The force majeure clause and other cost saving measures could bring down the losses for exhibitors, said Elara Capital in a research note.
There could be some relief to the exhibitors who are currently reeling under the pressure due to the shutdown of cinema halls, a move taken as a precautionary measure by state governments to contain the coronavirus spread in the country.
The force majeure clause and cost saving at various other variable cost heads may bring down the losses, said Elara Capital in a research note.
What is a force majeure clause?
Force majeure refers to a clause that is included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict participants from fulfilling obligations.
For example, the management at Inox Leisure believes that the rental costs will reduce down to Rs 4-5 crore per month since 95 percent of the properties contract consists of a force majeure clause whereby rent liability for these two months or so would be saved, said Karan Taurani, Vice President - Elara Capital.
Similarly, multiplex chain operator PVR, too, has a force majeure clause for almost all of its rented properties, which will lead to a big amount of cost saving, he added.
Along with this, exhibitors could save some money on employee cost.
For Inox, Taurani said that currently the fixed operating cost per month stands at Rs 75-80 crore comprising majorly of Rs 32-33 crore of rental cost, Rs 20 crore of manpower and employee costs and Rs 10-12 crore of electricity costs.
“Security costs, serving band and housekeeping costs are expected to reduce significantly as the manpower is not on Inox payroll and no liability would arise in months of closure,” he said.
As for PVR, expenses on security, electricity are too variable in nature which will be curbed due to cinema closure. “PVR also has a higher variable component in the salary expenses item which will be reduced towards the end of year due to this uncertain event,” he added.
On the expenses savings, he expects the security and housekeeping costs savings of Rs 16 crore and Rs 50 crore rental cost savings in FY21 based on a three-month impact.
“We don’t expect an EBITDA (Earnings before interest, taxes, depreciation, and amortization) downgrade of over 10 percent for both the exhibitors (Inox and PVR) even if cinema were to shut down for around two months."
He added that the occupancy is likely to shoot up once cinemas open after two months (as a worst case scenario assumption) on the back of people wanting to move out of home for entertainment avenues and multiple large budget films lined up every Friday instead of a normal situation where in the larger releases are limited to holiday (long weekends).
“The bigger opportunity lies within the exhibition ecosystem where in multiple small multiplex chains and single screens who are not able to survive the two month closure can become an acquisition target which will intensify consolidation and benefit market leaders like PVR/Inox which have over 40 percent market share in Hindi box office collection,” he said.
Despite the positive outlook for some exhibitors, there are certain challenges the theatres are dealing with in the current situation.
Sharp drop in footfalls
“Exhibitors have witnessed a sharp drop in footfalls overall and expect the occupancies to drop significantly to 10 percent levels up to mid-May. Further with the postponement of big-ticket movies, we believe the box office revenues to remain muted for the next two months or so until the big-starrer release of Salman Khan," said Taurani.
Khan's Radhe is an Eid release and is scheduled to hit theatres on May 22. This is when large players within the industry expect revival in revenues.
"Ad revenues too are expected to witness a significant decline over FY21,” he added.
He estimates the overall impact of the entire incident on Inox at Rs 100-110 crore.
Delay in screen openings and execution
“New screen additions for FY21 are expected to witness a significant drop with delays in licensing for 14 screens and 35 screens (95 percent completion level) expected to be launched in Q1FY21 might see postponement in execution,” said Taurani.This is why screen additions for FY20 are expected to drop to 56 screens from 65 screens. And, footfalls are expected to decline by 6 percent in FY21 and overall ad revenue is likely to see a decline of 15 percent YoY in FY21.