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IPO: Adlabs may deliver only in long term, says VS Fernando
An analysis on Adlabs Entertainment IPO by VS Fernando
OFFER AT A GLANCE
Name
Adlabs Entertainment Ltd
Public Offer
203.26 lakh shares of Rs 10 each
Offer % on Total Equity
25.44% on Rs 79.90 cr capital
Post-IPO Promoter Stake
56.84%
Offer Price
Between Rs 221 and Rs 230
Offer Amount
Between Rs 449 cr and Rs 468 cr
Application Quantity
65 & Multiples of 65
Bid/Offer Opens
10-Mar-15
Bid/Offer Closes
12-Mar-15
Listing
BSE and NSE
Rating
Nil
Book Running Lead Managers
Deutsche Equities, Centrum Capital & Kotak Mahindra
Registrars
Link Intime
The IPO
The present public offer comprises a fresh issue of 183.26 lakh equity shares and an offer for sale of 20 lakh shares by Thrill Park Ltd, one of the promoter-shareholders. The issue constitutes 25.44% of the post-issue capital (Rs 79.90 cr). The IPO is being made through the book-building route with a price band of Rs 221-230. There is a discount of Rs.12 on the issue price to retail individual bidders.
IPO Object
Through the fresh issue the company proposes to collect between Rs 405 cr and Rs 422 cr of which, Rs 330 cr is to be used for partial repayment of the consortium. The balance proceeds net of issue expenses is earmarked for general corporate purpose.
Grading
The company has not sought rating for its IPO.
Lineage
Even though the issuer-company is relatively young and going public for the first time, the people behind the company are not new to the investing public. The promoter, Manmohan Shetty (66), has more than three decades of experience in the Indian media and entertainment industry. In December 2000, he floated public Adlabs Films Ltd which he sold a few years later at a premium to the ADAG (Anil Ambani) group.
The issuer-company was incorporated as Adlabs Entertainment (P) Ltd (AEL) in February 2010 at Mumbai upon conversion of Dream Park, a partnership firm formed by the promoters in 2009. AEL has a holding company, Thrill Park Ltd, who currently holds 72.4% (4.458 cr shares at a cost of Rs 67.07 each) which would be reduced to 53.29% (4.258 cr shares costing Rs 59.42 each) post-IPO. The individual promoter (Manmohan Shetty) will hold 28.42 lakh shares (3.56% post-IPO) at a cost of Rs 227.99 per share. AEL has 100% subsidiary, Walkwater Properties (P) Ltd, which owns 170 acres of land meant for development of a township.
Business profile
The Raigad District (Maharashtra) located AEL is a high tech amusement park company with a massive capital outlay of Rs 1650 cr. It is one-of-a-kind “one-stop” entertainment destination in the country designed to provide a wholesome, day-long and ‘value for money’ entertainment option. Spread over 132 acres, AEL’s facilities at Khalapur (74 kilometres from Mumbai, off the Mumbai-Pune Expressway) include an all-weather theme park `Imagica’, Mykonos theme based water park `Aquamagica’, and a 287-key family hotel. The park features a diverse variety of rides and attractions of international standards, food and beverages outlets and retail & merchandise shops, designed to appeal to a broad demography of the Indian populace, delivering memorable experiences, with a strong value proposition.
The theme park Imagica, set up at a cost of Rs 1300 cr, has 25 rides and attractions, which are spread over six theme-based zones. Imagica’s marquee offerings include Rajasaurus River Adventure - a boat ride offering guests a peek into the pre-historic habitats of dinosaurs, Wrath of the Gods - a VFX show based on an archaeological discovery of an ancient Indian civilization, Nitro – said to be India’s largest roller coaster, I for India - a simulated helicopter ride over various sights and attractions across India and Mr. India – the Ride, a simulated ride based on the popular Bollywood movie, Mr. India. AEL also offers entertainment through live performances by acrobats, magicians, dancers, musicians and other artists throughout the day in various parts of our theme park.
Imagica operates an array of food and beverages (F&B) outlets owned by the company. Their retail and merchandise offerings provide guests an opportunity to memorialize their experiences at the theme park by purchasing products such as toys, apparel, bags, caps and commemorative mementos and photographs, which carry the ‘Imagica’ brand or are based on one of the rides or attractions in the theme park. Imagica also retails candies, chocolates and other utilities such as hats and sunglasses.
