Wonderla Holidays

Stock Opportunities Untested - but worth a good look
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I am no real estate expert but you may refer earlier posts (esp by @bheeshma regarding RE) on this thread.

  1. Buying land cheap which could be used much later is not only economically viable for the company but also barrier for others who want to start anew.
  2. The land parcels taken are usually outside cities. Even though they may not fetch you much price now, with growing urbanization and connectivity the likelihood and magnitude of their appreciation should be much more than mature/overcrowded areas.
    Note - I don’t mean that the prices will be at par with the cities but their degree of appreciation would be much higher. In one of the conf calls it was mentioned that the current price of Hyderabad land is already thrice of what it was purchased at and twice for Chennai’s. Again this is not such a liquid market to exactly prove these statements but you get the idea.
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Land is the raw material for theme based parks and more than the price of the land it’s the availability that matters (ofc price also matters but availability within motorable distance is more important ).

Wonderla as mentioned by members in the earlier posts is not a great business but its a decent business well run by knowledgeable individuals

In my view the business suffers from pricing issues that they haven’t been able to find a way to crack. The older parks have good ROI’s but the newer parks have ROIs that hover around 10% as per mgt. On top of that it’s a business with high operating leverage so one needs to buy when things are not going well for the co and earnings are tanking. The current scenario the business is available for around book value so it’s a decent price. The excess land is all nice and good to have but unless there is a trigger I would ignore it and concentrate on the main business for any valuation related exercise. I also feel that the son is a little laid-back and does not take too much tension. The Chennai park was stuck because of some LBT issue which made it unviable - if things like these make an entire park unviable then one must be doubly careful before jumping into the investment. That said, I think the Chennai park when it comes up will do very well

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Lets have thoughts on following -

  1. During 2020-2030 - India - The only country in the world will have highest % GDP growth having democracy
  2. India : Highest consumers in a single country
  3. At present no excellent theme park like Disney in India
  4. During growth cycle of the China Disney entered in China
    why Disney not select India for next growth geography ?? What is possibility that Disney kick start with acquisition of Wonderla?? !!!
    Lets share positive and negative point on this aspects!!

Note: Present share prices is true reflection of weakening of matrix for wonderla as ROCE reduced 40-50% range (2011-12) to 8-9%, ROE reduced from 12% to 6%. Only positive is company is debt free!

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As cleared above in the thread as well the ROE didnt dropped; its the revaluation of land assets that was carried out.

Regarding your other points - most important point to consider in this business model is the entry barrier created by land investment. This keeps the competitors at bay.As long as the company rides out tpugh periods, it will do well.

In fact, this theme has played out in many other industries where the strongest companies in business down cycle emerged stronger in subsequent cycles.

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This seems like a fallacy to me. If land prices are stable, anyone else can buy land and set up a park at a similar cost. If land prices have risen since Wonderla bought, then while they have have gained (notionally) on land price appreciation, the economics of the business suffer in terms of ROCE (on revalued capital employed). They might be better off shutting down the park & selling off the land in that case.
Also, if they are struggling so far with limited competition, what will happen if & when a (irrational?) competitor steps in & builds a park?

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That’s precisely why I mentioned to study the company over a business cycle. The irrational competitors didn’t put up investment all through that period when land prices were supposedly stable and cheap credit was available tells us about the moat.

Apart from land investment, there has to be enough market size for competitors to thrive and grow. That again is a deterrent in this case, not enough market in any city\state to support a lot of theme parks.

In business, being a big fish in a small pond is always a better proposition than swimming with others in large pond.

To understand the strength of moat, as I mentioned, you can consider studying similar cases in other industries where there are entry barriers which deter competitors from coming up over a business cycle and the result is that incumbents emerge stronger after each such business cycle.

2 e.g - Bharat Forge & DISA India

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One could argue the biggest barrier to entry is bad economics for the business. Hence no one (in their right mind) would enter. Of course, at SOME price, this would be a good investment. That is a subjective, individual judgement.

