Force majeure clause to be applicable again this year in places where malls are shut
Our channel checks with mall consultants indicate force majeure will apply yet again in the current lockdown situation; as of now Maharashtra, MP, Chattisgarh have implemented a lockdown for one month until 5th May and other states like Delhi, Karnataka, Gujarat, Rajasthan, UP etc have a night curfew for a period of one month. Our checks indicate that last year during the lockdown of six months from April to September’2020, many of tenants (QSR, cinema etc) had paid the partial or whole CAM charges (which is almost 20% of the total rental cost) before opening up in Oct’20; the arrangements were moved to revenue share for almost all the tenants until 31st March,2021. However, this revenue share arrangement was temporary in nature until 31st march and had a clause that in case a business reports a 70% recovery vs pre COVID, rentals will move to fixed model (pre Covid levels). In this interim of 6 months all the new contracts that were designed for new outlets had a specific force majeure clause to cover the pandemic.

QSR better placed vs cinemas as a large portion of mall outlets on revenue share arrangement even during pre COVID
Most of the F&B outlets in malls already operate on a revenue share even during pre COVID; we learnt that almost 50% of the QSR chains operate on a revenue share even in pre COVID times and hence the opening in Oct’20 did not have any negative impact and going ahead too, the shut down in malls will not lead a negative impact of QSR chains. The revenue share percentages however vary and are much lower for larger global QSR chains as compared to smaller chains/standalone outlets in malls. On the other hand, multiplexes were entirely based on fixed rentals in pre COVID times, moving towards a temporary revenue share until April’21 and post that they were supposed to come back to pre COVID. However, the current restrictive environment means multiplexes too will go for a force majeure or at most pay the CAM charges only; in fact most multiplex operators have asked for a revenue share arrangement in the near term due to poor visibility in near term as cinemas may again become the last ones (vs retail, QSR) to open up with 100% occupancy, and only full occupancy will persuade producers to release large content.

Traction on high street remains better vs malls
It is believed that going ahead a large portion of multiplex business too will be basis revenue share with mall developers just like QSR, except in certain key metro centres wherein there will be a fixed rental due to premium locations. The impact of rentals on high street isn’t subject to force majeure, however the demand on high street during the pandemic and even now has been better as compared to malls due to better footfalls. We believe QSR chains like JUBI which have a higher exposure on high street vs malls (WLDL and BK) are relatively better placed in this aspect too; outlets on high street can also run on delivery despite night curfews as compared to malls whose QSR outlets will remain shut in the lockdown.

Impact on listed companies – realignment in cost to continue until there is visibility for strong recovery
In terms of rental costs (Ex IND-AS impact) before the pandemic, QSR chains (JUBI & WLDL) incur almost 9%-11% of their revenue as rental costs whereas multiplexes (PVR and Inox) incur 19%-21% of their revenue as rentals which is higher than QSR due to 1) larger space, 2) compulsion of presence in key metro locations; rental costs for QSR are also low due to a revenue share arrangement with some mall developers. These rentals are subject to escalation of almost 15%-18% every 3 years which is largely inflation led in pre COVID times. We believe the pandemic (9MFY21) witnessed an absolute decline of 80% in rentals for multiplexes/QSR due to the force majeure being applied for first 6 months of lockdown and then the movement towards revenue share (from fixed rental model); further, even the rental contracts for new properties in case of QSR are lower by almost 50%-60% in absolute terms within malls and high street. We expect the realignment in cost structure towards lower rentals to continue in the near term unless there is visibility of business improvement towards 70% of pre COVID levels for QSR/cinema, which may not happen unless restrictions like 1) night curfew 2) partial lockdown move away completely.

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