Wonderla Holidays, which has come out with an initial public offering (IPO) to set up its third amusement park, could turn out a good investment, given its sound business model, strong return ratios, good record of promoters and growth potential.
It’s also cash-generating, with negative working capital. Considering these, at 17 times (based on the higher band of the IPO price of Rs 115-125) its FY15 estimated earnings, the issue looks reasonably valued. CRISIL has assigned grade four out of five to the IPO.
Wonderla is promoted by Kochouseph Chittilappilly, promoter of V-Guard Industries, a mid-cap company listed on the BSE, with a reasonable record.
Wonderla is one of the largest amusement park operators in India, with two parks in Kochi and Bangalore and an 84-room resort in Bangalore called Wonderla Resorts.
It has benefitted from the rising discretionary spend. Its strategy of in-house manufacturing and maintenance of ride equipment gives it an edge and enables it to earn high operating margins of 45 per cent and, consequently, high return ratios. The company says the cost of a ride made in-house is a third the cost of procuring it.
Increasingly, this business should create its own entry barriers because of the asset intensity, flexibility of margins and first-mover advantage, even as competition is rising fast. As some of its old properties get depreciated (low-cost base), the incremental revenues and profits should help sustain a high return on equity of over 30 per cent.
Notably, the company has undertaken all past capital expenditure and expansion without relying significantly on debt funding, which makes the business less risky.
To set up a new park at Hyderabad, Wonderla is looking to raise Rs 170-180 crore (Rs 1.70-1.80 billion) through this IPO. Of this, Rs 173 crore (Rs 1.73 billion) will be used for the amusement park, estimated to cost Rs 256 crore or Rs 2.56 billion (debt funding of Rs 45 crore or Rs 450 million).
This park, which will have the capacity to entertain 12,000 people a day, is similar to its existing park in Bangalore and will be operational by FY17.
Hopefully, considering Wonderla is generating annual cash flow from operations worth Rs 35-40 crore (Rs 350-400 million) on gross assets of Rs 230 crore or Rs 2.30 billion) (at end-December), as the Hyderabad property gets operational and asset base grows to over Rs 450 crore (Rs 4.50 billion), cash flows, too, could improve to Rs 80-100 crore (Rs 800 million-Rs 1 billion), providing fuel for further capital expenditure.
However, the biggest risk is, whether it is be able to tackle the rising cost of the properties as well as acquire land at suitable locations for future expansions? Rising costs of land has also resulted in the Hyderabad project cost being relatively higher than previous projects. “We will not go for aggressive capital expenditure. Whenever we will do that, it will be through the internal accruals”, said Arun Chittilappilly, managing director.
Investors should also note that while growth from new facilities will be a revenue kicker in the long run, in the initial years it may dampen margins and return ratios. “Considering the larger investments required in new parks compared with older parks and low returns generated by new parks in the initial years of operations, new parks are likely to pull down overall returns,” noted CRISIL.
Though there has been some slowdown in FY14 (first nine months) in footfall at the existing facilities, the long-term growth has been healthy at nine per cent a year in five years.
The company has also been able to increase prices by nine-10 per cent annually. “Current average revenue per customer is Rs 700 plus Rs 100 a person for food and beverages,” said Chittilappilly. If the long-term trend continues and Wonderla is able to sustain its pricing power, one can expect healthy growth in revenues from existing properties to continue.