Category: IPO/FPO ANALYSIS

Opportunities provided in IPO and FPO situations are analysed

Manpasand Beverages IPO – Natural but Expensive

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  • Date 25th June 2015
  • Price range: Rs. 290-320 and IPO Period:  24-26th June 2015
  • Small Cap with Rs 1600 cr Mkt Cap 
  • Industry – FMCG
  • Advice: High Risk, Expensive, Avoid

Manpasand Beverages is a small fruit drinks manufacturer based in Vadodara. It had FY14 revenues of Rs 294 crores and profits 20.4 cr. The market potential of this segment looks attractive. However, the segment is dominated by well-known Indian and MNC brands. The challenges extend to capacity creation and launch of several new brands and products. IPO pricing is aggressive (PE of 86-95 times) and leaves little on the table for investors in the short to medium term. Investors can avoid this IPO.

Here is a note on the Manpasand Beverages (MAP) IPO.

IPO highlights

  • The IPO is open from 24-26th June 2015 with Issue Price band: Rs. 290-320 per share
  • It’s a fresh Issue of 1.25 cr. shares of Face Value: Rs.10 per share
  • Each lot size is 45 shares and it can be bought in multiples of 45 shares
  • Shares offered as portion of equity post issue: ~25%. Post IPO the mkt cap will be ~1600 cr.
  • The promoter will sell 17% stake, while SAIF Partners and Aditya Birla Equity will sell 7% and 1%.
  • The amount proposed to be raised is Rs.400 cr. The IPO proceeds will be used for:
    • A new mfg. facility in Haryana for Rs 153.3 cr.,
    • Repayment of borrowings of Rs 100.9 cr
    • Modernization of mfg facilities at Vadodra and Varanasi at a cost of Rs.38.8 cr.
    • The rest is for a new corporate office at Vadodara, Gujarat, corporate purposes and exits by investors.

Introduction

  • Manpasand Beverages is a manufacturer and seller of fruit drinks based in Vadodra, Gujarat.
  • FY14 revenues were Rs 294 crores and profits 20.4 cr.
  • The mango based fruit drink ‘Mango Sip’ is the flagship brand and contributes 87% of sales. It caters to customers from semi urban and rural markets.
  • The distribution network of MAP includes 73 consignee agents and 654 distributors spread across 24 states. Also, MAP sells directly to Indian Railways Catering and Tourism Organization (IRCTC).
  • Dhirendra Singh, Chairman of MAP has 15 years experience in this industry. He is the also on the board for group entities like Manpasand Snacks and Beverages Ltd and Xcite Nutrition’s Private Ltd.
  • Recently the company launched two new brands, “Fruits Up” and “Manpasand ORS”. Manpasand ORS was launched with a view to capture the North East market.
JainMatrix Investments, Manpasand Beverages

Fig 1a – Revenue Segments (above) and Fig 1b – Brands

Business and News Updates  

  • Capacity: MAP has three factories that are currently manufacturing its products located in Vadodara and Varanasi including a new facility in Vadodara commencing production this April. The combined capacity for manufacturing is 40,000 Tetra Pak Cases/ day and 65,000 PET Bottle Cases/ day for fruit drinks and 15,000 PET Bottle Cases/ day for carbonated fruit drinks.
  • MAP has acquired and signed an MoU for a manufacturing facility at Dehradun. However it is yet to commence production.
  • MAP would require efficient working capital management as the soft drinks industry requires enough working capital to be able to procure and process payments for raw materials.
  • The MAP IPO has seen a 5% subscription on day 1.

Industry Outlook

  • The overall soft drinks market in India saw aggregate sales worth Rs 65,330 crores in the year 2014. The main segments constituting the soft drinks market in India are carbonates, juices and bottled water, which together accounted for over 99% of the total volumes sold in 2014.
  • About 75% of the total mango drinks market is controlled by Coca-Cola’s Maaza, Pepsico’s Slice and Parle Agro’s Frooti. Other players are Hershey’s India (Jumpin), Dabur (Real), Hector Beverages (Paperboat Aamras), Surya Food and Agro (Priyagold) and Scandic Foods (Sil).
  • Based on the industry data, MAP has a 3% market share of the packaged juices market of India.

