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GST may lead to better operating profit margin for multiplex operators
June, 23rd 2017

Multiplex companies—PVR Ltd and Inox Leisure Ltd—are expected to benefit from the implementation of the goods and services tax (GST). That’s mainly on account of the input tax credit on fixed costs that these firms bear such as rent, common area maintenance and so on. Ratings agency Icra Ltd estimates that input tax credit will be available on 33% of the total operating expenses.

The GST rate has been fixed at 28% for tickets costing over Rs100 and 18% for those under Rs100. Tickets below Rs100 account for a small portion of overall ticket sales of PVR and Inox. This is disappointing considering that the entertainment tax is in a similar range (of 28%) for these firms. As analysts from Dolat Capital Market Pvt. Ltd point out, entertainment tax for PVR and Inox based on their net box-office collection is 29% and 27%, respectively, as on fiscal year 2017 (FY17) and thus a 28% GST rate would not have any impact for the multiplex chains. Note that the industry was expecting 18% rate across the board.

But the major hit would be for the food and beverages (F&B) segment, which will attract a rate of 12-40% under GST depending on the composition of the F&B items. Icra points out that a majority of F&B items are expected to be falling within the 18% category. “This is likely to negatively impact the multiplex industry as currently, the tax is around 11% of the net F&B segment revenues,” it says.

But what really offers relief is the input tax credit as mentioned earlier. “At an aggregate level, the negative impact of GST on F&B will be more than offset by the input tax credit thereby resulting in an expansion of the operating margin of the industry players by 2.5-2.8%,” adds Icra. Of course, investors should watch whether companies will take price hikes to pass on the impact of higher F&B rates. That will determine the extent of improvement in profit margins for these companies.

For now, investors have little to complain about. The current quarter is expected to be robust thanks to the strong performance of Baahubali 2: The Conclusion. What’s more, the content pipeline for FY18 is decent too. The PVR and Inox stocks have appreciated 36% and 22%, respectively, so far this calendar year. Currently, based on Bloomberg data, one share trades at about 44 times and 35 times estimated earnings, respectively, for this fiscal year for PVR and Inox. Valuations suggest most of the positives are baked into the price.

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