Adlabs Entertainment : Smoother Ride Ahead?

Stock Opportunities Untested - but worth a good look
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Adlabs Entertainemnt (CMP : 70 . MKT CAP : 550 cr)

Adlabs entertainment owns and operates india’s largest theme park . The theme park comprises of :
Imagica - theme park with 21 rides . Ticket price - 1599 weekdays and 1999 for peak days.
Aquaimagica - water based theme park with 11 rides. Ticket price - 799 for weekdays .999 for peak days.
Novotel Imagica - a five star hotel with 287 room plus banquet halls/ meeting halls.

Background :

Adlabs entertainment was started by Manmohan Shetty ,a entertainment industry veteran who has been a film/tv producer, multiplex operator and erstwhile promoter of Adlabs films - which was sold to ADAG entertainment and became the now infamous reliance media works. After briefly heading and quitting reliance media works in short order, Manmohan Shetty had a bit of a Disney moment and wondered about lack of world class outdoor world entertainment options In India .Being a serial entrepreneur he went about making it happen and voila! 5 long years and 1650 crores later Imagica opened its gates to visitors on April 18 2013.

Company got listed in March 2015 after a disastrous IPO where the company had to revised its price band downward and extend closing date to get the IPO subscribed fully. Stock was listed at 167 and soon crashed over 60% in subsequent months making it one of the worst performing IPO last year!

Now what has drawn me to a company which has such a disastrous listing history ?! I present my investment case below :

Investment merits :

Emerging as a popular destination :Imagica and aquaimagica have both emerged as popular destinations as reflected by trip advisor ratings and growing footfalls.

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The theme parks are on track to record a combined footfall of over 1.6 million this financial year.ARPU in current quarter was Rs.1470. This is expected to increase to over Rs.1600 as company was absorbing the service tax hike impact since it came under service tax ambit starting June 2015. Ticket prices have been hiked from this week to pass on entire service tax impact to customer. This will be a good test to demonstrate company’s pricing power.

The hotel has also gained good traction as company is positioning it both as a theme park resort and a wedding/ corporate event destination .Currently 116 hotel rooms have been opened to a good response with average occupancy rates of 75% , which is pretty impressive for a brand new hotel . Rest of the rooms will come online in April.

Expanding reach : Adlabs has been working on promoting the park aggressively as a premium Pan-India tourist destination . Ad spends have been increased and it has tied up with various travel agents across the country to expand the reach of the park outside the Mumbai - Pune catchment area. Currently the ratio of visitors is 75:25 in favour of Mumbai area. Company plans to scale up this to 50:50 in 2-3 years by further expanding travel agent/distribution network and increasing awareness via ads and marketing.

New attractions :Brand New attractions like snow world and adventure park will be added to the theme park complex in next 6 months . Company has entered into a JV for both these projects .adlabs will not incur any major capital or operating expenditure for these projects and will be providing only common infrastructure plus ticketing and marketing them as part of theme park complex.For snowpark which will be opened to public later this month ,company has entered into a 25% revenue share arrangement. Adventure park is expected to be opened in second half of the year , revenue share details for this are not available yet.

Reducing debt costs: Adlabs cost of borrowing has steadily declined from peak of over 13% to 12.5% . Management has guided for reduction of another 1% by availing some refinance option in coming quarters . Also, interest costs are on declining trend , this should benefit the company and interest costs saving should find their way to bottom line.

In medium term, Company has also plans to monetise the land adjacent to theme park for development of a township through a Tie-up with real estate developers.Proceeds from this will be used for paring debt.company is keen on only supplying in land bank and does not intend to invest in development itself.

Key risks and concerns :

Mountain of Debt :Setting up Theme parks is a capital intensive business and Imagica cost about 1650 crores. A large part of it financed with debt . Current outstanding debt is 950 crores. There are no further funds required for expansion and management feels it’s peak debt.declinining interest costs help but company still needs to generate around 100 crores per year to meet its interest payout obligations. Land monetisation could take some time given the current real estate and economic environment.

Accidents and natural disasters : Like all amusement parks , Imagica is also prone to unfortunate accidents , two of them have happened since it opened.

Unfortunate as they are ,None of the accidents had any long lasting Impact on footfalls.

The theme park is also exposed and vulnerable to forces of nature , no catastrophes have befallen since its opened . Only impactful weather event happened in Q2 when landslides on Mumbai Pune expressway impacted the traffic and had to led to a temporary reduction in footfalls.

Competition :Entry of foreign players like Disney , six flags and universal in and around Mumbai could seriously dent imagica’s appeal. Imagica seems to be thriving though despite local competition like easel world and water kingdom.

