Syngene Post IPO report

Post IPO report dated 17th Aug 2015

Dear Investor,

Here is a short post listing report on the Syngene International IPO.

  • The IPO that was open from 27-29th July received excellent response with a 32.05 times over-subscription.
  • While Retail was only 4.8 times oversubscribed, the QIB portion was over 51.5 times and non institutional investors (NII) category was over a massive 90.2 times.
  • The IPO price was declared at the upper end of Rs 250. We saw the positive mood continuing on the listing  date also.
  • Listing happened on 11th Aug and was enthusiastic as the share closed with a 24% gain at Rs 310.
  • Today, one week from listing date, the share is at Rs 347, a solid 39% gain for investors.

For us at JainMatrix Investments, this is another win with a correct analysis so far.

Happy investing,

Punit Jain

IPO report dated 27th July 2015

  • Issue Price range: Rs. 240-250 and Issue Period: 27-29th July 2015
  • Target Market Cap Rs 5,000 crore and Industry – Pharma R&D
  • First day – 32% subscribed
  • Advice: Buy for 2-3 years

The Syngene IPO is a first time offer from the high potential sector of pharma R&D Outsourcing. The Income, EBITDA and Profits have grown well at 18.2%, 30% and 31.3% CAGR resp. over 5 yrs. There is ample global growth possible if Syngene is able to manage scale and efficient operations. The valuations are high by Indian IT services levels, but is justified by sector leadership & innovation. Investors may BUY with a 2-3 year perspective.

Here is a note on Syngene International Limited IPO.  (Syngene)

IPO highlights

  • The Syngene IPO is open from 27-29th July 2015 with Issue Price band: Rs. 240-250 per share.
  • Shares offered in IPO are 2.2 crores, of Face Value Rs 10 per share, which is 11% of their post-Offer equity share capital. This will raise Rs.550 cr. and target market cap is Rs 5,000 cr.
  • Minimum bids: 60 shares & multiples thereof. Minimum investment: Rs. 14,400.
  • The IPO involves no equity dilution, and IPO proceeds will flow to the promoter, Biocon Ltd.
  • The P/E of Syngene are 30.3 – 31.5 times estimated FY15 earnings, at lower/upper price limits.
  • The company has already raised Rs 150 cr. from anchor investors.
  • To understand Syngene better, we first see a snapshot of the listed parent company Biocon.

Biocon Ltd. Snapshot

  • Biocon Ltd is engaged in developing medicines (generic insulins and biosimilar monoclonal antibodies) for addressing chronic diseases for cancer, diabetes and autoimmune patients.
  • FY15 revenues were 3,300 cr and PAT 528 cr. The Income, EBITDA and Profits have grown at 15%, 9% and 10% CAGR respectively over 5 years. See Fig 1.
Biocon financials, JainMatrix Investments

Fig 1 – Biocon Financials, JainMatrix Investments

  • It had its IPO in 2004, at a price of Rs 315. There was a 1:1 bonus issue in 2008, so with the CMP of Rs 465, the share has given shareholders a 10.3% CAGR return over 11 years. The Sensex gave 15.3% CAGR in this period, so Biocon underperformed the Sensex by 5% CAGR.
  • Overall we rate Biocon as an average performer.

Introduction to Syngene

  • Syngene started in 1993 at Bengaluru, and is a subsidiary of Biocon. It is engaged in providing contract research and manufacturing services for pharma sector. It is one of India’s leading Contract Research Organisations (CRO) in the $14.7 bn global pharma CRO market.
  • Revenues in FY14 were Rs 708 cr and profits Rs 135 cr. It has 2,667 employees, incl. 2,096 scientists.
  • It offers a suite of integrated, discovery, development and delivery services for novel molecular entities (NMEs) across sectors like pharmaceutical, biopharma, and biotechnology.
  • It is primarily an export oriented business, see Fig 2.
Syngene Segments, JainMatrix Investments

Fig 2 – Syngene Business Segments, JainMatrix Investments

  • With a laboratory area of 9 lakh sq. ft., Syngene currently services over 200 clients, ranging from MNCs to start-ups, including 8 of the top 10 global firms. It has dedicated research centers with Bristol-Myers Squibb, Abbott Labs and Baxter International.
  • Syngene helps its clients in conducting discovery (from hit to candidate selection), development (including pre-clinical and clinical trials, analytical and bio-analytical evaluation, formulation development and stability studies) and pilot manufacturing (scale-up, pre-clinical and clinical supplies) each with distinctive economic advantage.
  • In addition to research staff dedicated to a particular client, Syngene also offers resources through flexible business models like a full-time equivalent (“FTE”) and fee-for-service (“FFS”).
  • Syngene is planning investments in the next three-four years of a new mfg. facility, a center for work on biologics and formulations (Bengaluru) and also to expand existing facilities. This will be with funds raised from internal accruals and debt.
  • The leadership team is Kiran Mazumdar Shaw (MD) and Peter Bains (ED/ CEO).
  • Silver Leaf Oak, a private equity fund acquired 10% stake in Syngene in 2014.