The company’s Rs 150 cr water park called Aquamagica , located adjacent to Imagica, offers 14 kinds of water slides and wave pools, including: Zip Zap Zoom - a high-speed mat racer that moves through enclosed looping aqua tubes, Loopy Woopy - a ride that comprises a launch capsule which is controlled by a trap door leading to a steep vertical drop of 72 feet, Screamer – that offers a series of twists, turns and oscillations through “rattles” which change shape in alignment with the different lengths of cylinders, and Twisty Turvy - a water coaster with drops and curves. It also offers water-based entertainment such as a beach front, waterfalls, cabanas, etc., besides separate family play areas, kids play zones and toddlers play equipment.
In Aquamagica, the F&B offerings are primarily designed as ‘grab and go’ options which cater to the preferences of customers enjoying water-based entertainment in the park. Aquamagica also has a variety of self-serving kiosks with a diverse range of express meals. Its merchandise operations inside the water park are primarily structured to offer a variety of swimwear and beachwear options to our guests, including an Aquamagica-branded line of swimwear across various price points and a range of women’s clothing. The company also offers utility products and toys that our guests are likely to use in a water park. AEL intends to position Aquamagica as a destination for young party-goers and host Bollywood and electronic dance music events where popular Indian and international artists and DJs perform at AEL’s “#gowiththeflow” weekend events.
The company’s proposed 287-room hotel project at a cost of Rs 200 cr adjoining to the Imagica theme park will have facilities such as banquet halls, conference rooms, specialty restaurants, a gourmet bar, recreation areas, a swimming pool, a spa, a kids’ activity centre and a fitness centre to cater to varying entertainment requirements of the guests. AEL has entered into a hotel management agreement with AAPC India Hotel Management (P) Ltd (“AAPC”) of Accor Group, which reportedly operates several global hotel chains, to manage and operate the hotel, under the name Novotel Imagica Khopoli. The first phase of the hotel, comprising 116-rooms, is expected to be operational by March 2015 n
Financial Performance
The theme park, Imagica, which started partial operation in April 2013, reportedly became fully operational since November 1, 2013. The total number of guests hosted at park for the twelve months ended December 2014 was counted at 912,061. The water park, Aqumagica, has been operational since September 25, 2014 and up to December 31, 2014 the total number of guests hosted at the water park was put at 90,940.
For the financial year ended March 2014, AEL’s top line amounted to Rs 107 cr on which it incurred a net loss of Rs 52.48 cr. The revenue from sale of tickets (for a period of five months from November to March 2014) amounted to Rs 71.29 cr. F&B operations fetched Rs 24 cr revenue while retail and merchandise sales accounted for Rs 6.38 cr. For the six months period ended September 2014, the company clocked a gross revenue of Rs 73.32 cr on which it ended at a net loss of Rs 53.53 cr. Revenue from the sale of tickets, F&B operations and retail & merchandise sales for the six months ended September 2014 stood at Rs 55.38 cr, Rs 11.98 cr and Rs 3.89 cr respectively.
Prospects
Amusement parks’ capacity is rated in terms of number of visitors or guests, known in the industry parlance as `footfall’. According to AEL’s management, at full capacity, it can attract 70 lakh footfalls in a year. Whereas its operating break-even and cash break-even are estimated at 8 lakh and 13.5 lakh footfall respectively, the company’s current footfall is said to be only about 7 lakh. As such it has to go a long way before finding a credible bottom line.
Nevertheless, once the company reaches a healthy scale of operations, its profitability may leap a quantum jump as it has already invested considerable amount in infrastructure which facilitates smooth expansion at a relatively low cost. For instance, the company has surplus land in the existing park to add 3-4 rides over the next 5 years including one major ride/attraction every two years.
Further, AEL claims to have entered into a memorandum of understanding with ACME Entertainment, which would conceptualize, construct, install, erect and run on a build, own, operate and transfer basis, a snow park at Adlabs Mumbai and share a portion of ticket sales for the snow park with AEL. With addition of the water park, the soon-to-be-launched hotel and the snow park, AEL’s management believes that they would be able to enhance guest experience at Adlabs Mumbai and position itself as a wholesome entertainment destination.
For long term growth, AEL has proposed a theme park near Hyderabad through a joint venture model with land owners. It is also exploring tourism related projects in Gujarat. Further, development of a township project on the 170 acres of surplus land through the wholly owned subsidiary is also on card.
Amusement Park industry is, of late, attracting many a big-ticket investment. Mumbai-based infrastructure company Atlanta, in association with the Government of Gujarat, is reportedly setting up a theme park under a public-private partnership near the sea coast, 20 km from Surat, at an expected investment of Rs 9500 cr for the entire township. International Amusement, which operates the Appu Ghar amusement park in New Delhi, has proposed to set up amusement parks at Rohini (Adventure Island and Metro Park), Noida (Entertainment City), Jaipur (Mega Tourism City) and Gurgaon (Appu Ghar) at a total cost of more than Rs 2500 cr. The massive investment proposals by big names do enhance the scope for existing mega players like Adlabs.
