Saturday, April 12, 2014

How Unique are Wonderla and its IPO? Interview with MD, Arun Chittilappilly

Seasonal Magazine interviews Wonderla Holidays's Co-founder and Managing Director Arun Chittilappilly on his plans to take the amusement park company public through its upcoming IPO:

It has been an year of eerie silence in India's primary markets after the highly successful Justdial IPO of last fiscal. The financial year passed on without any major IPOs. Was the jinx due to more regulatory tightening or lower promoter enthusiasm? The reason is more likely to be both. To be more precise, it must have been lower promoter enthusiasm due to more regulatory tightening!

But the Chittilappillys were unfazed. They kept on knocking at SEBI’s doors, complying with whatever a newly cautious regulator asked them to furnish. The result is the upcoming Rs. 190 crore Wonderla IPO, the first major IPO to get regulatory approval after Justdial and to thus become the first public offer in this new fiscal.

Chittilappillys’ home state of Kerala is infamous for entrepreneurship, but family head Kochouseph Chittilappilly is the man who changed all that perception. He is the founder of V-Guard Industries and co-founder of Wonderla Holidays. One of the largest income tax payers since his early days, Kochouseph has built up his businesses with a rare mix of accountability and growth appetite.

V-Guard went in for its IPO in 2008 and has been a 7X multibagger within the next six years. Can Wonderla better that track-record?

Whereas in V-Guard’s case, institutional enthusiasm had been low during the IPO time, the reverse should be expected in Wonderla’s case. Because, not only is the group now well-known in India’s capital markets due to V-Guard’s stock performance, but the market is likely to appreciate Wonderla’s much better profitability and Return on Equity.

Wonderla’s profitability after tax is 41% and its RoE is 27.57%, which are not ordinary figures. In fact, Wonderla’s Net Profit Margin is more than double that of Justdial, the last highly successful IPO. And while Justdial IPO demanded a hefty P/E valuation of 52-60 times, Wonderla IPO is coming at a reasonable pre-issue P/E of 13-15 times.

The only drawback is the capital intensive nature of the amusement parks business, but here too Wonderla fares better than competing parks with its unique cost-effective model, thanks to its capability in developing rides in-house, as against costly procurement from abroad.

Wonderla’s growth strategies too come across as contrarian, as they follow a multi-city / multi-park model for growth rather than the single-location / large-park model followed by almost all their competitors. The unique advantage from this approach is that apart from the steady growth in footfalls at existing parks, Wonderla can jumpstart growth to a much higher orbit whenever they commission a new park in a new city.

CRISIL has rated the Wonderla IPO at 4/5 indicating above average fundamentals. The IPO proceeds are for constructing their third park at Hyderabad which follows their first two parks at Kochi and Bangalore. The Wonderla Holidays IPO is open between April 21st to 23rd, and comes at a price band of Rs. 115 to Rs. 125.    

Seasonal Magazine interviews Co-founder and Managing Director Arun Chittilappilly in-depth regarding the upcoming Wonderla Holidays IPO:

Why did you choose the IPO route instead of private equity?

We could have gone the PE route any day, and we could have obtained better valuations too from PE funds. But then, such funds too would ask for an eventual exit route, and then we would be required to go for an IPO under such pressure. So, we thought that it would be better to go for an IPO now itself. Public Offer does have its advantages, like a wider shareholder base, better transparency, better visibility etc. which offsets the relatively lower valuations.

What took Wonderla so long in getting to its IPO date? Your initial papers were filed around 1 year back…

It was not only an issue with Wonderla IPO, as after the Justdial IPO last May, no major public issues have come out. I think the regulatory framework has been much more demanding than it was earlier. I can say this because I can compare it with the time V-Guard went in for its IPO. But I am of the view that the current framework is better for the investors and better for transparent companies like Wonderla.

Speaking about V-Guard IPO, it was aided more by retail investors than institutional investors. Do you foresee such issues for Wonderla IPO?

Not at all. That time we had to rely more on retail investors who knew about V-Guard, because being our first IPO, institutions didn’t know much about our background. But since then, institutional investors have tremendously warmed up to V-Guard, and the company has also performed well fundamentally as well as in the bourses. So, today, when Wonderla is going for its IPO, we are expecting just the reverse, and it has prompted us to reserve 50% of the issue for Qualified Institutional Buyers. The response from our recent road-shows and meetings in Mumbai also signal institutional enthusiasm.