Financials of Manpasand beverages

  • Revenues and EBITDA have been growing consistently, see Fig 2.
  • However PAT and EPS have been declining since Mar 2013.
  • Note – Mar-15 results are a simple projection of actual 9 month financials reported by MAP.
  • MAP is a profit making operation as of today but does not have free cash flows since the last few years. See Fig 3.
  • Profits and Free Cash flows appear to be stretched due to high competition, expansion costs and high capital expenditure.
JainMatrix Investments, Manpasand Beverages IPO

Fig 2 – Manpasand Beverages Financials

JainMatrix Investments, Manpasand Beverages

Fig 3 – Manpasand Cash Flows and Debt

Positives for Manpasand Beverages/ IPO offering

  • MAP is focusing on a market which is not well served i.e. semi urban and rural areas. Hence the company could see a good rise in the sales in the upcoming years
  • Rising Income Levels – In the last decade, Indian economy has progressed rapidly. With the progress of the economy, India’s per capita GDP (constant price) has gone up from Rs. 32,037 in 2005-06 to Rs. 46,555 in 2011-12, fuelling a consumption boom in the country. (Source: CARE Report). Thus demand for MAP products should continue to grow.
  • MAP has achieved net profit margins (5% approx) which would help them sustain in the long run in the FMCG sector.
  • MAP is building its own brands and this can be a powerful asset for long term growth.
  • They are growing beyond their flagship ‘Mango Sip’ product and launching a clutch of new products, which may grow their business rapidly in future.

Internal Risks

  • MAP heavily depends on its mango based fruit drink “Mango Sip‟ product which contributed 87% of its net sales for FY2014.
  • MAP had negative free cash flows in the past and this may continue in the next few years. MAP’s operations are cash intensive, and business is worse off due to high working capital needs.
  • A few group entities like Manpasand Snacks and Beverages and Xcite Nutrition’s Pvt have incurred losses in the preceding fiscal years which could be a drain on MAP’s resources.
  • MAP’s business is affected by seasonal variations like reduced demand in winter, and peak sales in summer. These variations could worsen due to a cool summer or a bad monsoon season.
  • MAP sources their tin can packaged products and 500 ml PET packaged “Fruits Up‟ drink from third party facilities and so MAP needs to maintain stringent quality controls with these partner/ vendors.

External Risks

  • A slowdown in economic growth in India could adversely impact MAP’s business.
  • The recent Nestle Maggie events highlight challenges in food packaging and labelling, and govt approvals. Compliance on these matters has to be ensured.
  • There is intense competition in this category with the presence of MNCs and large Indian business houses in the drinks segments. MAP as a small player has to build its niche and not directly compete.

Benchmarking

JainMatrix Investments, Manpasand Beverages

Fig 4 – Manpasand Beverages Benchmarking

  • PE and P/B valuations look stretched even compared to industry leaders like Britannia and Nestle.
  • Sales and profit growth look impressive. Net profit margin for MAP is almost at par with Britannia Industries, which indicates the company’s long term sustainability within the FMCG sector.
  • Overall, for a small company starting off, MAP is doing well, but needs to sustain its momentum.

Overall Opinion

  • The consumption theme in India is very powerful, and will play out over the next few years as income and education levels improve. Within this overall consumption theme, the food segment stands out as both a daily essential as well as an aspirational category.
  • Fruit based drinks is certainly a high potential consumption area with good prospects. Demand is likely to grow faster for fruit drinks than for colas and non-natural drink products.
  • MAP even with its niche rural and semi urban market, today faces intense competition, high costs of brand launches and planned capacity expansion.
  • It may take another 3-4 years to have free positive cash flows from operations.
  • Pricing of the IPO is aggressive, and the high valuations in terms of P/E (86-95 times) and P/B leaves little on the table for investors.
  • Investors should avoid this IPO.