Financials of Syngene

  • The Income, EBITDA and Profits have grown at 18.2%, 30% and 31.3% CAGR resp. over 5 years. See Fig 3.
  • The EPS, adjusted for the IPO has grown by 31.4% CAGR over 5 years.
Syngene Financials, JainMatrix Investments

Fig 3 – Syngene Financials, JainMatrix Investments

  • The business has been Cash Flow positive for 4 of the last 6 years. Of late, the firm has been investing heavily in its business. In FY15, the Free Cash Flow has been positive. See Fig.4.
  • RoCE and RoE metrics are quite impressive, which are at 30.5% & 20.5%.
  • Finance costs decreased by 94% in FY14 (from 6.5 cr. in FY13) on account of repayment of debt. In addition there were forex losses in FY15. As a result, in FY15 we see that there is negative cash from operations and positive flow from Investments.
Cash Flows, JainMatrix Investments

Fig 4 – Cash Flows (Chart by JainMatrix Investments)

  • Shareholding Pattern (%): Post-issue the shareholding pattern will be Promoter Group 74.5%, Institutions and Public 22.1% and Non Promoter & Non Public is 3.3%. See Fig 5.
Shareholding Patterns, JainMatrix Investments

Fig 5 – Shareholding Patterns, JainMatrix Investments

Business and Industry Notes 

  • CRO firms offer outsourced services to support R&D driven organizations across industrial sectors like pharmaceuticals, biotechnology, biopharmaceuticals, nutraceuticals, animal health, agro-chemicals, cosmetics and electronics.
  • CRO services for pharma sector span the range of R&D activities from New Molecular Entity (“NME”) discovery, development and manufacturing.
  • CROs offer clients an opportunity to manage costs, have flexible operations and realize efficiencies in R&D and related functions. However most CRO service providers specialize to some degree based on the needs of their clients and the market in which they operate.
  • As per Frost & Sullivan estimates, global R&D expenditure for the pharma industry in 2014 was approximately US$139 billion, of which US$105 billion could have potentially been outsourced. According to the report, outsourcing penetration for the CRO market for development services as of 2014 is estimated to be 27.3% of the potential outsourcing market for development services, but poised to grow to 38.7% in 2019, reflecting a CAGR of 12.5%.
  • Growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D. The CRO industry has grown substantially in recent years and there is also an opportunity to grow through an increase in market share.

Positives for the IPO

  • Syngene has plans for capex of Rs 1200 cr. over the next 3‐4 years. Out of this, one half would be for expanding existing facilities and the rest for setting up a new facility at Mangalore.
  • Syngene has 2,096 scientists, including 259 PhDs, and 1,661 scientists with master’s degree. Resource knowledge and experience is the major asset for Syngene.
  • Syngene has a good track record in compliance, getting a clean chit in three audits conducted by the US Food and Drug Administration (USFDA) over the past 18 months.
  • Syngene has already signed commercial supply contract for 3 molecules with its clients. Besides, the company has a list of potential molecules lined up from its clients to sustain its base business over the medium term.
  • Syngene is the first listing of an Indian pharma CRO firm. It is thus a leader and an innovative company and may receive a premium valuation.
  • There is a good synergy between the Biocon (pharma manufacturing) and Syngene (CRO). This will help Syngene in its planned growth.

Negatives and Risks

  • Syngene’s top 10 clients gave 72% of its revenues in FY15. There is a dependency on a few large clients, and the financials of Syngene can be affected in case loss of any of these clients.
  • There are a number of pending litigations against Syngene, under heads Tax Matters, Threatened Litigation and Pending CIL Litigation (former subsidiary); and Litigation by and against the Promoter, all numbering close to 100. An adverse outcome in these proceedings may affect the reputation and financials, and harm future business.
  • The FY14 balance sheet showed Contingent Liabilities totaling to Rs. 181.3 cr. which if materialized may adversely affect the profitability of the company.
  • Intensifying competition for pharma CRO services.
  • The Syngene financial performance can be affected by INR/ USD price fluctuations. In addition, international economic, taxation and outsourcing policy changes can materially affected operations.
  • Ability to attract, retain and develop key personnel and R&D talent.
  • The pharma sector faces many IP related compliances and legal challenges. Syngene needs to ensure it stays protected and safe from such issues.
  • Clients need high secrecy and confidentiality as R&D work is for multi-billion dollar new drugs. Syngene needs to ensure that at the group and employee level, information stays safe.
  • Regulatory tightening of clinical trials in India has slowed the work on Indian clinical trials.