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In porter framework all five forces have to play in company’s favour to create a really strong Moat …

Entry barrier by itself is never a Moat . Entry barrier may become a Moat only if product has no substitutes

Entertainment - both indoor and outdoor are substitutes to this business ++ all these business can improve novelty faster at lower cost …

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I was following the company for some time and took a tracking position very recently. The things that I like about the company are

  1. Promoter integrity

The promoters have around 69.52 % stake. The company is owned by v guard group family . They are not known for any corp governance issues so far. So not expecting any nasty suprises there other than MD being away for some time as pointed out in the forum already. It seems like he is already back in the business. The company is already established a brandname and has a goodwill. Promoter holding is at 69.58 % with some recent insider buying. FIIs hold around 15.39 % stake in the company.

2)Zero debt
Even when the business is considered as asset heavy, the company has managed to payoff debt prudently and is now a debt free company. However they plan to raise some fresh debt for the proposed Chennai park. The company has been very careful while raising debt.

4)The rides in the park are known to be best in safety. An incident in any other park can also be a negative for the company in the short term. Talked to a project manager at Dubai Parks and resorts some time back and had mentioned that Wonderla may probably be the only park in India where he would be ready to get on the rides. Having said that any accident can be a severe deterrent.

5)Management’s expansion strategy

The management has a good vision on growing business and expansion. To open a new park every 3 year. But due to the land acquisition and other regulatory guidelines, this may not be possible everytime. The Chennai park has lagged a lot. Now that the construction has started, management expects the park to be completed in 18 months. And company is exempted from levy of entertainment tax for a period of 5 years from the commencement of commercial operations or from 30 th September 2021. Company is also evaluating the possibility of opening an asset light model at Orissa by raising some debt and through internal accruals. I like the idea of company going forward to open up smaller parks in Tier 2 or 3 cities. Ticket prices will be lesser than what it is now which will improve affordability.

6)Large Landbank
Company is having a very large unused landbank at all it’s parks. As per last revaluation the value of land assets is higher than the market cap.

Unused land at it various parks
Bengaluru: 42.5 acres
Kochi :64.4 acres
Hyderabad :22.5 acres
Chennai: 64 acres

The land kept idle doesnot add any additional value as many in the forum has already highlighted. The current business model they have adopted requires a lot of land. These parks needs new rides to be installed every few years to improve the visibilty. To purchase new land around developed parks once the park is operational is not going to be economically vaiable. So they have to buy a land parcel in the begining itself. Whole land cant be developed together as it will entail a lot of investment which will mean higher debt and longer period to break even. So I like the way they open the park and then develop the park slowly based on requirement and using internal accruals. I think availablity of unused land is very much essential for them to take the parks to the next level. Once there is enough footfalls company may develop the land and rent out some of the properties which will be a very source of revenue. I have seen this at Dubai Parks and resorts where they have developed the land inside the park and has rented out the same to numerous hotels and restaurants. They have already opened resorts at Bengaluru and Hyderabad.

Considering the very large population we have I believe there is very good scope for the business going forward. Company is also trying to increase sales through various promotional offers like discount to groups, students etc. Iam quite positive on the Chennai park, but the commencement may get further delayed due to the lockdown

OPM is above 40 %. There is considerable increase in non ticketing revenue. One major risk cited by many is the entry of some biggy like Disney. But I believe it may take many years for Disney for land acquistion and be operational due to the many regulatory bottlenecks which is evident from the Chennai Park. Similarly Wonderla can also consider tie ups with Marvel or Lionsgate for themed rides as well as for hosting their characters. But for any large tie ups like this , I think they will need more parks and more footfalls.

ROCE goes down whenever company starts land acquisition for a new park due to large gestation period and large upfront investment required on land and machinery. Once the park starts maturing , ROCE goes on increasing due to relatively low additional capital required. I believe ROCE will start improving once Chennai Park becomes operational.