Valuation

Company is not yet generating profits so usual ratios don’t make sense. It’s offerings though have been quite successful with customers and so far it has registered footfalls of 3.0 million in a short span of 21/2 years .FY17 will be the full year of operation when all three major components of this theme park are fully operational. Company expects to be cash positive in FY17 and achieve a positive PAT next year . I view this more of a startup with very decent chances of generating good cash flows starting next FY. High costs and long gestation period for setting up new theme parks of this scale and quality should act as entry barriers.

Disclosure : invested at 5% of portfolio . Looking To add more on significant declines and improving business dynamics.not intended to be a buy recommendation do your own diligence .views invited.

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CONFERENCE CALL - from Capital Markets

Target for cash breakeven in FY17

Adlab Entertainment held its conference call for discussing Q4 FY16 results.

Key highlights:-

  • The net sales for Q4 increased by 14% to Rs 54.96 crore. The loss at bottom-line stood at Rs 15.98 crore.

  • Revenue from ticketing was Rs 33.5 crore, from F&B was Rs 9.3 crore, retail was Rs 4.2 crore and hotel was Rs 8 crore.

  • In Q4, 3.17 lakh total footfall out of which theme park was 68% and water park was 32%. For FY16, 16 lakh total footfall out of which theme park was 63% and water park was 37%.

  • Ticket has been moved to plus tax model. Also Low ARPU promotions like Happy Tuesday & Wat-a-Wednesday have been discontinued which helped ARPU to increased

  • 28% ARPU has improved of theme park vs Jan – March period. 24% APRU has improved of water park vs Jan – March.

  • For Novotel Imagica the average occupancy for Q4 stood at 78% and average ARR was Rs. 5,800+ and inclusive of F&B the ARR was Rs. 9,900. During the 6 months of operations till March 2016 , the hotel has hosted 155 corporates and 6 destination weddings

  • Imagica worked on a new branding and positioning with our creative agency and decided to merge the entire offering under a single brand of Magical. The company feel that consolidating the Theme Park (TP), Water Park (WP) & Snow Park(SP) under a single brand name Imagica will lead to an optimization of marketing cost and a much better brand recall

  • Snow Park was completed in March 2016 and conducted trial runs for the same and was opened for guest in first week April '16 . Rs 499 plus tax snow park ticket. Looking at converting 15% of footfall coming to theme park.

  • For FY17, the mgmt will focus on increasing ARPU and will observe its impact on footfall and revenue. The company will pass on any tax as soon as possible. Channel partner revenue increase from 15% to 20% in FY17. Non ticket revenue increase from 27% to 30% in FY17. Will focus on repeat visitor

  • For Novotel, 80 rooms was launch in Q1 and balance 91 room will be launch in Q2…

  • The company will monetize surplus land in FY17.

  • The company will try to re-finance and negotiate for lower interest cost.

  • The mgmt target for cash breakeven in FY17.

  • For Q4 FY16, APRU was at Rs 1543 vs Rs 1546 in Q4 FY15. For FY 16, it was at Rs 1521 vs Rs1779 in FY15. Drop in ARPU is primary due to service tax absorption and mix change related to waterpark.

  • APRU breakup for Q4 – out of Rs 1543, ticket was Rs 1057, F&B was Rs 294, Retail and photos was Rs 143 and other was Rs 59.

  • The company’s debt stands at Rs 962 crore.

  • The company will launch Adventure Park. After monsoon, work may start. It’s a revenue sharing arrangement with no Capex. Expected to be operational in H2 FY17.

  • The mgmt expects in 2-3 yrs time to have a steady state EBIDTA margin of 35%. 1.5-2 mn fooftfall per annum will help to reach that type of margin.

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Footfalls have declined by over 30% this quarter in theme park+water park combined and management reasons its due to discontinuation of the deep discount Happy tuesdays . Management wants to bring back “premium” positioning of imagica and looks to increase ARPU this year but they seem to be loosing footfalls in big way. .The quantum of footfall decline especially for theme park in peak summer season is disappointing .To me , this shows that imagica doesnt quite have the pricing power yet. Water park though is doing steadily well .Typically theme parks start picking up footfalls from third year forward but this is not happening for imagica .

In another major development ,company got permission to develop township and they are exploring JVs with various players .Could be year or two till something concrete happens given real estate downtrend.

Disclosure : Have reduced the position to around 2% for tracking . Will check back in if footfall growth picks up or land monetisation cash flow gets visiblity

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the drop in footfalls this qtr is 4% yoy from 539187 to 515555.
i think the removal of discounts is a good move.
Also high temperatures this summer may have lead to lower footfalls in theme park.
in scorching heat going to park during daytime may not be a good idea. Water park is OK. This is just my guess. However, removal of discounts would definitely have been one reason. But the footfalls should grow with word of mouth publicity.
did any of valuepickr has visited imagica and if so how was the experience.