Benchmarking

As there are no listed companies in India that are directly comparable to Syngene, we benchmark the firm against IT services, KPO and PHARMA firms like Biocon, eClerx, Glenmark and Mphasis Ltd.

Benchmarking, JainMatrix Investments

Fig 6 – Benchmarking of Syngene, JainMatrix Investments

  • Based on Fig 6, we come to the following conclusions.
  • Syngene revenue growth is impressive. On margin parameters, it ranks second after eClerx.
  • Syngene rates high on RoCE and RoE.
  • For an early stage company, Syngene appears good in terms of low debt and financials.
  • Syngene’s closest listed peer outside India is a Chinese firm, Wuxi Pharmatech, which is four times bigger in revenues, and is trading at a PE of 30.

Overall Opinion

  • The Syngene IPO is a first time listing from a new and high potential sector of pharma CRO.
  • This business builds on Indian advantages in IT services and KPO, with a pharma sector focus. The benefits have shifted from cost arbitrage to enhancing R&D productivity and reducing time to market.
  • The promoters have an average record of providing returns to shareholders in Biocon. However, Syngene represents a high potential business segment, which is being spun off.
  • The success of competition, eg Wuxi Pharmatech, indicates that there are ample opportunities for Syngene to grow and compete in the global market.
  • We are positive on the prospects of Syngene in this IPO offering. Buy at cut off with a 2-3 year investment perspective.

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 Syngene International Limited 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.

Syngene IPO: Good Pharma R&D spinoff from Biocon

  • Date – 27th July 2015
  • Issue Price range: Rs. 240-250 and Issue Period: 27-29th July 2015
  • Target Market Cap Rs 5,000 crore and Industry – Pharma R&D
  • First day – 32% subscribed
  • Advice: Buy for 2-3 years

The Syngene IPO is a first time offer from the high potential sector of pharma R&D Outsourcing. The Income, EBITDA and Profits have grown well at 18.2%, 30% and 31.3% CAGR resp. over 5 yrs. There is ample global growth possible if Syngene is able to manage scale and efficient operations. The valuations are high by Indian IT services levels, but is justified by sector leadership & innovation. Investors may BUY with a 2-3 year perspective.

Here is a note on Syngene International Limited IPO.  (Syngene)

IPO highlights

  • The Syngene IPO is open from 27-29th July 2015 with Issue Price band: Rs. 240-250 per share.
  • Shares offered in IPO are 2.2 crores, of Face Value Rs 10 per share, which is 11% of their post-Offer equity share capital. This will raise Rs.550 cr. and target market cap is Rs 5,000 cr.
  • Minimum bids: 60 shares & multiples thereof. Minimum investment: Rs. 14,400.
  • The IPO involves no equity dilution, and IPO proceeds will flow to the promoter, Biocon Ltd.
  • The P/E of Syngene are 30.3 – 31.5 times estimated FY15 earnings, at lower/upper price limits.
  • The company has already raised Rs 150 cr. from anchor investors.
  • To understand Syngene better, we first see a snapshot of the listed parent company Biocon.

Biocon Ltd. Snapshot

  • Biocon Ltd is engaged in developing medicines (generic insulins and biosimilar monoclonal antibodies) for addressing chronic diseases for cancer, diabetes and autoimmune patients.
  • FY15 revenues were 3,300 cr and PAT 528 cr. The Income, EBITDA and Profits have grown at 15%, 9% and 10% CAGR respectively over 5 years. See Fig 1.
Biocon financials, JainMatrix Investments

Fig 1 – Biocon Financials, JainMatrix Investments

  • It had its IPO in 2004, at a price of Rs 315. There was a 1:1 bonus issue in 2008, so with the CMP of Rs 465, the share has given shareholders a 10.3% CAGR return over 11 years. The Sensex gave 15.3% CAGR in this period, so Biocon underperformed the Sensex by 5% CAGR.
  • Overall we rate Biocon as an average performer.

