now look at the recent announcements of a few movies’ direct to digital Rating CMP TP Upside (%) release. PVR has indicated that it is circumstances based as big movies will PVR Hold 860 990 15 continue to choose theatrical releases, which provide better return metrics. Inox Hold 211 235 11 We concur with the same. Furthermore, the company expects movie theatres to reopen in a staggered manner by the end of July or beginning of August. We highlight that our estimates implies a washout H1FY20 (with PVR modest occupancy in the first phase post reopening) coupled with possibility of box office clash of big movies. There are also media reports 2200 13000 Update Sector that PVR is planning to raise | 300 crore via rights issue in July. Warburg 1760 10400 Pincus and Multiple PE fund along with the promoters are likely to participate in the issue, which in our view is sentimentally positive and dispels any 1320 7800 concerns over liquidity issues. We retain our estimates (as the situation is 880 5200 too fluid to make frequent changes) and maintain HOLD rating on PVR and 440 2600 Inox Leisure with a target price of | 990/share and | 235/share, respectively. 0 0 OTT- Not a threat as per management Sep-17 Sep-18 Sep-19 Mar-18 Mar-19 Mar-20 Notwithstanding the announcements of recent low/medium budget movies Mar-17 opting for OTT release, the company remained confident that big budget PVR (LHS) Nifty Index movies with box office potential will wait for theatres to reopen. They further indicated that cinemas have survived the emergence of all other platforms Inox Leisure like TV, VCR, DVD, internet, etc. Similarly, OTT services have been operational in India for past three years. It has not been a threat to cinemas. 500 13000 Social distancing, behavioural pattern change 400 10400 Research The Multiplex Association of India has suggested “Enhanced Safety and 300 7800 Precaution plan for Cinemas” encompassing health & hygiene norms, social 200 5200 distancing and F&B sale. Leaving the adjacent seats empty, if implemented, 100 2600 will affect the occupancy up to ~25% as per the management. The weekend 0 0 occupancy for PVR is ~52% while weekday occupancy is ~26%. This could Retail Equity Equity Retail undergo a change as some customers may prefer weekday viewing – Sep-17 Sep-18 Sep-19 Mar-18 Mar-19 Mar-20 compared to weekend in earlier phases to avoid crowding. Mar-17 Life immediately post Covid -19 Inox (LHS) Nifty Index The management said occupancy will be moderate in the starting phase and will increase with word of mouth. The success of initial films will be important in order to improve sentiments of both the audience and Research Analyst businesses. As big movies like Sooryavanshi, 83 and Master, etc, will be Securities ICICI released in the next six to nine months, ATP is likely to be higher. The Bhupendra Tiwary, CFA [email protected] management added that break-even point for fixed costs will be at 20% occupancy as some fixed costs will remain lower. They are seeking lower Amogh Deshpande rental post Covid-19 also and are in discussions with mall owners. [email protected] Valuation & Outlook We highlight that notwithstanding the recent Covid-19 scare, the structural story of multiplexes as a proxy play on urban discretionary remains. However, leisure activities and discretionary spend will take a backseat during stressed macroeconomic setup in the near term. We will closely track the reopening of cinemas and development of Covid-19. We value PVR at 8.5x FY22E (ex-Ind-AS) EV/EBITDA and arrive at a target price of | 990/share with a HOLD rating. We value Inox Leisure at 6x FY22E (ex- Ind-AS) EV/EBITDA and arrive at a target price of | 235/share with a HOLD rating. ICICI Securities | Retail Research 1 Sector Update | Multiplexes ICICI Direct Research Box office - Most important metric The management said that although they were disappointed with some films skipping theatrical release, big budget movies with box office potential will wait for theatres to reopen. They were of the view that streaming platforms may be paying 15-20% premium over the cost of production to the producers. Such acquisitions are tactical in nature given the circumstances (shutdown of theatres, movie budget, financial position of producer, etc). Box office is the most important barometer of success. For most films, digital revenue is linked to box office collections. Hence, higher box office revenue leads to higher digital revenue. The management added that cinemas have survived the emergence of all other platforms like TV, VCR, DVD, internet, etc. Similarly, OTT services have been operational in India for the past three years and have not