They are considering an asset light park in Orissa for the first time, so if thats successful, company may build more asset light parks from hereon. The company can hive off unused land available at the existing parks and sell them anytime they want if they dont feel that the land can’t be made to any better use at the park( company has repeatedly reiterated that they have no such intentions). With no reliable, successful business models for an amusement park to follow so far in our country , they are in the process of developing one based on models in many other countries and the business is only moving from an embryonic to growth phase.

Now with market cap at a discount to gross block the company surely looks attractive. Price is at a discount of 20% to book value and available at IPO prices.

Key risks

The current covid19 crisis will be a testing time for the company. Children being the ones mostly attracted to the parks , the company’s revenue will be considerably hit until covid 19 is totally sorted out as social distancing will not make any sense at an amusement park. We may see very muted or NIL revenue for a couple of quarters to the least.

Affordability

The ticket rates at Bengaluru park is already around 1300/*. The company may find it tough to increase the rates going forward.

Disc: invested. Around 2% of my portfolio.Views may be biased. Not a recommendation to buy or sell the company discussed

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With WFH culture becoming the norm, I think the amusement parks’ and similar outdoor experiences will witness increase in demand. And increased demand might provide more pricing elasticity as well. This will lead the company into a favorable position to increase prices as well.

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China disneyland tickets sold out for opening week.

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This is what @jats wrote about Wonderla in the Memo of his Advisory Company.

Let’s Brace for P&L Accidents But Not Overestimate Impact on Intrinsic Values

Starting this earning season i.e. of Q4FY20 (& beyond), we would hear a lot of exceptional items in the form of loss of revenue and profits due to lockdown, increased operating expenses, changes in the way businesses operate, etc.

For some businesses like Wonderla Holidays, the impact of lockdown is extreme - All its parks are closed and revenue will be zero until they reopen, while a significant cost base is fixed in nature (salaries & maintenance) so the company will report losses for this period. On the other extreme, there are a few businesses in our portfolio from agro-chem/pharma sectors for whom it is literally life as usual. In reality, most of the businesses will lie somewhere in the middle - there will be a significant drop in revenues however it will not be zero like Wonderla, and with some cost control they may avoid sliding into losses.

The other pertinent dimension to consider is the timeline to recovery. Again, for a business like Wonderla the recovery could take long, maybe a couple of years, whereas for some it could just take a few months or quarters. Once the economy is completely opened up, for the vast majority of our portfolio companies the normalcy should resume within a year.

Lockdown Impact on Intrinsic Value of Businesses
Before we get to impact on business values, I’ve got a small exercise for you. Let’s assume you have decided to invest in agricultural land and after considering various options around your city you have got your eyes on a particular land parcel. To arrive at a fair valuation, you have considered prevailing market price in that region but since you are a long-term value investor who wants to actually do farming on that land, you use yield method to determine its fair value. Based on the long-term average, this land produces agricultural commodities worth anywhere between Rs 40,000 to Rs 50,000 per annum per acre. You prefer to buy it at a yield of no less than 4%, and accordingly, you make an offer to its current owner of Rs 10 lacs per acre. He accepts your offer, you pay him in cash from your own pocket (without resorting to any loan), and the farmland is yours.

Unfortunately, the following year experiences a major hailstorm that destroys the crop just before the harvest, giving you zero revenues in that entire year. On top of that, you had incurred expenses on procuring seeds & pesticides and labor charges, etc. which have all turned into irrecoverable losses.

Now an opportunistic stranger walks up to you and offers you Rs 5 lacs per acre for the same piece of land which optically may look like a good offer given the gloomy environment, but is it? Think about it. How would a one-year loss of revenue affect the value of the land which has the potential to offer you farm produce for an indefinite future? The 4-5% yield also has the potential to increase if you re-invest annual surplus in farm mechanization, rotate to different high-yielding crops, deploy new technologies like drip irrigation, etc. Under any circumstances, can the capital value of your land erode by 50% just basis one year’s loss of revenue?

