Recreation, leisure and luxury stocks may take longer to recover

ET Intelligence Group: The current timetable suggests India’s nationwide lockdown would last until mid-April. But that wouldn’t mean customers would start crowding theatre halls or book airline travel immediately. The finer things in life — recreation, leisure and luxury — must wait. And that’s not ideal for stocks of airlines, hotels, fine-dining restaurants, or multiplexes.

Analysts and fund managers believe that these sectors will be among the last to regain full form after the lockdown ends. Given their high fixed costs and no immediate revenue visibility, analysts have drastically cut earnings growth estimates of key companies in these sectors in the range of 16-50% for FY21.

To be sure, many of the services offered by these sectors are not strictly essential. “It would take six months to a year to gauge whether there can be business as usual after the lockdown,” said Sunil Singhania, founder of Abakkus Asset Manager. “Sectors such as airlines, hotels and multiplexes, which require large crowds, would take much longer to recover in terms of revenues.”

Yet, these sectors have high fixed costs to bear, and that burden will erode any possibility of quick profitability growth. Airlines such as InterGlobe Aviation and SpiceJet have fixed costs of close to Rs 5,000 crore and Rs 1,800 crore, respectively, for a quarter. Multiplexes such as PVR and Inox Leisure have fixed costs of Rs 140-145 crore and Rs 40-45 crore, respectively, per month.

“For these sectors with heavy fixed costs, whether rent or employee costs, it will take a long time to recover,” said Singhania.


Furthermore, substitutes exist for some of these service lines.

An analyst with a leading broking firm said,“Today, when one has so much content readily available on streaming platforms and the social media platforms, one would not mind going to theatres. Once the lockdown period ends, a person who would watch one or two films in a month would not binge-watch films in theatres or travel immediately because they were deprived in the lockdown period.”

Also services such as video-conferencing make up for any business travel. And the scare and the preventive measures to avoid “group engagements” rule out any possibility of leisure travel.

“Self distancing will definitely have consequences on these sectors. We believe it will take at least six months for occupancy levels to go back to good old days. In the listed space, we don’t see multiplex companies facing survival issues as their balance sheets are healthy. But unlike multiplexes, aviation and hotel players with heavy balance sheets will face challenges,” said Pankaj Pandey, head of research, ICICI Direct.

The March and June quarters, coinciding with school vacations, provide significant business for these sectors. Given the lockdown, and circumspect consumer spending in the months to follow, business in these sectors would be rather weak.