posed a threat to cinemas. Also, producers have one more ancillary revenue stream in the form of digital rights now, which is beneficial for them. However, as the other revenue streams are linked to box office, it remains the most important metric. On relationship with producers The management said this is not the first time movies are releasing directly on OTT. They are confident that majority of films will release in theatres. They are in discussions with producers and trying to minimise the number of films directly releasing on OTT. They added that they have a longstanding relationship with producers and there will not be any conflict due to some films going directly online. On the content supply chain, the management does no foresee any disruption as the films that are currently in production will definitely be completed and released. Also, PVR’s content pipeline is well diversified as they screen films in 12 different languages and are not dependent on any one language. Possible shutdown of single screens/smaller chains The management said that some single screens may find it difficult to sustain the prolonged lockdown and may shut permanently. It is also a possibility that some of the leveraged smaller multiplex chains may close down as they will unable to bear losses. If this were to happen, it will benefit chains with a nationwide presence. They also added that four national multiplex chains contribute ~60% of revenues in case of Hindi films. Commentary on global trend Even in the US, some producers/studios have released their films directly on OTT. However, the same producers/studios have scheduled their big budget films for later release dates, waiting for theatres to reopen Premium VOD model, which is popular in the West, is not attractive enough in Indian scenario as the window between theatrical release and SVOD is very aggressive. In the US, films are available on premium VOD 90 days after theatrical release. SVOD release is seven to eight months post theatrical release. In India, the release window is only eight weeks for SVOD, which are available at cheap subscription rates compared to the West In the US, some independent chains have opened cinemas in four of the states. However, no national chains have opened as yet. The larger cinema chains are expected to open by end of June In South Korea, independent chains opened with old/library films. The response from the audience was encouraging ICICI Securities | Retail Research 2 Sector Update | Multiplexes ICICI Direct Research Exhibit 1: Movies releasing directly on OTT (Amazon Prime) Name Language Cast Gulabo Sitabo Hindi Ayushmann Khurana, Amiitabh Bachchan Shakuntala Devi Hindi Vidya Balan Ponmagal vandhal Tamil Jyothika, Partiban Penguin Tamil/Telugu Keerthy Suresh Law Kannada Ragini Chandran, Siri Prahlad French Biryani Kannada Danish Sait, Sal Yusuf Sufiyum Sujatayum Malayalam Aditi Rao Hydari, Jayasurya Source: Company, ICICI Direct Research Exhibit 2: Hindi movies content pipeline Name Tentative Release Date Cast Sandeep Aur Pinky Faraar Jun-20 Arjun kapoor, Parineeti Chopra Coolie No. 1 Aug-20 Varun Dhawan, Sara Ali Khan Toofan 17-Sep-20 Farhan Akhtar, Pareash Rawal Dil Bechara 16-Oct-20 Sushant Singh Rajput, Sanana Sanghi 83 Oct-20 Ranveer Singh, Deepika Padukone Radhe 14-Nov-20 Salman khan, Disha Patani Sooryavanshi Nov-20 Akshay kumar, katrina kaif Jayeshbhai Jordaar Dec-20 Ranveer Singh, Shalini Pandey Brashmastra Dec-20 Ranbir Kapoor, Alia Bhatt Laal Singh Chaddha Dec-20/Jan -21 Aamir Khan, Kareena Kapoor Sardar Udham Singh 8-Jan-21 Vicky Kaushal Bhuj Jan-21 Ajay Devgn, Sanjay Dutt Prithviraaj Jan-21 Akshay Kumar, Sanjay Dutt Jersey Feb-21 Shahid Kapoor, Mrunal Thakur Bhool Bhulaiyya Feb-21 Kartik Aryan, Kiara Advani Shamshera TBD Ranbir Kapoor, Sanjay Dutt Maidaan TBD Ajay Devgn, Priyamani Laxmmi Bomb TBD Akshay Kumar, Kiara Advani Jhund TBD Amitabh Bachchan Gunjan Saxena : The Kargil Girl TBD Janhvi Kapoor, Pankaj Tripathi Source: Company, ICICI Direct Research Exhibit 3: Hollywood movies pipeline Name Tentative Release Date Cast Tenet 17-Jul-20 John Washington, Robert Pattinson Mulan 24-Jul-20 Liu Yifei, Donnie Yen Wonder Woman 1984 14-Aug-20 Gal Gadot, Chris Pine Black Widow 6-Nov-20 Scarlett Johansson, david harbour No Tme To Die (James Bond) 26-Nov-20 Daniel Craig, Rami Malek Top Gun : Maverick 23-Dec-20 Tom Crusie, Miles Teller The Eternals 12-Feb-21 Angelina Jolie, Richard Madden Source: Company, ICICI Direct Research ICICI Securities | Retail Research 3 Sector Update | Multiplexes ICICI Direct Research Exhibit 4: Regional movies pipeline Name Tentative Release Date Cast Soorarai Pottru 14-Aug-20 Suriya, Jackie Shroff Cobra