JAINMATRIX KNOWLEDGE BASE:

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Manpasand Beverages Ltd or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

VRL Logistics IPO – Winner Takes All

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  • Date 14th April 2015
  • IPO Price range: Rs. 195-205
  • IPO Period: 15-17th Apr 2015
  • Mid Cap – Rs 1900 cr Mkt Cap
  • Industry – Transportation, Goods and Passengers
  • Advice: BUY, with a 2 year holding period

Summary:

  • The transportation sector is recognized as a leading indicator of the economic cycle of the country. We expect this sector to do well over the next few years.
  • VRL Logistics is one of the larger organized players of this sector. The firm represents several high potential businesses, built over many years by the first and now second generation entrepreneurs.
  • We feel that in this sector the business volumes are critical and the top 2-3 players will dominate, a ‘Winner Tales All’ situation. VRL is well placed to be the winner over the next few years.
  • Management quality appears good. Like the real estate sector, doing business in transportation too involves many legal issues and disputes, the resolution of which may take many years due to our glacial judicial process. We downplay the large number of pending cases involving VRL.
  • VRL appears to be business wise aggressive while financially sound, using PE funding for new ventures, and ensuring positive FCF for 5 of the last 6 years. This is a good combination.
  • The VRL Logistics IPO is rated medium risk, but a BUY, with a 2 year holding period.

VRL Logistics Financials, by JainMatrix Investments

VRL Logistics Financials, by JainMatrix Investments

IPO highlights

  • IPO is open from 15-17th Apr 2015 with Issue Price band: Rs.195-205 per share
  • Shares offered to public: 2.27 crores of Face Value: Rs.10 per share
  • Shares offered as portion of equity post issue: 25%. Post IPO, promoters stake would reduce to 70%, another 25% would be sold in IPO to numerous parties and the rest 5% held by private investors.
  • The amount proposed to be raised: Rs.467 crores (at upper end). The IPO proceed will be used for:
    1. Rs 350 crore – exit by New Silk Route, PE firm and promoters Dr. Vijay and Anand Sankeshwar.
    2. Rs 67 crore on acquisition of new fleet.
    3. Rs 28 crore for repayment of debts and
    4. The rest of about Rs 22 cr. would be spent for corporate purposes.
  • These objects appear to be reasonable – for investor exit and to grow the core business of VRL.

Download this Research Report

JainMatrix Investments has created a 4 page Research report of VRL Logistics IPO. This captures our perspective of VRL Logistics IPO in the current economic context, including  financial review and Cash Flow analysis, SWOT review  with Risks and Overall Expert Opinion.

JainMatrix Investments_VRL IPO_Apr2015

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Disclosures and Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. JM has been publishing equity research reports since Nov 2012. JM and its promoters/ employees have no financial interest in VRL Logistics Ltd or their group companies, and no known material conflict of interest as on date of publication of this report. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

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Inox Wind IPO – Positive, and for the Environment

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Dear Investor,

Here is a short post facto report on the Inox Wind IPO.

  • The IPO received excellent response with an 18 times over-subscription.
  • Retail was only 2 times over while institutional, HNI and corporates’ portions were subscribed over 35 times.
  • Naturally the pent up demand showed up on listing.
  • Listing on April 9th, yesterday, was enthusiastic and the share closed the day with a 35% gain at Rs 438.
  • Today, at the time of going into the cloud, the share is at 442, a solid 43% gain for Retail investors.
  • We will reiterate our advice as below, its a medium risk BUY, and hold for 2 years.

Happily for us at JainMatrix, another win and a correct analysis, (so far).

Happy investing,

Punit Jain

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  • Date 18th March 2015
  • Price range: Rs. 315-325
  • IPO Period:  18-20th Mar 2015
  • Mid Cap – Rs 7200 cr Mkt Cap
  • Industry – Wind Power (Equipment and Projects)
  • Advice: medium risk BUY, and hold for 2 years

Summary:

  • INOX is certainly in the right sector of Wind power generation, where we should see good double digit growth for a decade. It also is an environmentally positive segment. The government is doing a lot to promote / subsidize it.
  • The firm itself has scaled up well so far, and the promotor group is good. There is also a scarcity of good quality listed firms in this sector.
  • The challenge for this firm is to manage costs, cash flows and technology stability. It has to perhaps slow down growth in the next few years, in order to be a more financially feasible concern.
  • The INOX Wind IPO is rated a BUY, with medium risk, and investors can purchase for a 2 year holding period.