This is exactly what has happened in equity markets; stock prices in many cases have crashed as much as 40-50-60% even though the drop in the intrinsic value of the underlying businesses maybe just a fraction of it, of course assuming they are not leveraged a lot and have a business model that will stay relevant.

…companies to not only survive this storm given their strong balance sheets but also thrive on the other side. However, 2020 will be a year of lost harvest for some of these. We have to be mentally prepared to read horrifying P&L Statements and yet retain the sanity that its impact on intrinsic value may not be that material. We can’t panic and impulsively sell our valuable stake at a distressed price, rather this is the time to sit tight on those attractive assets.

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I have been following Wonderla since almost 4 years now. Mainly because I cannot figure out why this was touted to be such a wonderful business when it is not supported by numbers that a great business should churn out atleast after a couple of years of lull.

This is one company which tends to get affected by one or the other factor. If it is not heavy rains and flooding (which it seems is frequent in southern states) then it is things like Corona. One can argue that Corona is a black swan event but still over a period of 4-5 years even prior to Corona, it should have shown some consistent growth. Instead I find that topline has remained nearly static in the 270-280 crores range and net profit tends to fluctuate between 35 to 65 crores.

There are a lot of other examples similar to Wonderla where inspite of supposedly strong business models, numbers have failed to materialise because of one or the other reason. e.g ccl products, advanced enzymes. These have failed to live up to the hype surrounding them, created by market participants. Markets have over the years given long ropes to these companies but after perpetual disappointment these stocks also start correcting.

I think after a point, say a few quarters, if numbers do not start coming as per expectations, one has to re consider investment thesis and move on if an objective assessment fails to inspire confidence. These at some point become hope stocks and management keeps giving excuses for numbers not coming through.

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Thanks for making this very valuable remark. It used to irk me as to how an amusement park can be touted as a secular growth story. I am sharing my insights from the numbers this company has generated since listing. I have to say that its a very easy company to analyze!

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A few insights:

  • Footfalls tend to stagnate at 10 lacs once the park is well discovered.
  • Long term growth in ticketing is close to long term inflation (8-10%). In recent years, the growth in ticketing price has come down. This indicates that the company has some sort of pricing power atleast to pass on inflation to its customers.
  • For a mature park, the growth in revenues will be low (4-5%), might simply cover inflation in staff prices. Mature parks make close to 100 cr. With long term PBT margin of ~33%, they should generate 25 cr. profits and should be valued at ~200-250 cr. (10-12% cost of capital).
  • Growth comes from new parks. Now lets see if new parks actually generate ROE in excess of cost of capital. Hyderabad park required 250 cr. to setup and generated revenue of 75 cr. in FY19 and FY20. Lets say the sales will stabilize at ~100 cr. (PAT ~ 25 cr.), which gives a ROCE of 10%. Company can amplify their ROE by taking debt for CAPEX but its clear that ROE will not be >20%.

Seeing all of this, its clear that this is a business whose underlying ROCE is close to their cost of capital. Long term growth rates will probably be 10-12% (with 1 park being added every 3-4 years). Such a business should be valued relative to their tangible book value. In my opinion, the best time to buy these businesses is during recessions (like now) and sell it when economy is doing very well and company is trading at 3-4 times their tangible book value. These are my insights and I would love to get contrary feedback :slight_smile:

Disclosure: Invested (detailed portfolio here)

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Challenge here has been that it is first to get affected and last to revive in current context.

Growth in good time was also not impressive and mkt has consistently derated it in last few years - another similar stock was quick heal in my exp.

For those invested from higher level- averaging and hoping to make some profit is simply far fetch and believe significant opportunity cost.

While I like everything about Wonderla but dont see any rerating in near term. In current context lots of other opportunities.

