Redefining the �Theme� in Theme parks (May apply)

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Review By Antique on March 9, 2015

Adlabs Entertainment owns and operates Imagica - the theme park; Aquamagica - the water park; and a family hotel. The company is strategically located at Khalapur, 74km from Mumbai, off the Mumbai-Pune Expressway. It has identified Hyderabad as the next location to develop a new theme park. Promoter Shri Manmohan Shetty has over three decades of experience in the Indian media and entertainment industry, and is the former promoter of Adlabs Films, one of India's largest entertainment companies. It owns 302 acres of land, of which it utilises ~138 acres for Imagica and Aquamagica. The firm hosted over 0.8m visitors in FY14 and expects 1.1m footfalls in FY15e. It clocked revenues of ~INR1bn in FY14, with an EBITDA of INR39m. Average realisations per visitor stood at INR1,650 for Imagica in FY14. It expects to enjoy realisations of ~INR1,800 and ~INR1,500 for Imagica and Aquamagica in FY15e, respectively. According to the management, the average ticket size is ~5-6 people.

We value Adlabs at 12x FY17e EBITDA (enterprise value: ~INR26.9bn) similar to its global peers valuation. With increasing visibility and execution, multiples could rerate. Lower-than-expected footfalls remain the key risk.

Significant scope to scale up; Addressable market over 15m

Adlabs' addressable market is ~15m, as derived by the number of car-owning households (Source: Census 2011). The same in its immediate catchment area - Mumbai, Mumbai suburbs, Thane, and Pune - is 3.5m. In the first full year of its operations, it managed to cater to 0.8m visitors. This can be significantly scaled up, considering the large opportunity this addressable market presents. Both the immediate addressable market and consequent footfalls could grow further, if and when the company expands into other geographies.

Revenue pegged to footfalls, could potentially grow to INR5bn revenues by FY17e

The company has achieved decent scale in its first full-year of launch, and will likely surpass 1m visitors in FY15e. We expect footfalls to increase significantly to 1.8m and 2.3m by FY16e and FY17e, respectively, driven by both a push and pull strategy. It has increased its marketing spend and started targeting the Gujarat market. With its hotel expected to commence operations in FY16e, it will open to corporate clients. Visitors can be categorised as: 1) Walk-ins; 2) Corporate/social groups; 3) Schools, colleges, etc; 4) Websites/callcenters; and 5) Travel agents.

Bulk of the capex is behind Adlabs; Has potential to be free cash flow positive by FY16e

Capital expenditure for Adlabs is predominantly on equipments and rides. With the INR16.5bn Mumbai project now fully operational, bulk of the capital expenditure is behind it. A major portion of the funds raised through the initial public offering is expected to be utilised in paring down its debt. Consequently, with bulk of the capital expenditure already incurred and lower interest outgo, we expect FCF to increasingly mirror EBITDA.

Valuation and outlook

We value Adlabs at 12x FY17e EBITDA (enterprise value: INR26.9bn) similar to its global peers. With increasing visibility and execution, multiples could re-rate. Lower-than-expected footfalls remain the key risk.

Overview of the Indian amusement park industry

The Indian amusement park industry presents a huge opportunity with only ~150 parks, of which large parks are less than 10%, for an urban population of 380m. In comparison, the US has over 400 parks for a population of ~320m. The size of the Indian amusement park industry is estimated to double to INR50-60bn from INR25-30bn over the next five years. With a growing middle-class and increase in disposable income, theme parks are well positioned to gain from higher spend on discretionary leisure activities.

Wonderla is the only listed amusement park player in India currently and operates 2 amusement parks in Kochi and Bangalore. Adlabs Imagica is one of the biggest parks in India, spread across 114 acres. It has surplus land of ~140 acres for future developments. With growing scale and increase in visitors, it is increasingly expected to develop its financial muscle to further expand the amusement park.

Location of the park: A key advantage

Adlabs is strategically located at Khalapur, 74km from Mumbai, off the Mumbai-Pune Expressway. Its immediate catchment area comprises Mumbai, Mumbai suburbs, Thane, and Pune. Its primary catchment extends to the Rest of Maharashta and Gujarat, where the per capita income is significantly higher than the national average. Mumbai and Pune are home to a large student and youth population, attracts a large number of domestic and international tourists, and has a large corporate base.

Valuation and outlook

We value Adlabs at 12x FY17e EBITDA (enterprise value: INR26.9bn) similar to its global peers. With increasing visibility and execution, multiples could re-rate. Lower-than-expected footfalls remain the key risk.

Objects of the issue:

The issue comprises a fresh issue and an offer for sale. It proposes
to utilise the net proceeds from the fresh issue towards:

1. Partial repayment or pre-payment of the consortium loan
2. General corporate purposes

Key risks

Change in consumer preference and an economic slowdown

Operations could be adversely affected by a change in public and consumer tastes or a decline in discretionary consumer spending. The park's success is substantially dependent on consumer tastes and preferences, which can change in often unpredictable ways. Both attendance and total per capita spending at parks are key drivers of revenue and profitability. Reductions in either can adversely affect the business

Business is seasonal in nature

The theme and water park industry is seasonal in nature. Parks could experience volatility in attendance as a result of school vacations, public holidays, weekends, and adverse weather conditions such as monsoon and excessive heat. Unfavourable conditions such as forecasts of excessive rainfalls or heat may reduce attendance at parks

High dependence on Western India

Since the company's entire operations are situated at one location, it will continue to primarily cater to visitors from the Western region of India. This region will account for most of its revenues in the near future. If this region experiences adverse events such as a local economic downturn, civil or political unrest, transport or other infrastructure problems, natural disasters, contagious disease outbreaks or a terrorist attack, or if the local authorities adopt regulations that place additional restrictions or burdens on the company or on the industry in general, operations may be adversely affected

Competition in the catchment area

It faces competition from other amusement and water parks and diverse entertainment alternatives on a number of metrics, including cost, ease of use, proximity to large population centres, and quality of entertainment offered. Mumbai is also home to EsselWorld, which includes an amusement and water park. In addition to competing with other parks, it also competes with other types of recreational and entertainment venues, including movies, sports attractions, and vacation travel

Dependence on delivery of adequate, uninterrupted supply of power and water

The company depends substantially on the delivery of adequate and uninterrupted supply of power and water at reasonable cost. Prolonged disruption of these services during operational hours can have an adverse effect on operations.