Financials

 Inox Wind – 5 year financials 

IPO highlights

  • IPO is open from 18-20th Mar 2015 with Issue Price band: Rs.315-325 per share
  • There is a discount of Rs 15 for retail and employee categories
  • Shares offered to public: 3.26 crores of Face Value: Rs.10 per share
  • Shares offered as portion of equity post issue: 13.9%
  • Amount proposed to be raised: Rs.1025 crores (at upper end). The IPO proceed will be used for:
    • 300 crore is an exit by Inox Wind promoter Gujarat Fluorochemicals
    • 300 crore will be used to fund long term working capital requirements
    • 150 crore towards expansion of manufacturing facilities in Himachal Pradesh and Gujarat
    • 150 crore for project site development, mostly by subsidiary IWISL
    • The rest of about 100 crore will be for General Corporate Purposes
  • These objects appear to be reasonable and will grow the core business of wind power generation.

Download this Research Report

JainMatrix Investments has created a 5 page Research report of INOX Wind IPO. This captures our unique perspective on INOX including Promoter Group review, Industry and Competition Notes, Strengths /Positives, Risks and Challenges and Overall Opinion.

Inox Wind IPO_JainMatrix Investments_Mar2015

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Disclosures and Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. JM has been publishing equity research reports since Nov 2012. JM and its promoters/ employees have no financial interest in Inox Wind Ltd or their group companies, and no known material conflict of interest as on date of publication of this report. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

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A new investment idea – Listing of startups on stock exchanges

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We have seen a jump of IPO listing on the exchanges this year, but if these new norms and rules come into existence, the trickle may grow into a flood. The new opportunity – Startups.

In this article from Economic Times, there is news of norms being created for listing of Startups, to allow them to access funds from India based investors. At the same time, since Startups may have complex business models, are riskier, and may even switch businesses (pivot), the plan is to protect Retail investors by having higher minimum application size.

See all the details here. Listing of Startups – an article by Economic Times

This appears to be part of the initiative of ‘Improving the ease of doing business’ in India, something that the government has hinted at in the Budget and other occasions.

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Inox Wind IPO – Positive, and for the Environment

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  • Date 18th March 2015
  • Price range: Rs. 315-325
  • IPO Period:  18-20th Mar 2015
  • Mid Cap – Rs 7200 cr Mkt Cap
  • Industry – Wind Power (Equipment and Projects)
  • Advice: medium risk BUY, and hold for 2 years

Summary:

  • INOX is certainly in the right sector of Wind power generation, where we should see good double digit growth for a decade. It also is an environmentally positive segment. The government is doing a lot to promote / subsidize it.
  • The firm itself has scaled up well so far, and the promotor group is good. There is also a scarcity of good quality listed firms in this sector.
  • The challenge for this firm is to manage costs, cash flows and technology stability. It has to perhaps slow down growth in the next few years, in order to be a more financially feasible concern.
  • The INOX Wind IPO is rated a BUY, with medium risk, and investors can purchase for a 2 year holding period.

Financials

 Inox Wind – 5 year financials 

IPO highlights

  • IPO is open from 18-20th Mar 2015 with Issue Price band: Rs.315-325 per share
  • There is a discount of Rs 15 for retail and employee categories
  • Shares offered to public: 3.26 crores of Face Value: Rs.10 per share
  • Shares offered as portion of equity post issue: 13.9%
  • Amount proposed to be raised: Rs.1025 crores (at upper end). The IPO proceed will be used for:
    • 300 crore is an exit by Inox Wind promoter Gujarat Fluorochemicals
    • 300 crore will be used to fund long term working capital requirements
    • 150 crore towards expansion of manufacturing facilities in Himachal Pradesh and Gujarat
    • 150 crore for project site development, mostly by subsidiary IWISL
    • The rest of about 100 crore will be for General Corporate Purposes
  • These objects appear to be reasonable and will grow the core business of wind power generation.

Download this Research Report

JainMatrix Investments has created a 5 page Research report of INOX Wind IPO. This captures our unique perspective on INOX including Promoter Group review, Industry and Competition Notes, Strengths /Positives, Risks and Challenges and Overall Opinion.

Inox Wind IPO_JainMatrix Investments_Mar2015

This report is now available for your usage. Click link above to download the PDF format report.

