Profiting from recovery: Media

SECTOR VIEW

The pre-pandemic situation
The Indian media & entertainment industry (M&E industry) mainly comprises four segments - TV, print media, digital media and filmed entertainment. In FY15-FY 19, the industry clocked a CAGR of 11.5 per cent and was expected to grow at 13.5 per cent CAGR over FY19-24 (KPMG India's media and entertainment report 2019). In the last five years, the industry has witnessed several changes, including the proliferation of OTT platforms and changes in the regulatory environment. The OTT space gained prominence because of two factors - the first factor was the introduction of 4G, as well as the consequent price war that reduced mobile data charges to the lowest in the world. And the second factor was the exponential growth of smartphones, owing to a production surge. Both these developments resulted in an explosion in the number of screens which opened up a new dimension for the industry. All these factors led to a massive jump in the number of new players vying to grab a pie of this fast growing market. Although this led to significant investments in creating content, setting up distribution infrastructure and acquiring customers, players temporarily sacrificed profitability so that they could maximise their growth and market share.

During the pandemic
The pandemic's impact was quite strong on the M&E industry but it had varying effects on different sub-segments. With theatres remaining shut for the most part and with no production of content for over six months, revenues of the filmed entertainment segment plummeted by more than 62 per cent, as per the 2021 edition of the FICCI-EY Report on the Indian M&E sector. In the TV segment, advertisement revenues fell by 22 per cent and subscription revenues dropped by 7 per cent. But even amid this gloom, the digital subscription and online gaming sub-segments grew by 49 per cent and 18 per cent, respectively, owing to the availability of new content and the convenience and easy access that they offer to subscribers. It ultimately resulted in an increase of 166 per cent in the number of digital subscribers.

The present situation
As expected, the shift to digital is continuing, while many subsegments are limping back to their pre-COVID levels. While TV distributors are witnessing a marginal decline in revenues because of the regulatory flux and 'cord-cutting' phenomenon, theatre owners are still struggling as the second wave of COVID prevented full re-opening. Therefore, more and more movies are now being released digitally as producers are exploring newer ways to monetise their assets. With many Hollywood movies being released straight on OTT platforms, the Indian industry is likely to follow suit.

STOCK VIEW: INOX LEISURE
INOX Leisure is India's second-largest chain of multiplex theatres with 648 screens across 69 cities. The company was one of the major beneficiaries of the shift in consumers' preference from single-screen theatres to multiplexes, as it offered greater convenience while catering to the growing need for a premium viewing experience.

The competitive edge
The company undertook many cost-cutting measures to reduce the rate at which it was losing cash during the height of the pandemic. It renegotiated leases, reduced employee expenses and further trimmed its operating expenses. It also raised funds (Rs 250 crore in 2020 and another Rs 300 crore in 2021) to keep its balance sheet healthy and is in a comfortable position to ride out the extremely challenging operating environment.

Besides, there are other factors that make INOX stand out. The movie pipeline continues to be large since producers of big-ticket movies realised that it would not be viable for them to launch their movies on OTT platforms. The lure of watching movies on a big screen could encourage higher footfalls. Another factor is the company's attempt to shift its cost structure to a revenue-sharing model, which, if successful, would reduce the company's operating leverage and make it more robust to future shocks.

Financials & valuations
The company - valued at Rs 3,834 crore as on July 15, 2021 - has gone up by only around 40 per cent, while its benchmark index has jumped by 107 per cent in the same period. It was particularly hit hard as revenues in FY21 plummeted by more than 94 per cent and its bottom line swung from a profit of Rs 133 crore in FY19 to a loss of Rs 337 crore in FY21. It is currently trading at a P/B level of 4.61 (as on August 26, 2021) as compared to its five-year median P/B of 4.08 and the three-year median of 3.86. As on March 31, 2021, its net debt-to-equity ratio was just 0.02 and it had Rs 350 crore worth of real estate on its balance sheet.

ABOUT THE CHART AND THE TABLE

Sensex vs sector stocks portfolio
In the analysis above, we have given a three-year chart of the portfolio comprising the top stocks in the sector vis-à-vis the Sensex. This chart will help you assess the movement in the sector as compared to the market. The stocks considered for this chart are the ones given in the table of key stocks. It was assumed that one invested an equal amount in each stock three years ago. If a company was not listed three years ago, it was incorporated in the portfolio from its listing and the appropriate adjustment was made.

Key sector stocks
This table mentions the top stocks in the sector, along with their key financial stability numbers. Given that most companies in the sectors discussed have witnessed a significant drop in their profits, profitability related metrics may not be very useful. One must assess their balance-sheet and cash-flow strength. Following are the key columns in this table:

Net debt-to-equity: This is the debt to-equity ratio adjusted for cash and current investments. A negative ratio indicates more cash/current investments than debt. This is a comfortable position to be in.

Free cash flows: Cash flows from operations minus capital expenditure is free cash flows. They indicate that a company is able to incur capital expenditure from its own cash flows rather than depend on outside funding. This is highly desirable.

Cash flows from operations: This is cash generated from a company's operational activities. A positive value is desirable. A negative value indicates that profits, if any, are not getting converted into real cash, an undesirable scenario.

Interest-coverage ratio: It indicates how easily a company can service the interest on its debt. The higher the number, the better.

Profiting from recovery: Aviation

Profiting from recovery: Hospitality