PRIVATE CLIENT RESEARCH INITIATING COVERAGE JANUARY 5, 2018 Pankaj Kumar [email protected] WONDERLA HOLIDAYS LTD (WHL) +91 22 6218 6434 PRICE: RS.363 RECOMMENDATION: BUY TARGET PRICE: RS.465 FY19E PE: 29.1X Stock details Stock details Wonderla Holidays Ltd (WHL) is the largest amusement park chain in India BSE code : 538268 with over 17 years of successful operations. WHL has been running NSE code : WONDERLA amusement park in southern India through 3 operational parks in Kochi, Market cap (Rs bn) : 20.5 Bangalore and Hyderabad. The company follows low capex model with its Free float (%) : 29.0 parks located near large cities with less than 7 years of payback period as 52 wk Hi/Lo (Rs) : 405/330 Avg daily volume (nos) : 28940 against capex intensive holiday destination model. In order to tap huge Shares (o/s) (mn) : 56.5 opportunity in the sector, WHL is expanding its presence to Chennai where it has finalized land and is further targeting new geographies particularly in western India. WHL intends to setup new park every 3 years which would be Summary table funded through its strong balance sheet and robust cash flows with negligible (Rs mn) FY17 FY18E FY19E debt. The contribution from high margin non-ticket revenue has been Revenue 2704 3172 3797 increasing over the past 5-6 years from 14% in FY12 to 25% in FY17 and is Growth (%) 31.7 17.3 19.7 expected to increase further to 28% in FY19E. We expect company’s revenue EBITDA 739 1051 1377 and PAT to grow at a CAGR of 18% and 46% respectively in FY17-19E (due to EBITDA margin (%) 27.3 33.1 36.3 PBT 484 745 1050 lower base of FY17). We recommend Buy on the stock with DCF based target PAT 336 499 704 price of Rs.465. EPS 5.9 8.8 12.5 EPS Growth(%) (45) 51 41 Key Investment argument CEPS (Rs) 11 15 19 Amusement park business: Huge opportunity to grow - Indian amusement Book value (Rs/share) 77 85 96 Dividend per share (Rs) 1 1 1 park sector valued at Rs 29.3 bn in 2016 grew at 10.25%. The sector is very ROE ( %) 7.9 10.9 13.7 small as compared to Rs 1.675 trn (USD25 billion) global amusement park ROC E ( %) 10.5 15.3 19.6 sector. It is at a nascent stage in India and is on the verge of transition. The Net cash (debt) 640 874 715 park to population ratio is remarkably lower in India as compared to the USA NW Capital (Days) (8) (4) (6) market which has 400 theme parks for a population of 319 million. With rising P/E (x) 62.0 41.1 29.1 P/BV (x) 4.7 4.3 3.8 income levels, increasing domestic tourism and favourable demographics, the EV/EBITDA (x) 26.9 18.7 14.4 sector is estimated to grow at a CAGR of 19% over the next 5 years to Rs 69.8 EV/Sales (x) 7.3 6.2 5.2 bn by end of 2021. Source: Company, Kotak Securities – Private Client Research Efficient business model with strong track record of running amusement parks - WHL has been running amusement park business efficiently for last 17 years Share holding pattern with wide presence in southern India through 3 operational parks. The company follows low capex model where its parks are based on concept of Others 10% giving an alternative option for leisure and entertainment near large cities as DII against capex intensive holiday destination model (like Adlabs). The company 6% does not invest a large sum in creating huge real estate and aims for payback FII of less than 7 years from its parks. The asset light model helps it to generate 13% high RoCEs of over 20% with zero debt balance sheet and strong operating Promoter cash flows. 71% New and upcoming parks to drive growth. As part of its growth strategy, WHL Source: Capitaline intends to expand its presence in new geographies by leveraging its brand equity and experience in the amusement park industry. In 2017, it rolled out One-year performance (Rel to Sensex) operations in Hyderabad. Further, the company has acquired 57 acres of land for its upcoming park at Thiruporur, near Chennai. WHL intends to setup new park in every 3 years which would be funded through its internal cash flows and debt. The company is expected to generate Operating & Free Cash Flow of ~Rs.1 bn and ~Rs.300 mn, respectively in FY18. Post Chennai set-up the company could look to expand in Maharashtra and Gujarat in future. The cash generation from old parks should help it in meeting funding requirement for new parks. Increasing share of non-ticket revenue - Over the years, the company has been growing its revenue pie from non-ticket revenue segment which includes food Source: Capitaline and