Invested and added in last 30 days. Hoping to exit in some bounce back.

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I think the way to look at these kind of companies are their cash flows because they have a huge impact of depreciation as per the rates of companies act while in reality these assets gets depreciated much slower. So if we take a look of PAT + Depriciation from 2008 till 2019 it is Rs(in crores) 5, 20, 24, 73, 74, 84, 98, 124, 147, 83, 97, 139. I think with such a simple business model predictability of the numbers are easy. I think this business is perfect example of consistent compounding. I will explain how with my views. 1.) Wonderla has got clear moat in terms of its internal manufacturing capabilities and they have demonstrated the same by building a new park at Rs 300 crores which if we see of its competitors they have to do 3-4 times of capex of wonderla which makes the business of competitor unviable. 2.) I think this is the business with longetivity.(I have my own reasoning for the same) So in the formula of compounding ‘n’ can create a magic here. 3.) Lets see practically how this has played out it took wonderla 5 years to open a park i.e. 15 years to open 3 parks.Now they have cashflows at a level which can pemit them to open a new park every 3 years and on. 4.) Management seems to be very disciplined with regards to borrowing as they have funded all these expansions through only the internal accruals and going by their commentaries they plan to do the same even in the future.

So the parks gets on increasing(Intensity of increase also increasing) over the period of time which can provide growth. So let me show a broader picture of how this looks over a period of time. In 2000 Kochouseph Chittilappilly started theme park business (a capital intensive business) with a capital of Rs 50 Crores with no further capital infusion except IPO which was around 180 crores (IPO was in 2014 so in 14 years 50 crores was converted to 900 crores as there were already 3 theme parks giving an IRR of 25%) totalling 230 crores of capital in the business with now producing this capital every 2 years in cash flow. So this is the quantum of value it has created and again it has potential to create in future years.

So looking at the model if someone ask me following questions these are clear answers in my mind with my own thesis.
1.) Is the model of the business simple to understand?
yes
2.) Do risks gets reduced a lot with model being simple and product very easy to understand?
yes (When I compare this with a pharma company or a chemical company or a commodity I think things are much simple here)
3.) Can I find a substitute of this business which can have a meaningful impact in future years?
I dont think so (I see it with businesses which has a long history like that of tobacoo, financing or say alcohol)
4.) Are management to be trusted?
I again have a yes.
5.) Is this a business which keeps on going on its on regardless of management?
I again think yes (There are very few businesses which keeps on going regardless of management) Management just have to make sure in terms of borrowings and dont have to go for agressive borrowings which I dont think they will do seeing their history and also seeing their group company which also have no borrowing.
6.) Is compounding of money happening here with no worries?
Absolutely yes
7.) Is ROCE = Cost of Capital?
No, again we have to look this business in terms of cash flows. With 134 odd crores of cash being generated on 500 odd crores of capital employed (This figure is arrived excluding the effect of revaluation) gives the picture of ROCE.

I would also like to add here we can further see this number going up if we see more proposals like odisha (Lease model) as it saves 33% of capital employed.

8.) Are valuations comfortable at 700 crores?
Something which produces a predictable cashflows of 125 odd crores with growth added to it. Again you are getting a asset with a value of 1200 odd crores. So the compounding matrix increases drastically at this valuation. I have a clear answer of this too in my mind. :grinning:
I have been personally following your posts (Hitesh bhai) since long.
Hope this helps from my side. :slightly_smiling_face:

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How are you inferring a 30% ROCE? For the Hyderabad park, they spent 250 cr. and are currently generating 70 cr. revenues. In best case, it is generating 10-15% ROCE. When looking at cashflow, you have to remove maintenance CAPEX which turns out to be ~10 cr./year for a given park. The management has clearly stated that they are generating close to 25 cr. free cashflow (after accounting for maintenance CAPEX) on their mature parks (Kochi, Bangalore). Similarly, the Chennai park is estimated to cost ~350 cr. and will require quite a few years to generate 100 cr. of revenue (leading to PAT of 25-30 cr.).

