High likelihood of near-term weakness as Hindi content remains below par

Ranbir Kapoor starrer Shamshera is slated to release across over 3,500 screens in India tomorrow; the film is estimated to report an opening day collection of INR 8-10cr basis advances and a lifetime collection of INR 70-75cr; these collection estimates are below par given the nature and scale of the film. This will be the second consecutive large-scale format film post-Prithviraj (INR 65cr lifetime collection), which would report a below-par collection number.

In terms of recent performances, Jug Jug Jeeyo has reported a lifetime collection of INR 85cr, a tad below our estimate of INR 100cr; other films like Rocketry, Shabaash Mithu and Khuda Haafiz 2 have reported dismal collections, which has further had a negative impact on Box Office this quarter.

We have already moved in H2CY22 (Jan and Feb 2022 was largely shut) and only three Hindi films – Kashmir Files, Gangubai Kathiawadi and Bhool Bhoolaiya have emerged as a Hit, basis their collection and ROI (return on investment), which too is a concern. We will monitor coming months for any kind of positive surprises for Hindi films emerging as Hit, basis their cost and ROI. We believe that next three quarters are very crucial, as Hindi content may see a strong comeback if they transition their content, as this has happened in the past too, wherein Hindi film industry saw a strong comeback post Baahubali-2.

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Regional and Hollywood content continues to have a strong hold for Box Office, as recently released English film – Thor too has reported Box Office collection of INR 83cr and is estimated to breach the INR 100cr mark.

We estimate Hindi Box Office to decline in Q2FY23, despite release of few large ticket films in the quarter, as small/medium budget films continue to report a very dismal performance; we estimate a decline of 15% in Q1FY23 to INR 875cr vs pre COVID levels (Q2FY20), despite release of big budget films like Brahmastra and Laal Singh Chadha. We believe this is the first time since Q1FY18, that Hindi Box Office is estimated to decline on a normalized base  (cannot compare recent decline Q4FY22 due to negative impact of pandemic). However, basis current slate of films and expectation of a strong Q3FY23 (festive season), Hindi Box Office is slated to grow 6% over pre COVID levels (FY20) in FY23, which too will be monitored carefully and may be at risk if small/medium budget films continue to fail in H2FY23.

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Advertising revenue remains to be at 70% recovery level vs pre COVID levels (FY20), as Hindi content drives a larger chunk of ad. revenues led by premium pricing in the north/west market, dominated by Hindi film footfalls; continue to maintain our view that ad. recovery towards pre COVID levels, will happen only in FY24, once we see a more consistent performance by Hindi films.

Merger approvals and synergies post that remain to be key triggers for PVR/INOL over the near term that will continue to support valuations, despite a below par run at Hindi Box Office; we have a BUY rating on PVR/INOL with a TP of INR 2,325/575 respectively; believe merger will lead to a potential upgrade on target prices helped by synergies and valuation multiple re-rating.

– Karan Taurani @ Elara Capital