beverages, merchandise, etc. The contribution of non-ticket revenue has been increasing over the past 5-6 years from 14% in FY12 to 25% in FY17 INITIATING COVERAGE January 5, 2018 and this is expected to increase further to 28% by FY19E. We believe that there is enough scope to grow non-ticket revenue pie as it is much lower as compared to 50-55% in international parks The margin in non-ticket revenue segment is far higher. Hence increased share of non-ticket revenue will have positive impact on margins of WHL. Volume growth to revive as most of the negatives already factored in - Last two years have been challenging for WHL’s business due to service tax issue, political issues in southern states, demonetization, GST, etc. As a result, the footfall in its parks took a hit. Further, the company has taken price hike for its parks keeping GST rates in mind. Hence, we expect some impact on total volumes which would grow at slower pace of 2.3% in FY18E due to rise in ticket prices. We expect 5.3% CAGR in footfalls in FY17-19E with overall normalcy expected in FY19E (with 8.4% yoy growth built in for the year). Outlook & valuations We expect company’s revenue and PAT to grow at a CAGR of 18% and 46% respectively in FY17-19E, led by 1) 16.5% CAGR in ticket income 2) and 26% CAGR in non-ticket income3) 5.3% growth in footfall and 4) 12.7% growth in average revenue per footfall. We expect 900 bps improvement in EBITDA margins in FY17-19E. This should have positive impact on earnings and returns ratios. The stock is presently trading at FY18E and FY19E PE of 41.1x and 29.1x based on EPS of Rs 8.8 and Rs 12.5, respectively. It will not be justified to value the stock purely on PE basis keeping in mind the capex oriented nature, annuity income and cash flows that accrue every year. The company operates at a healthy EBITDA margin of over 30%. Post commissioning of the Chennai property the company could easily fund its future capex from internal accruals (see self-sufficiency coming into play). One also needs to keep in mind the future potential of theme parks (as per capita income levels keep on rising) and limited avenues of entertainment surrounding the metros and Tier-I cities. We have high regards for the management, its integrity and sole focus on this business segment. The best way to capture the upside of the stock is to use DCF method. Our DCF based target price works to Rs.465. We initiate coverage on the stock with a BUY recommendation. Key risk and concerns Slowdown in consumer discretionary spending Competition from large global players Any major change in tax structure Accidental risk Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2 INITIATING COVERAGE January 5, 2018 COMPANY BACKGROUND Wonderla Holidays Ltd (WHL) is the largest amusement park chain in India with over 17 years of successful operations. It has entertained over 30 mn visitors across its parks in Kochi, Bangalore and Hyderabad. The company is promoted by Mr. Arun Chittilappilly and Mr. Kochouseph Chittilappilly, who also incorporated V- Guard Industries Ltd. The promoters have operational experience in the amusement park industry since 2000. The promoters launched the first amusement park in Kochi in 2000 under the name Veegaland, later successfully launched the second park in Bangalore in 2005 and third park in Hyderabad in 2016 under the name “Wonderla”. The company also operates Wonderla Resort attached to its amusement park in Bangalore. It is a three Star leisure resort with has 84 luxury rooms and 4 banquet halls / conference rooms. WHRL has vast experience in running amusement parks resulting in understanding customer preferences. This enables it to conceptualize and develop innovative rides. The company has an In- house manufacturing facility located at Kochi which manufactures /constructs rides and attractions for all of its parks. Over the years, the company has successfully run the business whereby revenue grew at 19% CAGR in FY12-17. Kochi Amusement Park Wonderla Kochi amusement park was launched in 2000 by the name ‘Veegaland’ and operating under the name ‘Wonderla’ since April 2008. It is situated on 93.17 acres of land, and currently occupying 28.75 acres for 55 land and water based attractions and other allied facilities. It has 6 restaurants offering various cuisines, of which five are operated by the company. Kochi Park financials FY17 FY16 YoY (%) Total Revenues (Rs Mn) * 848 820 3.4% No of Visitors (In ‘000) 1000 1049 -4.7% Avg.