What would be the TTM EPS of Wonderla and TTM P/E of the offer?

For the last financial year, i.e. ended March 13, Wonderla’s EPS was Rs. 7.97. This year, for the first three quarters, i.e. for the period ended December 31st, our EPS has been Rs. 7.38. We may close this full fiscal upwards of Rs. 8.5. Taking the EPS at the lower end of the guidance itself, the pre-issue P/E works out to only 14 to 15 times, at the top end of the IPO price band which is Rs. 125.

What would be the one-year forward P/E?

We plan to grow our bottomline at least at this fiscal’s YoY rate, or even better if possible. This is not an official guidance, but may be we can touch Rs. 9.4 or beyond, next fiscal. So the one-year pre-issue forward P/E now may be around 13 times only.

What has been the valuation criteria you considered? Was the comparison with the hospitality sector or with the entertainment sector like the multiplexes?

It may be the first time an amusement park business of our size is going for its IPO in India. Though we have a small hospitality business, comparison with that industry is not correct as there are too many differences like, their fixed inventory. Comparisons with multiplexes may be slightly better, but also not correct. Reality is that Wonderla doesn’t have any comparable peers in the listed space. We have noted it in our DRHP. 

When will the Hyderabad park get commissioned?

Our plan is to complete it by the next 20 to 22 months. Which means by the Q4 for FY’15-16, it should be operational.

Are there any unique specialities being planned for the Hyderabad park?

Being our latest park, the Hyderabad facility will have the next generation of rides. This will be the case, in both the rides we design and build ourselves, as well as in the rides we procure or import.

Speaking about your in-house ride development capability, where does it stand now?

It has come a long way. At the beginning, we were doing only the simple rides like the large merry-go-rounds. But my dad’s decision to implement such an in-house strategy from the very beginning has helped us tremendously. Because, our capabilities in ride development has improved over the years, and today we can design and build 3D and 4D rides of international standards.

Do you have the capability to do augmented reality rides in-house, like the ones you see in some Middle East malls and parks?

Yes, definitely we can do rides incorporating augmented reality.  

Are you confident of maintaining the growth in footfalls, revenue, and profit, even if the Hyderabad Park takes more time than anticipated?

As you know, growth for an amusement park company is two-fold. One is from commissioning of new parks and the other is from more footfalls and better profitability. Ever since our first park was commissioned at Kochi in 2000, we have grown the footfalls, revenue, and profits there. And ever since our second park was opened in Bangalore in 2005, that too has witnessed steady growth. In fact, due to the greater potential of Bangalore compared with Kochi, Wonderla Bangalore has been outpacing Kochi in growth rate, and this year it will surpass Wonderla Kochi in footfalls for the first time. So, even if there are no new parks, or even in the eventuality of a new park getting delayed, there is a steady growth in footfalls, revenue, and profitability.

Which brings us to the obvious question - what would be these growth rates without new parks?

Well, footfall growth would be around 5-7%. Revenue growth can be bigger as the non-ticket revenue too can be improved. Profit growth can, in fact, be double i.e. around 14-15% as we can grow the ticket rates too at 5-7% per annum.

What would be the ticket and non-ticket components of revenue, and how can it be improved?

Currently, our parks are registering 80% as ticket revenue and the remaining 20% as non-ticket income. The ratio was even more skewed earlier. But over the last few years, we have systematically beefed up non-ticket revenue, and it can get much better from here. Because, there are a lot of value-added services that we have started offering like fast-track, ride photography, resort rooms, merchandising etc.

Can you explain fast-track and ride photography?

Ride photography is a very promising area in this age of Facebook, Instagram, and social networking. Youngsters and families not only want to participate in hair-raising rides but to have their photographs on these rides instantly. So, we have tied up with Kodak and they are doing some sophisticated ride photography for our visitors. We even have underwater photography. The other one you asked about, Fast-track, is a facility by which, for a premium fee, you can have access to the park and rides without going through queues. In other words, you get preferential treatment like a VIP.

