Imagicaaworld Entertainment Ltd - Stock Valuation and Financial Performance

Say ‘NO’ to ride with Adlabs Entertainment Ltd!

Adlabs Entertainment Ltd

Details of the offer

Price Band has been fixed at Rs. 221-230 and the issue is opening on March 10 and will close on March 12.

Offer Objective

Through the fresh issue the company proposes to collect between Rs 448 cr and Rs 467 cr by issue of 20 lakh shares of which, Rs 330 cr is to be used for partial repayment of the consortium. The balance proceeds net of issue expenses is earmarked for general corporate purpose.
 

About the Company

Adlabs Entertainment Limited (Adlabs), Rs. 1650 Cr company, is promoted by Mr Manmohan Shetty, and owns and operates two theme parks (Adlabs Mumbai) on the Mumbai-Pune expressway, namely, Imagica Theme Park (Imagica) and Aquamagica Water Nation (Aquamagica). The company also owns a hotel managed by Novotel which is expected to start operations in March, 2015. Imagica has 25 rides and attractions while Aquamagica houses 14 water slides and wave pools. It is the first large format theme park in India covering over 110 acres.

What Should Investors do?

In entertainment industry location plays a key role in generating the revenues. Imagica is strategically located between Mumbai & Pune which gives it good opportunity to attract people hangout in Lonavala & Khandala. Della Adventure, a similar hangout nearby attracts good number of visitors for the same reason. Given the high capacity of Adlabs Imagica, 15,000 per hour, we believe it will be very attractive destination for weekend holidays, corporate and school trips. In expectations of lucrative prospects, the company has already incurred capacity layout of Rs. 1650 Cr in total, with debt funding of close to Rs. 1,150 Cr.

The company earns ~70% of its revenues from ticket sales and rest from food & beverages and parking. The revenues are seasonal in nature, wherein there are high footfalls in summer vacation of schools & colleges. Coming to cost structure, due to high initial capital outlay with help of debt financing, interest cost along with depreciation form major part of its overall cost structure. In addition to that, employee cost & power cost form fixed part of cost structure. The business by nature has high operating leverage, wherein the increase in revenues beyond fixed cost flows to earnings directly, which can be distributed to the shareholders. Key metric to judge the value of the company is to estimate increase in footfalls & ticket size (i.e. Revenues). The management is trying to attract customers on regular basis by way of creating a holiday resort with Accord's Novotel Hotel in Imagica campus. The company doesn’t have a proven track record in entertainment & resorts. The success highly depends on how the brand attracts new customers and earns their loyalty.

Considering very optimistic scenario wherein the revenues will grow at 25% CAGR for next three years and report an operating margin of 50%, we get Enterprise Value of Rs. 1397 or ten times three year hence cash flow. This gives around market value of equity of ~Rs. 627 Cr or Rs. 140 per share at the end of third year. Actual value per share today comes at Rs. 90-111 per share.

We believe that due to bullish market sentiments, the IPO may list at much higher price multiple and jump on the first day of trading. However, we feel that at the price band of Rs. 221-230 the stock is highly overvalued and has no upside based on valuation. Being fundamental analysts, we do not recommend subscribing to this IPO.

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