The Covid-19 pandemic is likely to halve occupancy levels at multiplexes and lead to Ebitda¹ losses in the current fiscal. That is because, even after the lifting of the lockdown, social distancing norms will reduce effective seating capacity, while fear of enclosed spaces will keep moviegoers away from cinemas for a while.

We see the virus as a material threat to multiplexes, not over-the-top (OTT) platforms.

Ticket sales, which account for two-thirds of multiplex revenue, are seen plummeting ~55% this fiscal as social distancing keeps occupancies low. Besides, other revenue streams such as food and beverages (F&B) and advertisement, which account for the balance one-third, will also be impacted for the same reason.

Even multiplexes that have had strong credit profiles will see rising credit pressure because of longer road to recovery. Crisil-rated multiplexes command ~45% revenue market share. In March 2020, Crisil had placed their ratings on ‘Rating Watch with Negative Implications’ after government orders to shut cinemas.

Says Sachin Gupta, Senior Director, Crisil Ratings, “Occupancy rates of multiplexes could halve to ~15% this fiscal compared with over 30% in the past two fiscals. Their high operating leverage, in turn, would lead to a sharp fall in profitability and cause Ebitda-level losses this fiscal. That compares with average operating profit of 17-19% seen through fiscals 2018-2020.”

With operations halted, multiplex operators have invoked force majeure in their lease agreements (legal validity of which is yet to be established) to save on rentals, a major fixed cost. They have also deferred maintenance and capex outlays. But these measures won’t help much once operations are restored. High fixed costs would mean operating losses could increase on lower occupancy.

Our base case assumes multiplex operators resuming operations in the second quarter of this fiscal (refer annexure) and a gradual recovery thereafter. Occupancy levels are expected to normalise only in the next fiscal.

Cinemas were among the first businesses to shutter because of the pandemic-induced restrictions, well before the nationwide lockdown was promulgated.

Says Nitesh Jain, Director, Crisil Ratings, “Given the milieu, liquidity management has become critical, so multiplexes will have to reset their cost structures. Those with strong balance sheets and ability to raise funds will be better placed, but prolonged closure and lower occupancy will impair credit profiles. Therefore, Crisil will continue to monitor liquidity, efficacy of cost-cutting measures, support from promoters, and fund-raising plans of operators.”

Recently, there has been much debate around multiplex operators and film producers about release of movies at theatres and OTT platforms. We see both platforms co-existing and the current disruption as temporary. The presence of OTT will have no material bearing on the credit profiles of multiplexes, which have seen robust revenue growth over the past few years despite economic slowdown and faster adoption of OTT content.

We expect equilibrium will be restored between film producers and multiplexes once occupancy levels start rising, because the latter accounts for more than half of the former’s revenue. For moviegoers, beyond content, multiplexes offer an experience and are among the few out-of-home entertainment options in India.

Multiplex operators have sought relief from the government through interest-free loans, exemption from taxes and underwriting of employee costs partially, which could offer material relief. This will therefore be a monitorable.

¹ Earnings before interest, tax, depreciation and amortization