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The reported footfall number includes snow park footfalls this quarter which is around 88000 .Snow park was started in April this year…iam doing a like to like comparison for theme park and water park YOY. I disregard snow park footfalls as its operated via JV and at best it will add 5-6 crores to topline given that adlabs gets only 25% revenue share from the operator. Personally i was puzzled management included snowpark footfalls in headline footfall number as its such a small piece in overall scheme of things.

Summer is the peak season for the theme park due to vacation crowd .Mid june onwards ,monsoon starts and with that heavy mumbai showers keep a check on footfall till september . After that the footfalls perkup again in october during festive season up till Jan. Jan till mid march again there is a slowdown due to exams etc .Heat doesn’t really affect theme parks as much as rains.

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Hi Manish

I had visited Imagica in the last August on a weekend. I can say that this is the best park as on date in India.

I also visited Wonderla in Hyderabad last month.

I can simply say that Imagica is far better in visitor point of view, no doubt its a bit expensive but its worth.

Regards
Viswanth

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Was going through fy 16 annual report and found around 93 crore deduction in land asset. Can someone explain what exactly does this mean?

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Company had transferred some of the land bank around the park for monetisation and development to its subsidiary walkwater properties . the balance sheet change could be possibly referring to that .

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But this is the consolidated gross block. Would it not include subsidiary assets?

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I visited Imagica last week on Wednesday, and there was a huge crowd. Min 45 mins waiting on top attractions. That prompted me to have a look at the stock. Current financials and debt are a sorry figures (understandably since they have incurred a huge capex). We would be banking on a increase in footfalls in the future to make any money from the park. I think its a FY18 and beyond story. But there are huge risks in the story. Footfalls have fallen in Q2 due to increased in prices. While on a consumption theme story looks attractive but there are risks. add to the already high capex park they have five star hotel.

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Anybody has an idea of the approximate value of the land that they plan to monetize.

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Company in its recent Investor presentation has shared its 2021 vision, where they aim to attract 2.0m to 2.4m visitations vs 1.5m at present, implying a growth of 8% - 12% CAGR.
Interestingly they see no improvement in ARPU’s, while Wonderla has been able to increase them at 10% odd CAGR.

Company has started De-leveraging process with sale of its hotel to RK Damani for 212crs and its ~200 acre land for 150crs, also another 50crs is been infused by way of pref allotments, helping them to reduce debt by 40% by the end of the year.

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Hope the management has become more sensible / practical at estimating footfalls. Read the below 2013 article. Clearly they were very aggressive in estimating the footfalls and hence incurred huge capex using borrowings. This is obviously haunting them now.

Extract from the article.

Shetty says he expects to get between two and three million visitors to the park a year. (1.75 million is what his business needs to break even) He’s based his numbers on careful calculations and says the park will be a draw for visitors from Mumbai, Pune and Nashik – a 40 million strong catchment area.

Footfalls were steady at approx. 1.5 million for 2016 and 2017. No growth in footfalls in 2017.

Having said that, 7% CAGR footfalls growth sounds achievable (Need to track it regularly). Operating leverage will clearly play out well as and when footfalls increase.

This is definitely positive. Need to understand the tax implication of hotel sale. How much of 212 cr. will be available (net of tax) for debt repayment.

Discl.: Not invested

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Results:
http://www.bseindia.com/xml-data/corpfiling/AttachLive/fca148bd-1647-4ee6-a5d0-c423e7703afe.pdf

Press Release:
http://www.bseindia.com/xml-data/corpfiling/AttachLive/dd701fb0-0fb8-4399-b059-ead96425f40c.pdf

I think decent set of numbers.

1 Footfalls have increased by 14%
2 Although the EBITDA growth looks low, but if we add in the SGST refund, it is a very good figure
3 The debt has been reduced by 23 cr with the Centrum money.
4 The sale of hotel is with the lenders, so that event should happen in this quarter
5 The benifit of low GST also should come in next quarters earning as it was effective from January.

Disc: Invested

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Sorry if you find quite naive.

I see major blocker for investment into this otherwise wonderful theme park is huge debt.

Snippet from last three years

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There is no sign of abating this. From the last con-call, long term borrowing still stands at 1k Cr.
Although the management planned to sell extra land parcel and 5-star hotel, outstanding debt will still be huge. Any projections when Adlabs will be debt-free?
Also, any idea how Wonderla manages its capex in this capital intensive sector ?

image

Disc: Tracking for investment

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Imagica is about to turn back.
After covid effect, it seems is on its way with big volumes.
As per the 2021-2022 annual report, debt restructuring plan implemented. Visitors number will increase as no restrictions.

Anybody still tracking?

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anyone tracking this, I think turnaround is going great and todays results will be amazing

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https://twitter.com/jaimalpani/status/1663968832636207104?s=46&t=UYVsqJDN35ZydR3R9bDKkw

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