Second COVID-19 wave threatens multiplex stocks; will it be 2020 all over again?

Aviation, retail and multiplex stocks have been among the hardest hit since the coronavirus outbreak in the country in 2020 and now with a more furious wave battering India, forcing lockdown and curfews, these sectors are again in the line of fire.

Data shows stocks such as Jet Airways, Future Retail, PVR and SpiceJet have fallen between 20 and 34 percent on BSE since March 1, 2021. Equity barometer the Sensex is down about half a percent for the same period.

Airline stocks have come under pressure as several states have announced fresh restrictions, while retail is witnessing pressure as fewer people are stepping out to make discretionary purchases. Multiplexes had not even seen a full recovery when the second wave started pounding India.

2020 all over again?
The second wave is worrisome but it is too early to conclude that will be as devastating for these sectors as in 2020, as most businesses have taken several measures to mitigate the impact of similar uncertainties.

“It is too early to measure how the second wave lockdown will impact the sector, learning from past experience gives confidence that most of the businesses have taken several measures to insulate themselves from similar uncertainties. These measures include identifying alternate resources of supply, cost control, operational efficiency and use of technology for internal and external operations,” Vinod Nair, Head of Research at Geojit Financial said.

“Most of the retail firms have developed a strong and efficient online business strategy for supply and distribution. Given the ongoing vaccination programme and planned lockdown, we do not expect the lockdown to impact the business as last year,” Nair said.

For multiplexes, the second wave would have a major impact on the finances and operations of multiplex operators around the country.

“Resumption of lockdown measures in Mumbai has led to closures of multiplexes and it is expected that similar measures will be announced in other cities and towns. Restrictions have also led to the postponement of blockbuster movie releases which in turn will impact occupancy rates of multiplexes,” Nair said.

The restrictions increased demand for OTT content, which was a source of competition. Rental costs were expected to increase, which will impact margins as occupancy would continue to be low, he said.

Ajit Mishra, VP Research, Religare Broking, said the government was focusing on micro-containment, which would somewhat limit the impact.

“It could be similar to the first wave, but we do not see any sharp correction in airline counters. Secondly, strong support from the government and central bank would ensure a speedy recovery,” said Mishra.

For retail, Mishra expects the sector to take a hit as fewer people would step out to make discretionary purchases but the focus on micro-containment would limit the impact. With people spending more time at home, consumer staples could see increased demand, he said.

The impact on multiplexes in the second wave would be similar as key states like Maharashtra have shut cinemas. However, the intensity of the impact would depend upon the duration of restrictions, Mishra said.

Gaurav Garg, Head of Research, CapitalVia Global Research, said though the Centre had not restricted domestic travel, airlines will need to fly fewer planes because customers may not want to travel at these times, at least until they have been vaccinated.

“It would definitely put a lot of pressure on airlines and Q1FY22 numbers are definitely going to take a hit,” said Garg.

“Retail (except essentials) is also going to take a hit and the companies involved in the retail business are going to face tough times for at least a month,” Garg said.

Multiplexes are one of the hardest hit but unlike last year, where cinemas were closed for more than nine months, that may not happen this time because of mass vaccination.

Aviation, retail and multiplex sectors may suffer temporary losses due to new restrictions but the government and businesses were well-prepared to combat the pandemic, Garg said. It was unlikely that the impact would be severe as 2020.

Rusmik Oza, Executive VP and Head of Fundamental Research, Kotak Securities, said the spike in confirmed and active COVID-19 cases could result in more lockdowns in cities and states.

“The earnings impact on account of the second wave on sectors like airlines, retail and multiplexes will be severe and is not built-in future estimates,” he said.

“On a year-on-year basis, the impact will be less in Q1FY22 due to low base but sequentially it will be negative. April and May are peak months for airlines, retail and multiplexes and it will be difficult to cover up the losses incurred during these months in the subsequent months that will have a monsoon effect,” Oza said.

Oza foresees a material impact on the earnings of these sectors in FY22 but believes investors would look into FY23 to justify valuations.

“Going by past experience of last year, we could see the impact remaining for a limited period and as and when activity normalises, stocks from these sectors will again come into the limelight. Investors get the opportunity to add stocks in these sectors during these difficult times. Hence it is worth adding stocks in these sectors in every decline taking a two to three years views rather than one year view,” he said. Money Ccontrol