Comparing the land sizes of your earlier parks and the upcoming Hyderabad park, why is the land size significantly smaller?

There are two reasons, mainly. One is that though we have a larger land bank at Bangalore, we have not utilized more than 50% of it for the rides or facilities even after 9 years of commissioning and subsequent expansions. So, an excellent park can be built at half the land that we had acquired for Wonderla Bangalore. Secondly comes the land cost. There is no comparison between then and now. Whereas the Bangalore property cost us around Rs. 5 crore to acquire, the current land cost including land development and civil works is around Rs. 82 crore in Hyderabad. So, it doesn’t make sense to have as large a land in Hyderabad for a new park in 2014.

Are you planning to expand on your hotel rooms business?

We have resort rooms only in the Bangalore park. We are not planning to have any rooms in the beginning at the Hyderabad park. Rooms will work only in mature parks. So, we will see as we go forward in Hyderabad. Regarding Kochi, there is subdued demand for resort rooms as it is more nearer to the city and because there are already a couple of reasonable hotels there. Expansion in Bangalore rooms will be taken up as per the emerging demand. Currently we have 84 rooms, which are of 3-Star class, and it is more or less optimum for the current footfalls at Wonderla Bangalore. Expansion will be taken up judiciously as we incur around Rs. 50 lakh per resort room.

Where would be the next Wonderla park and the approximate time-frame?

Our next plan is for Chennai and we are planning towards completing parks within a shorter time-frame like 2 years.

Is Wonderla planning to get into any other entertainment business like, say, multiplexes?

No, we will be focusing on developing amusement parks alone, on a pan-India basis. But having said that, one area of interest that may emerge is, when our parks gradually get into city limits due to cities expanding. We may look at any possibilities like multiplexes or malls then.

Will the promoters ever have an entertainment park outside of the listed Wonderla?

No, there won’t be any such hanky-panky from this promoter family.

Have you beefed up the safety and security aspects of your parks in recent years?

Yes, those two are areas that we constantly work on. Regarding safety, the best thing that we have done is adopting the annual audit by TUV of Germany. They give us recommendations every year that we implement for bettering the safety standards. But even otherwise, the fact that we didn’t have any serious safety mishap in either of our parks, over these 14 years, speaks something about our diligence in ensuring safety. Whatever incidents we had so far were with regard to medical conditions like epilepsy, heart disease etc. Coming to security, we have done studies on this often, and what we find is that since amusement parks are far away from Central Business Districts, the potential for terrorism like activities is pretty low. But on that front too, we have been most diligent.

Why have you adopted this multi-city multi-park model as against the world standard of doing one large amusement park like say Disneyland, or Imagica here in India?

Disneyland works because Americans and international tourists who visit it can afford the hefty ticket rates. The same is not true for India. If you do only one park like Imagica here in India, you tend to do it large, and that inevitably raises the ticket rates beyond affordability. Finally, everything boils down to footfalls. You may be able to build the best park at one remote location, but if the footfalls don’t grow, how will it all work out? But having said that, parks like Imagica are good for the amusement parks industry. In our case, Wonderla’s combined footfalls can challenge something like Universal Studios, and it has been possible largely due to three reasons - quality of rides and service, multi location and affordability. That will continue.

As a business, how far is Wonderla different from the competition?

There are two major differences. Firstly, once upon a time, it was said that amusement park business has high entry barrier. It was mainly due to the expertise required. But today it is not fully true. If you are ready to invest, and procure from abroad, the Americans can come and fix the entire park and rides for you. But that would be at a high cost. Wonderla has not been set up that way. We have been extremely cost-conscious in every stage right from land purchase to in-house ride design to efficient but cost-effective management. That is one reason why Wonderla is worthy of investments. Our net profitability is above 41%. Our Return on Equity is still at an industry-leading 27.57%. When the Hyderabad park too is completed, we will be having three world-class parks within this company with an equity base of less than Rs. 50 crore. That is what makes this a high-quality business. Second difference is our growth appetite. Whereas the single park model can grow its footfalls and profitability only steadily, we can jumpstart all-round growth by opening new parks at new locations every 2-3 years. The Wonderla model has been proved very viable, and now the strategy is to replicate it at many locations, at a faster pace.

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