JainMatrix Knowledge Base:

See other useful reports

Disclosures and Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. JM has been publishing equity research reports since Nov 2012. JM and its promoters/ employees have no financial interest in Inox Wind Ltd or their group companies, and no known material conflict of interest as on date of publication of this report. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

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Adlabs IPO – Last Day Update

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Date: 12th March 2015

Today is the closing of this IPO. Readers may have see my IPO analysis report published on 10th March.

Adlabs Entertainment IPO – Premature Offering, Avoid

The Update on this IPO is:

  • Subscription so far has been poor – at 18% of the entire IPO offering, reported at 5 pm on 11th yesterday, it has not really gathered steam so far.
  • Typically IPOs see maximum collections on the last day as people rush to meet the deadline.
  • Its interesting that the analyst community is sharply divided in their opinion of this IPO. Here’s a quick compilation of opinions, drawn from recent reports.
Analyst    /   Subscribe?  Yes No Qualifier/ Source
JainMatrix Investments Avoid
GEPL Capital Subscribe  MoneyControl report
SPA Research Subscribe  MoneyControl report
Hem Securities Avoid  MoneyControl report
Anand Rathi Subscribe TOI report
Angel Broking Avoid TOI report
Emkay Global Subscribe TOI report
ICICI Direct Subscribe TOI report
Sharekhan Subscribe Long Term Investors/ TOI report
Mint Money Avoid LiveMint report
Capital Mind Avoid  Own website
Hindu BusinessLine Avoid   Own website
VS Fernando Subscribe Only for long term/ MoneyControl report
  • Analysts seem to be quite divided in their opinions.
  • My own thought is that this much negativity is rare among analysts.
  • Having said that, lets see how it performs.

Happy investing.

Adlabs IPO – Premature Offering, Avoid

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  • Date 10th March 2015
  • Price range: Rs. 221-230 with Retail discount 
  • Period:  10-12th Mar 2015 
  • Small Cap – Rs 1800 cr Mkt Cap; Industry – Amusement Parks  
  • Advice: High Risk, Avoid

logo Summary:

  • Adlabs Entertainment has two new amusement parks that are wonderful properties with unique attractions and located in an affluent customer catchment area.
  • However Adlabs is loss making. It has a high cost structure. It is still stabilizing operation in its two parks. There are access and maintenance challenges. The amusement holiday concept has still to be proven in the Indian context.
  • Current revenue levels are unsustainable. We feel that only if revenues ramp up sharply from here, will Adlabs be able to achieve profitability in 2 years.
  • As an investment, the Adlabs IPO is rated a high risk, Venture Capital type offering.
  • Investors can avoid this IPO.

Here is a note on the Adlabs Entertainment Ltd. IPO.  (ADEL)

IPO Highlights 

  • IPO is open from 10-12th Mar 2015 with Issue Price band: Rs.221-230 per share
  • There is a discount of Rs 12 for Retail category only
  • Shares offered to public: 2.03 crores of Face Value: Rs.10 per share
  • Shares offered as portion of equity post issue: 25.44%
  • Amount proposed to be raised: Rs.450-468 crores.
  • IPO proceeds: Rs. 330 cr. for partial repayment of Bank loans taken to set up amusement park near Mumbai. One of the Promoters will exit partially to the extent of Rs 46 cr. The rest of the amount will be utilized in general corporate purposes.
  • ADEL is a loss making operation as of today, and is only EBITDA positive since FY14.
  • News – ADEL raises Rs 60 cr. from anchor investors ahead of IPO, a positive for this IPO.

Introduction

  • ADEL is an Indian amusement park firm based in Mumbai. It has two operational parks adjacent to each other, Imagica Theme Park (fully functional since Nov 1, 2013) and Aquamagica, the water park located adjacent (operational since Oct 1, 2014).
  • The park is located in near Khopoli, and is 74 km from Mumbai, off the Mumbai-Pune Expressway.
  • Next to the parks is planned a 3 star hotel with 287 rooms (116 rooms will be ready by Apr 2015).
  • This addition will promote amusement vacations and provide synergy with Lonavala, Matheran and Khandala, tourist locations close by. ADEL also attracts customers from nearby Mumbai & Pune.
  • Revenues in FY14 were Rs 107 cr and Losses Rs 52 cr. They have 1,248 employees.
  • The promoters of ADEL are Mr Manmohan Shetty, and Thrill Park, a company with ownership again primarily with Manmohan Shetty. Mr Kapil Bagla is Exec. Director of ADEL.
  • Imagica and Aquamagica have among the highest entry ticket rates for amusement parks in India, with Rs 1900 and 1150 (off season 1500 and 950). The business model is mostly an entry ticket which allows unlimited usage of rides. The additional revenue sources are specified in Fig 1.
  • Future projects include new parks at Hyderabad and Gujarat, but these are at very early stage today.
JainMatrix Investments, Adlabs IPO