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For Hyderabad park give it some time my friend :grinning: . Look at the initial years of Kochi and Bengaluru Park. Also look numbers of this park when they were matured. As far as ROCE is concerned I was talking of company as a whole. 30% was a wrong figure. Its 134 crores of EBDITA on 500 odd crores of capital. (Still Hyderabad is not mature here)

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Q4FY20 earnings conference brief -

  1. Covid - 19 pandemic has hampered operations and parks are closed from 15th March. Revenue is 0 in the month of April. But management is optimistic and hope that lockdown will be opened soon and post-opening situation will come to normal soon.
  2. Management was doing brain storming during this closure period and have stretegy around to reopen along with gaining footfall recovery. As per management they can scale the all time footfall peaks in couple of years across all the parks.
  3. Each park has capacity of hosting 8K to 10K people per day and normally they operate on 1/3rd capacity. Management expects 2.5K people per day at each park will be easy to manage while following social distancing and snaitization norms. Company is prepared to follow needed practices like checking people at entry and sanitization of rides after each use. Cost of sanitization is calculated at Rs. 50 per vistor aprox.
  4. Fixed cost overall is aprox. 15 Cr per month in normal sitautions. This includes salaries and ongoing maintenance. Management has worked aggressively and cut down this cost by 75% and currently they are spending 4.5 Cr per month. This includes 50% wage cut for employees. But they are maintaining min. wage of 12K per month norm and not cutting salaries below this threshhold value.
  5. All marketing expenses has been cut down and management has strategy in place for effective marketing post relaunce of operations
  6. Current cash balance of 125K+ is sufficient for operating expenses for period of more than one year
  7. At relaunch management thinks government may allow only dry rides first and wet rides may need to wait. In such scenario tickets will be charged at 60% of normal ticket range. Also there will be discounted price to attract crowd in initial 15 days of reopening and prices will come to normal level post 15 days promotional offerr. But management thinks there is no harm in opening water rides as well and has given CNN reference where it was mentioned that its very less likely to transmit this disease through water.
  8. Chennai Park - reiterated that all permissions are in place along with waiver of LBT by cheenai corp for the period of 5 years starting 1st Oct 2021. Park construction is on agenda and management is otmistic that still it can be completed by Oct 2021. Hopes to get lockdown open and construction to start soon.
  9. Odisha park is just in conception phase and there is no concrete plan to start work or target completion date
  10. Share buy back option - Management needs cash for ongoing capex as well as construction of Chennai park. so buy back is not on agenda even though share prices are dropped drastically.
  11. Imagica - On question whether management will go for acquisiotn like impagica park to expand, management has clarified that they have thier own startegy to construct parks and do not go for Imagica acquistion. But if some other party acquires it and ask wonderla to operate park on revenue sharing model, that possibility can be explored.
  12. Management thinks that amusement park is unique experience in outdoor category and people will rush to have that experience. Parks in China and SE asia have seen good numbers after reopening.
    Please add for any point missed out here. Mr. Arun K. was surprisingly missing and not present. I was expecting to hear from him during this concall.
    Discl: Invested and looking to add more once parks start to pick up momentum.
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**to recover to normalcy atleast 2 years and recency effect on customer brains is too long like pandamic .A big Negative for like this business **

Satheesh Seshadri: Everybody are talking about V, W, bath-tub shaped recovery, all
type of economic rebouncing. So, I would be very conservative there.
If you ask me a conservative question, I will say at least two years to
come back to those levels. I think 2021 is gone, 2022 I will not recover
fully. We will look at 2023.

https://www.bseindia.com/xml-data/corpfiling/AttachLive/9cbe7a1f-91d6-43b8-b9d4-9453a944a0fd.pdf

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