Several near-term risks abate, backed by ramp-up in vaccination

We believe strong recovery overseas will drive Hindi movie producers to release their films in cinema halls, as this was a key reason big releases did not happen in January (overseas collection contribute 28-30% of revenue for a big movie. Multiplexes cater to middle- and upper middle-class moviegoers; we believe a large section of this group will be fully vaccinated by October-November 2021, which will reduce concerns and bring back moviegoers. We expect an overflow of content as it has been 18 months since cinema halls have opened up with full capacity; with a pipeline of 300-350 Hindi films, only 31 have taken the direct OTT route since the pandemic. Delayed recovery in the ad revenues given the large exposure to local advertising alongside Print, Radio verticals, and imposition of a lockdown due to outbreak of COVID Wave-III, are the only risks in near to medium term. Almost 20% of single screens (mostly in North & West India) may shut permanently; however, in our view, this is not a big risk as it may lead to multiplexes gaining market share in those pockets and as single screens do not contribute more than 20% of box office for Hindi and English content. Overall, the impact of Wave II has been subdued on cinema, due to 1) vaccination being available as a solution, and 2) visibility in the overseas market.

Global box office posts strong comeback post COVID-19

As per the latest July’21 report by Gower Street which is a leading global film tech company, there were 84% screens open in the US, 93% in China and 90% in the EMEA, which is higher than screen openings of 41%, 94% and 24%, respectively, in February 2021. Confidence of the exhibitors is backed by strong content pipeline and performance of recently released films like Godzilla vs Kong, F9: The Fast Saga, Black Widow and Conjuring, which have reported robust collections of USD 442mn, INR 622mn, INR 315mn and INR 112mn, respectively. We believe vaccination is key for driving moviegoers into cinemas, and India too is expected to see similar trends. The Gower Street report states average weekend collections in the US have seen a jump from 8% pre-COVID recovery in January 2021 to 40% pre-COVID recovery in July; we believe this threshold will ramp up over time once consumers return to the cinema halls, led by release of large-ticket films.

TVOD & PPV models unable to match with box office

We believe emerging models like TV on demand (TVOD) and pay per view (PPV) are unable to match box office collections in India and globally as they limit monetization opportunity for a producer; these models work favourably only in the case of platforms (wanting to generate high eyeballs) paying a sizeable premium to buy content, however, we see less or no willingness from a producer with a revenue share arrangement with these platforms as done globally and in India.
Our checks suggest a marquee film like Radhe acquired at a cost of INR 2.25bn was able to generate collections of a mere INR 350-400mn and the balance allocation (digital rights and TVOD – INR 1.35bn) was cost of customer acquisition. Similarly, in the US, trends indicate cinema halls remain the preferred choice for release of large films once the COVID-19 impact dissipates given they increase monetization opportunity for a producer; the experience of watching a big movie in cinema halls cannot be matched with OTT viewing.

Cinema recovery delayed but not written off

We still believe one cannot write off a strong recovery in the cinema sector in India and globally, as it remains to be a mode of family outing, especially in India, given limited entertainment options; trends suggest there has been no or minimal change in the ticket prices coupled with higher F&B spend (vs pre-COVID), which is a promising sign for the segment, in our view. India exhibitors such as PVRL and INOL, have good liquidity of INR 7,323mn and INR 772mn, respectively, based on cash & liquid investments position on the balance sheet as on 31 March 2021. They have raised adequate liquidity via the QIP and debt route over the course of the past year of INR 6,964mn for INOL and INR 16,000mn for PVRL, which is adequate to sail through even if uncertainty remains until March-April 2022 based on per month cash burn.
We believe most states will allow 100% occupancy toward end-CY21 with removal of timing restrictions after a large section of the public is vaccinated as it has happened globally. In the interim, we believe recovery of cinema halls will happen in a phased manner, with select large-ticket films recovering faster toward pre-COVID vs small & medium budget films, which may take longer. The risk of a Third Wave, which is more or equally impactful vs Waves One & Two remain the only overhang for a further delay in recovery of cinema halls.
We expect overall revenue to revert to 80% of pre-COVID (FY20) in FY23, with a recovery in FY24, which may see revenue moving toward 110-120% vs pre-COVID (FY20); we expect ad revenue to take the longest to recover due to high exposure to local advertising whereas other revenue metrics (F&B & convenience fee) will follow footfall recovery trends. Less impact from the Third Wave and faster recovery in ad spend by FY23 will be key monitorable driving upgrade in the near to medium term, in our view.

Valuation: retain positive sector stance

We retain our positive stance on the sector based on the above triggers. We pare our EBITDA estimates by 35-40% for FY23E, after factoring in the negative impact of the Wave II in FY22E and rollover our TP to FY24E of INR 2,100 for PVRL on 13.5x (unchanged) and INR 520 for INOL on 11.5x (unchanged) one-year forward EV/EBITDA.

(The views expressed in the article are those of the writer and indianbroadcastingworld.com need not necessarily subscribe those views)