Adlabs Entertainment

A costly ride

The valuation at which the shares are being offered factors in substantial increase in revenues from current levels

CM RATING

40/100

Promoted by Manmohan Shetty, the founder of Adlabs Films and India's first Imax theatre, has more than three decades of experience in the media and entertainment business. Adlabs Entertainment owns and operates Imagica-The Theme Park, Aquamagica-The water Park and family hotel Novotel Imagica Khapoli.

Spread over 132 acres in Khalapur, 74 km from Mumbai, the theme became fully operational from November 2013 and features 25 rides and attractions of international standards, multi cuisine food and beverages (F&B) outlets, and retail and merchandise shops. The theme park includes some of the world's marquee offerings and live performance of various artists and dancers throughout the day to appeal to a broad demography of Indian populace. The company owns and also operates the entire array of F&B outlets of Imagica.

Aquamagica, the water park located next to the theme park, became operational from October 2014 and offers 14 kinds of water slides and wave pools and various water-based entertainment.

The first phase of the 287-key hotel comprising 116 keys will be operational from April 2015 and will include facilities such as banquet halls, conference rooms, specialty restaurants, bar, recreation areas, swimming pool, spa, kids activity and a fitness centre catering to the requirements of the guests.

The company is looking to build two more such theme parks: one in South India, probably in Hyderabad; and the other in north India, in the next 3-5 years. It has also entered into an MOU with Acme Entertainment to run a snow park on a build-own-operate basis at Adlabs Mumbai.

Currently, 75% of the revenue comes from ticketing, 17-18% from F&B, and rest from sale of merchanidise. So far about 1.7 million people have visited the theme park. Students account for 20-25% of visitors.

The entire cost of the project including the theme park, water park and hotel is around Rs 1650 crore, for which the company took a debt of about Rs 1100 crore. Rest is equity. The company still has 170 acres of surplus land around the theme park, which it will monetize in future.

The company's business is seasonal, with about 40% of the revenue coming in H1 and the remaining in H2 of the fiscal year. The ticket pricing for Imagica works out to about Rs 1450 on a blended basis after considering the weekdays and week end rates and offers and discounts for students. For the water park, the blended rate is about Rs 1000.

The company's ticketing pricing is around US $25 per day as against the global average of about US$ 75. About 20% of the tickets are sold online. About 20% of the footfalls comprise school students (fetching lower revenues and margin). So far about 800 schools have visited.

To be Ebidta positive, the company needs about nine lakh footfalls on an average and to break even at the cash level about 14 lakh footfalls per year. The total number of guests hosted at the theme park in the twelve months ended December 2014 was 9.12 lakh.

The Offer and the Objects

The issue of 2.03 crore equity shares of face value of Rs 10 each comprises fresh issue of 1.83 crore of equity shares of face value of Rs 10 each and an offer for sale of 0.20 crore of equity shares of Rs 10 each by Thrill Park, part of the promoter group. The issue constitutes 25.44% of the post-issue paid-up equity share capital of Rs 79.90 crore. The issue offers a discount of Rs 12 on the issue price to retail individual bidders. The minimum bid lot is 65 equity shares and multiples of 65 equity shares thereafter.

The issue price has been revised lower to Rs 180-215 from Rs 221-230 and closing date has been extended to 17^th March 2015 due to non subscription of the entire issue on the original closing date 12^th March 2015.

The object of the issue is to repay or pre pay loan up to Rs 330 crore from a consortium of bankers. The rest is for general corporate purpose in addition to achieving the benefits of listing the equity shares on stock exchanges such as enhancing visibility and brand image among existing and potential customers and providing liquidity to the existing shareholders.

Strengths

Globally, the theme park entertainment market is pegged at about US $ 32 billion. In India, it has not even touched US$0.5 billion. There is a plenty of scope for the business given the favorable demography and a rising middle class.

There is strong entry barrier. It involves designing and constructing the theme park and support from the government in terms of land, clearances and approach roads. .

Imagica is a world class theme park, which was built at nearly 1/3^rd of the average cost of about US $ 1 billion required by other theme park around the world. The entertainment value in visiting Imagica and such other high-end world class theme parks is the same.

The capex for building the theme park is completed. Now, operating leverage will come in. The average industry Ebidta margin for such theme park is 50%. As almost all fixed costs are already incurred, any increase in revenue will have a multiplier effect on the bottom line.

Worldwide, non-ticketing revenue constitutes around 50% of the total revenue. For the company, it is only 20-25%. Increase in sale of merchandise products, setting up of other shopping outlets including malls and increase in sale of F&B will fetch better and higher margin.

With the availability of a hotel near the park, the entire entertainment venue will be a multi-day visit rather than a one-day visit. Also, there will be lot more cross selling between the theme park, water park and hotel, which will increase the overall revenue and margin going forward.

There is exemption of entertainment tax for 10 years from the date of incorporation of the park.

Weaknesses

The success of the park depends on consumer tastes and preferences and on discretionary consumer spending, which is heavily influenced by the general economic environment and consumer confidence.

Any accident or adverse incident at the facilities and consequent adverse publicity can affect the business.

The business is dependent on school vacations, public holidays, weather conditions and weekends. There was some change in the examination schedule of Maharashtra schools due to state elections and holidays were shifted from the December 2014 quarter to the March 2015 quarter. Thus, some of the ticketing sales got shifted from the December 2014 quarter to the March 2015 quarter.

Revenues are dependent on the western region of India due to the location near the Mumbai-Pune Expressway. Any kind of disturbances or calamities in this region can affect revenues.

The industry is capital intensive industry. The projects have long gestation periods and would require substantial funds for future expansion.

The company is dependent o uninterrupted supply of power from the Maharashtra State Electricity Distribution Grid. The agreement with the grid expires in March 2015. The company does not have sufficient back-up power to run the theme park. Any interruption in power supply can affect business as well as reputation.

Valuation

In the period of six months ended September 2014, revenues stood at Rs 72.15 crore and net loss Rs 53.52 crore. In the year ended March 2014, revenues stood at Rs 103.69 crore and loss Rs 52.42 crore.

Established on 82 acres, Wonderla Holidays, a midsized theme park, is available at EV/Ebidta of around 19.4 times. Based on Revised Issue Price band of Rs 180-210, assuming the planned debt repayment of Rs 330 crore and surplus cash of about Rs 50 crore, EV of Adlabs works out to around Rs 2558 crore. With the average industry Ebidta margin of 45%, the company would require net sales of around Rs 295 crore and Ebidta of around Rs 132 crore to generate 19.4 times EV/Ebidta.