Valuation & Perception
AEL has proposed a price band of Rs 221-230 for its Rs 10 paid up share. At the upper limit the company thus aims a market capitalisation of Rs 1838 cr. Is it justified? AEL’s current operations are too low to arrive at a P/E multiple. Moreover, the company does not have a comparable peer in the domestic listed domain in terms of size and business profile.
During the late 80’s and early 90’s about half a dozen amusement parks hit the capital market. However, none of them except Nicco Parks could put up a credible performance. As matter of fact, Ajwa Fun, Funworld & Tourism, Surya Funcity, South Asian Enterprises, etc. have failed to get a regular quote on the stock exchange leave alone fetching capital appreciation. Nicco’s Re.1 paid up share is currently quoting about Rs 16 discounting its latest earnings around 15 times.
The most recent entrant to the capital market (in April 2014) and a more credible player in the industry in terms of profitability, Wonderla Holidays, is presently commanding a premium of more than 100% over its offer price of Rs 125 (10 paid-up). At around Rs 270, Wonderla enjoys a market-cap of Rs 1525 cr which is about 24 times its net earnings, 4 times net worth, 9 times revenue and about 10 times its Net Block of assets.
Though AEL has not yet reached a respectable scale of operations to post earnings at the net level, the upper end of the price discounts its net worth only 2.1 times and the price is just 1.3x of its net fixed assets. The difference between AEL and Wonderla can be gauged from the value assets owned by them. Whereas Wonderla’s net block stood at Rs 161 cr at the end of September 2014, as compared to its current market cap of Rs 1525 cr, AEL’s net block is as high as Rs 1466 cr as compared to its high-end market cap of Rs 1838 cr. Considering the asset base, AEL’s proposed equity capital size (less than Rs 80 cr) is indeed attractive.
HOW ADLABS ENTERTAINMENT COMPARES WITH WONDERLA HOLIDAYS
ADLABS ENTERTAINMENT
WONDERLA HOLIDAYS
(Amount in Lakh)
30-Sep-14
31-Mar-14
30-Sep-14
31-Mar-14
Gross Income
7333
10692
8391
15601
Operating Profit
457
697
5471
7274
Operating Margin %
4.7
3.6
62.9
45.8
Net Profit
-5352
-5248
3128
3989
Networth
87553
50754
37650
36200
Equity Capital
7990
6157
5650
4200
Reserves
90407
50089
32000
32000
Accumulated Loss
-10843
-5492
0
0
Net Block
146562
139446
16067
16552
Borrowings
125641
114004
1231
2031
Market Cap
183765
152552
Share Price
230
270
Price/Earnings
-
24.4
Price/Book Value
2.1
4.1
Price/Revenue
12.5
9.1
Price/Net Block
1.3
9.5
Dividend (%)
0
15
Dividend Yield (%)
0
0.6
Capital Appreciation Prospects
Being a long-gestation project, AEL may take at least three years to post a decent bottom line. In the absence of earnings at the net level, the scrip may not attract many retail investors in the near term. Also, one may argue that when the shares were priced at Rs 138 and Rs 187 in January 2015 how can one justify a price of Rs 230 in March 2015? The company contends that the convertible debentures issued to India Advantage Fund (an ICICI affiliate) and NYLIM Jacob Ballas (an associate of New York Life Insurance) in August 2013 and October 2014 respectively did not carry any interest till the conversion in January 2015. These two institutional investors get a return of 47% and 75% per annum on the IPO cap price of Rs 230. Will the IPO investors get such returns?
The main promoter, Manmohan Shetty, has acquired 22.95 lakh shares (2.87% of post-IPO capital) from Centrum Financial in March 2013 @ Rs 230 a piece. Fourteen years ago, Shetty’s maiden public venture, Adlabs Films, offered Rs 5 paid shares at a price of Rs 120 each. For almost three years this share was languishing below the offer price. In fact, the price went down to as low as Rs 35 in the years 2001 and 2003. Nevertheless, once Shetty started negotiating with Reliance-ADAG for the sale of his stake, the price sky-rocked and reached Rs 1940! Thus, not only the promoter understands the entertainment business very well but, he is also capable of convincing large potential shooters (for his business). Hence, it won’t be a surprise if global players like Walt Disney show interest in Adlabs Imagica once it stabilizes operations. And, on hearing such news, AEL’s stock may enjoy a roller-coaster ride!
Source: http://indiaer.blogspot.in/