Fig 1 – Revenue Segments at Adlabs Imagica

Financials of ADEL

  • ADEL has not yet completed one full financial year with both parks operational. However the data from 4 quarters ending Dec 2014 indicates annual revenue run rate of Rs 210 cr.
  • There are large loans on the books, a total of 1084 cr. as on Dec 2014. As a result, the Finance and Interest charges are high. Additionally, depreciation and amortization charges too are high.
  • The firm has a Debt Equity D/E ratio of 4.9, which will reduce to 3.7 after IPO due to repayment from proceeds. This is very high indeed.
  • Financials are captured in Fig 2.
Adlabs Financials, JainMatrix Investments

Fig 2 – Adlabs Financials, Source Company documents, click image to expand

Business Profile

  • The nature of the amusement park business is of a large initial capital investment in land, permissions, rides, hotel and branding. Then follow growing the footfalls and revenue.
  • Capacity: the capacity of the theme park is 15,000 people hourly (as per Company Prospectus). The highest usage was in Q3FY15 with average footfalls 3,171 per day and the record for one day is 11,933. For the water park capacity peak is 5,450 and average footfalls inQ3FY15 were 819.
    • Data from Wonderla parks indicates a capacity utilization of 23-27%. If we set ADEL utilization at the upper end of this range, the Theme park footfalls could go up 28% to 4050.
  • The last 4 quarters saw footfalls of Imagica (9.12 lakh) and Aquamagic (3.01 lakh) totaling 12.13L. Management has commented on a need for annual footfalls of 14 lakh in order to become a cash positive company. Its only after this that ADEL starts repaying its loans.

Industry Data and Personal Notes

  • The amusement park industry in India is estimated at worth Rs 7,000 cr and has grown at 15-20% CAGR.
  • ADEL thus appears to have only a 3% market share of this industry.
  • Other players include Wonderla Holidays, Ocean Park Hyderabad, Essel World/ Water Kingdom Mumbai, FunNFood Village Gurgaon, Adventure Island Delhi, Nicco Park Kolkata, Entertainment City Noida, MGM Dizzee World Chennai and Ramoji Film City, Hyderabad.
  • Globally it’s a very massive industry with the likes of Disneyland and Universal Studios of USA dominating. Like many others, this sector could also see the entry of MNCs and foreign investments in future. Any such event will raise the valuations for ADEL.
  • Demand drivers: India’s per capita income has grown at a five-year CAGR of 16%. Also, the share of discretionary spending in overall expenses has increased rapidly from 19% in FY1981 to 45% in FY12. This has led to higher spending on leisure and entertainment activities such as visits to multiplexes, malls, vacations, restaurants and amusement parks.
  • Personal Notes – A visit to Adlabs Imagica in Dec’14 provides the following insights on the business:
    • Connectivity with Mumbai while good on the Expressway, is poor on the last 4-5 km stretch.
    • Some of the larger rides were out of operation, for maintenance.
    • However all the functioning rides were well conceptualized and uniquely Indian rides, celebrating and packaging India’s cultural, natural and historical diversity.
    • A visit here is a whole day picnic, and there’s ample potential for F&B and allied services.
    • There’s a massive demand from affluent city visitors for this unique experience. The focus has to be on schoolchildren, young parents and under 30 thrill seekers.
  • The likely sequence of business events in future for ADEL, post IPO are:
    1. Commissioning of 3 star hotel adjacent to parks by Apr 2015.
    2. Marketing of parks as a holiday destination in Mumbai, Pune and other Metros in India.
    3. Improved operations and utilization of current park facilities, so cash flow is better.
    4. Repayment of loans by ADEL from internal cash flow, reducing finance and interest costs.
    5. Expected operational cash positive performance of ADEL in FY15 and 16.

