The re-imposition of localised lockdowns and temporary closure of multiplexes in key states to contain the third wave of Covid-19 infections are expected to cut footfalls and compel producers of films to defer new releases. That would push back full revenue recovery of multiplexes to the second half of next fiscal, versus the first quarter we expected earlier.

But once restrictions are lifted, the pace of recovery is expected to be sharp — as was witnessed after the second wave — and should, along with healthy balance sheets, limit further downside in the credit profiles of multiplex operators rated by CRISIL Ratings. These account for almost half of the industry’s revenue.

Says Nitesh Jain, Director, CRISIL Ratings, “The temporary closure of operations in New Delhi/National Capital Region, Bihar, Haryana and restrictions in other key states such as Maharashtra will push back new film releases. A few big-ticket films such as ‘RRR’ and ‘Jersey’ have already been postponed indefinitely. Our base case assumes the third wave to peak in February and bottom out by the end of March. We expect theatre release of big-ticket content to resume in the first quarter of fiscal 2023, which should sharply improve occupancy. A full recovery, however, is expected only in the second half of next fiscal.”

For the record, occupancy doubled to ~20% in December 2021 from ~10% in September, indicating healthy demand, and could have improved to over 25% this quarter (compared with ~30% pre-pandemic) as several big-ticket films were scheduled for release had there been no third wave.

Although multiplex operators had increased average ticket prices last quarter by 10-15% from their pre-Covid levels, occupancy improved on-month. Moreover, movies such as ‘Sooryavanshi’ and ‘Spider-Man: No Way Home’ had collected ~Rs 200 crore each at the box office, which is comparable to the collections made by big-ticket films in a normal year. The swift recovery shows the relevance of multiplexes despite the plethora of over-the-top (OTT) platforms, and reinforces our view that OTT platforms are not a threat to multiplexes — the two can co-exist — and that the current disruption is temporary.

Multiplexes are estimated to have clocked an operating profit of ~Rs 40-60 crore in the third quarter of this fiscal despite being operational for only a few months after the second wave, and that, too, in a staggered manner. This followed operating losses of ~Rs 625 crore and ~Rs 360 crore in fiscal 2021 and the first half of fiscal 2022, respectively.

While the third wave will once again lead to operating losses (in the fourth quarter of this fiscal), healthy liquidity (~Rs 880 crore as on September 30, 2021) would comfortably cover operating expenses and debt obligations for the next 4-6 months. Strong content pipeline should help the industry recover from the first quarter of next fiscal.

Says Rakshit Kachhal, Associate Director, CRISIL Ratings, “Theatre releases will also bolster revenue from the food and beverages (F&B) segment, which accounts for 25-30% of the topline of multiplex operators. Average spend per head on F&B had risen sharply by 20-25% to ~Rs 115 over the last two quarters, because of change in consumption patterns of moviegoers, and initiatives to improve the F&B offering, such as improving the service quality, rejig of menu and new tie-ups. We expect the spend per head to hold steady and support the topline as occupancy improves after resumption of operations.”

In the milieu, multiplex operators are expected to continue cost-control measures, including deferring maintenance and major capital expenditure. They will likely continue to get significant waiver on lease rentals for the period of closure of operations, as was seen during the first two waves. Their ability to renegotiate with landlords and keep a leash on fixed cost is a monitorable.

Downside risks include sustainability of cost-control measures and prolonged impact of the pandemic. These will, therefore, bear watching in the road ahead.

Note: The analysis includes the top two players that account for almost half of the industry’s revenue.