Monday, September 2, 2013

Can Wonderla IPO be a Multibagger Like V-Guard?

Can Wonderla be a 7X multibagger like V-Guard within the next 5 years? It is a complex question, as it would be the first time an amusement park business is going for listing in India. The highly capital intensive nature of this business is not lost on anyone. In short, it is not asset-light like V-Guard. On the other hand, Wonderla is more profitable and returns-generating than the flagship electrical appliance maker of the group. Promoters Kochouseph Chittilappilly and Arun Chittilappilly have so far delivered reasonably well with their two parks, with a third Wonderla Amusement Park in the offing at Hyderabad using the upcoming IPO proceeds. Rating agency CRISIL has rated Wonderla IPO at 4/5, indicating above average fundamentals. As usual, this IPO rating doesn’t take into consideration the potential asking price. On one side is the impressive metrics, and on the other is whether a too high valuation would be sought.

The upcoming IPO of Wonderla Holidays Ltd, an amusement park company, would be keenly watched by the investment community. The main reason for this investor interest, of course, will be that Wonderla Holidays is from the stable of V-Guard Group.

Also Read: Interview with Wonderla's Co-founder and MD, Arun Chittilappilly

Flagship V-Guard Industries Ltd (BSE: 532953, NSE: VGUARD) had gone for its IPO soon after Sensex started to fall massively from its 2008 peak of over 21,000 after the controversial and market-rattling mega public issue by Reliance Power. V-Guard went ahead unfazed with its relatively small issue to collect Rs. 70 crore from the market, despite the emerging gloom.

By the time it listed in mid March 2008 at around Rs. 85, markets were steadily going down, and in September 2008, the collapse of Lehman Brothers happened, sending the global capital markets into a tailspin. Smallcap stock V-Guard too was not spared, and it hit its nadir of Rs. 36.50 soon afterwards.

And from there gradually V-Guard started clawing back. The going was steady but slow in initial years, but by mid 2012, the electrical appliances stock started its vertical climb. By December 2012, it had scaled up dizzying heights, marking an all-time high of Rs. 590.50, making it a nearly 7X multibagger from its IPO level, and a 16X bagger from its all-time low, within as little as 4.5 years!


That is the first reason why Wonderla IPO too would be keenly watched by investors. Group Founder and Chairman of V-Guard Industries Ltd, Kochouseph Chittilappilly is also the Founder, Co-Promoter, Vice-Chairman, and Whole Time Director of Wonderla Holidays Ltd. Kochouseph’s elder son Arun Chittilappilly who played the leadership role in setting up Wonderla’s second amusement park at Bangalore, is the Co-Promoter and Managing Director of the company.

Given the wealth creation and wealth sharing track record of Kochouseph Chittilappilly, the real question before investors would be how inferior or superior would be Wonderla Holidays vis-à-vis V-Guard Industries.

Compared to V-Guard Industries - which is basically an electrical appliances and electrical cable company - Wonderla Holidays as an investment opportunity is starkly different. For example, V-Guard generated a Net Profit Margin (NPM) of only 4.63% in FY’13. In sharp contrast, the NPM enjoyed by Wonderla Holidays is an impressive 26.23% in FY‘12.

Secondly, on the all-important metric of Return on Equity, while V-Guard had an impressive RoE of 24.08% in FY’13, Wonderla Holidays had a superlative RoE of 32.04% in FY‘12.

However, there is a flipside to it too. While V-Guard enjoys a small equity base of Rs. 29.85 crore, Wonderla has an equity base of Rs. 42 crore already, which will expand to Rs. 56.5 crore through this IPO that involves issue of 1.45 crore new shares of Rs. 10 Face Value each.

This reveals the capital intensive nature of Wonderla Holidays as against the asset-light nature of V-Guard. Despite this capital intensive nature, it goes to Wonderla’s credit that it has run up a total indebtedness of only Rs. 18.36 crore which translates to around a debt/equity ratio of just 0.15.

On the issue of growth prospects, amusement parks business has a unique problem in that a new park is absolutely necessary to jumpstart growth to each higher level. And a new park is always a capital intensive and time consuming affair.

For example, despite being incorporated in 1998 and their first Kochi park being opened in 2000, it took Wonderla another 5 years to launch its second park at Bangalore. It has been taking even more time for the next one.

The land acquisition itself can take significant time and resources, if not controversies. For instance, the high-profile Imagica project by Manmohan Shetty in Maharashtra has run into serious controversy recently regarding land acquisition.

Wonderla Kochi spans 92.95 acres of land, Wonderla Bangalore is on 81.75 acres, and their upcoming Wonderla Hyderabad will be on 46.17 acres. The planning and land acquisition for the third park at Hyderabad has been undertaken since the last few years.

Being set up at a projected cost of over Rs. 250 crore, only around Rs. 22.60 crore has been spent by February 2013. Around Rs. 50 crore will be the debt component for this third park, and the remaining amount of Rs. 178 crore will be from the upcoming IPO proceeds.

Adding new parks being such a challenging process, the focus will naturally be also on growth prospects without new parks. So far, Wonderla has excelled in this regard. Their total footfalls from their two amusement parks in Kochi and Bangalore have grown at a CAGR of 18.48% from FY’10 to FY’12, which is a reasonable growth record.

The CAGRs of revenue and net profit have fared even better. For FY’09-FY’12 period, revenue has risen by a CAGR of 21.85% and net profit has risen by a CAGR of 39.65%, which reveals pricing power as well as steadily improving operational efficiencies.

One major issue facing amusement parks since 2011 has been the steadily weakening rupee. Amusement parks source bulk of their rides from overseas in foreign currency, and as such, there is a forex risk or scaling up of capital costs for not only setting up new parks but new rides too.

But here too, Wonderla has a slight edge, as they have a major domestic manufacturing facility for simpler rides at Wonderla, Kochi, that can cater to 25% of their requirements.

Another challenge with the amusement parks business is that around 90% of their revenue is from the sole stream of ticket sales. Wonderla has been trying to diversify its revenue streams by starting a 3-Star Resort with 84 luxury rooms inside its Bangalore park, and by growing its foods, beverages, and merchandising activities. It has been showing slow but steady results, with ticketing being limited to 85.59% of their total sales in FY‘12.

Though amusement parks is clearly a discretionary consumer spending category, higher disposable incomes as well as higher spending on leisure activities are expected to counterbalance this drawback.

On the other hand, though the entry barrier to this business is quite high due to various aspects like complex land acquisition, high labour, and high capital, there is no dearth of serious competition, as India is all set to get 12 new major amusement parks that will add to 18 such parks the country already has.

However, all considered, Wonderla IPO appears to be a reasonable investment opportunity, especially if it is priced right. It remains to be seen whether promoters will leave adequate money on the table for public investors, or demand too steep a valuation citing their high NPM, RoE, or lack of competition in the listed space, like some companies have done in the last few years.

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