Positives for the IPO / ADEL business

  • Demand and Demographic Advantages. India is one of the youngest countries in the world with the median age of 26.5 years, compared to 37.1 years in US, 45.4 years in Japan and 35.9 years in China (Source: CIA, The World Factbook and CARE Research). This will drive demand for ADEL.
  • Rising Income Levels. In the last decade, Indian economy has progressed rapidly. With the progress of the economy, India’s per capita GDP (constant price) has gone up from Rs. 32,037 in 2005-06 to Rs. 46,555 in 2011-12, fuelling a consumption boom in the country. (Source: CARE Report)
  • Increased Spending on Tourism and Leisure Activities. In the last 6-7 years, there had been a steady growth in domestic spend on tourism, growing at a CAGR of 13.7% to USD 73.4 billion in 2011. Holidaying, leisure and recreation related tourism constitutes major part of the domestic tourism.
  • ADEL has conceptualized and created a massive 132 acres amusement park on the lines of the large and successful parks like Disneyworld abroad. At the same time, the themes, concepts and execution of rides is uniquely Indian, combining entertainment with education and culture. This is very visionary thinking. In addition a strong brand has been built in a fairly short period.
  • The promoters are media and entertainment savvy professionals and entrepreneurs.
  • The key assets with good capacities are in place and operational. ADEL now needs to steadily build the brand, demand, utilization, maintenance and improvements of these.
  • In the Mumbai – Pune catchment area, there are few comparable competitive entertainment destinations. Only Essel World and Water Kingdom come close. They are older properties, but are better located close to Mumbai city. ADEL parks are refreshingly different and offer an attractive option to customers.

Internal Risks

  • High costs structure: The large bank debt and VC funds taken for the project are reflected in the high finance and interest costs. Operational costs too are high. The IPO can only rest a part of the loan. Already a repayment due Dec 2014 has been mutually deferred to March 2015 post IPO. The fear here is that ADEL may not be able to ramp up revenues fast enough to stay ahead of the repayment cycle demanded by lenders.
  • The Promoters have also pledged part of their shares to raise loans for the ADEL operations. This is a high risk situation as any subsequent fall in share price after listing will trigger a share sale.
  • Rider Safety: The safety of amusement park visitors is important, and it is an ongoing challenge to keep up high maintenance and well-marked safety regulations for visitors, to prevent mishaps. ADEL has had 1-2 accidents so far, but has an overall good record. This must sustain.
  • The hotel project needs to be commissioned on time, and launched successfully promoting the amusement + holiday synergy. Any delay could adversely affect the business performance.
  • Changes in consumer preferences could adversely affect the business. Typically a repeat visitor may like to see new rides and innovation in amusement rides, this is an ongoing challenge for ADEL.
  • There is no clarity on Hyderabad and Gujarat projects, so we cannot assume any revenues there.

External Risks

  • Litigations: There are several suits pending in courts against Promoters, ADEL, directors and group companies. We cannot be sure if the future business will be affected.
  • A slowdown in economic growth in India could cause the business at ADEL to suffer.
  • Competition from existing and new players. A slew of new projects are in the pipeline.

Benchmarking

Since ADEL is loss making and just recently launched, a benchmarking exercise against other firms is inappropriate. However, a simple revenue to market cap comparison with closest competitor Wonderla Holidays reveals: Benchmarking

Fig 3 – Comparison of ADEL and Wonderla

This simple comparison indicates that ADEL may be only 14% overpriced compared to WHL. However in reality ADEL has a massive cost disadvantage due to the recent construction. And WHL has mostly older operating assets and is investing in a new amusement park. WHL is identified as a safer investment.

Overall Opinion

  • There is no doubt that the new parks of ADEL are wonderful properties with unique attractions and located in an affluent customer catchment area.
  • However ADEL has a high cost structure. It is still stabilizing operations in its two theme parks. There are access and maintenance challenges. The vacation amusement concept still has to be proven in the Indian context.
  • Current revenue levels are unsustainable. We feel that only if revenues ramp up sharply from current levels will ADEL be able to achieve profitability in 2 years.
  • As an investment, the ADEL IPO is rated a high risk, Venture Capital type offering.
  • Investors can avoid this IPO.

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Adlabs Entertainment Ltd or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com