Introduction to Syngene

  • Syngene started in 1993 at Bengaluru, and is a subsidiary of Biocon. It is engaged in providing contract research and manufacturing services for pharma sector. It is one of India’s leading Contract Research Organisations (CRO) in the $14.7 bn global pharma CRO market.
  • Revenues in FY14 were Rs 708 cr and profits Rs 135 cr. It has 2,667 employees, incl. 2,096 scientists.
  • It offers a suite of integrated, discovery, development and delivery services for novel molecular entities (NMEs) across sectors like pharmaceutical, biopharma, and biotechnology.
  • It is primarily an export oriented business, see Fig 2.
Syngene Segments, JainMatrix Investments

Fig 2 – Syngene Business Segments, JainMatrix Investments

  • With a laboratory area of 9 lakh sq. ft., Syngene currently services over 200 clients, ranging from MNCs to start-ups, including 8 of the top 10 global firms. It has dedicated research centers with Bristol-Myers Squibb, Abbott Labs and Baxter International.
  • Syngene helps its clients in conducting discovery (from hit to candidate selection), development (including pre-clinical and clinical trials, analytical and bio-analytical evaluation, formulation development and stability studies) and pilot manufacturing (scale-up, pre-clinical and clinical supplies) each with distinctive economic advantage.
  • In addition to research staff dedicated to a particular client, Syngene also offers resources through flexible business models like a full-time equivalent (“FTE”) and fee-for-service (“FFS”).
  • Syngene is planning investments in the next three-four years of a new mfg. facility, a center for work on biologics and formulations (Bengaluru) and also to expand existing facilities. This will be with funds raised from internal accruals and debt.
  • The leadership team is Kiran Mazumdar Shaw (MD) and Peter Bains (ED/ CEO).
  • Silver Leaf Oak, a private equity fund acquired 10% stake in Syngene in 2014.

Financials of Syngene

  • The Income, EBITDA and Profits have grown at 18.2%, 30% and 31.3% CAGR resp. over 5 years. See Fig 3.
  • The EPS, adjusted for the IPO has grown by 31.4% CAGR over 5 years.
Syngene Financials, JainMatrix Investments

Fig 3 – Syngene Financials, JainMatrix Investments

  • The business has been Cash Flow positive for 4 of the last 6 years. Of late, the firm has been investing heavily in its business. In FY15, the Free Cash Flow has been positive. See Fig.4.
  • RoCE and RoE metrics are quite impressive, which are at 30.5% & 20.5%.
  • Finance costs decreased by 94% in FY14 (from 6.5 cr. in FY13) on account of repayment of debt. In addition there were forex losses in FY15. As a result, in FY15 we see that there is negative cash from operations and positive flow from Investments.
Cash Flows, JainMatrix Investments

Fig 4 – Cash Flows (Chart by JainMatrix Investments)

  • Shareholding Pattern (%): Post-issue the shareholding pattern will be Promoter Group 74.5%, Institutions and Public 22.1% and Non Promoter & Non Public is 3.3%. See Fig 5.
Shareholding Patterns, JainMatrix Investments

Fig 5 – Shareholding Patterns, JainMatrix Investments

Business and Industry Notes 

  • CRO firms offer outsourced services to support R&D driven organizations across industrial sectors like pharmaceuticals, biotechnology, biopharmaceuticals, nutraceuticals, animal health, agro-chemicals, cosmetics and electronics.
  • CRO services for pharma sector span the range of R&D activities from New Molecular Entity (“NME”) discovery, development and manufacturing.
  • CROs offer clients an opportunity to manage costs, have flexible operations and realize efficiencies in R&D and related functions. However most CRO service providers specialize to some degree based on the needs of their clients and the market in which they operate.
  • As per Frost & Sullivan estimates, global R&D expenditure for the pharma industry in 2014 was approximately US$139 billion, of which US$105 billion could have potentially been outsourced. According to the report, outsourcing penetration for the CRO market for development services as of 2014 is estimated to be 27.3% of the potential outsourcing market for development services, but poised to grow to 38.7% in 2019, reflecting a CAGR of 12.5%.
  • Growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D. The CRO industry has grown substantially in recent years and there is also an opportunity to grow through an increase in market share.

Positives for the IPO

  • Syngene has plans for capex of Rs 1200 cr. over the next 3‐4 years. Out of this, one half would be for expanding existing facilities and the rest for setting up a new facility at Mangalore.
  • Syngene has 2,096 scientists, including 259 PhDs, and 1,661 scientists with master’s degree. Resource knowledge and experience is the major asset for Syngene.
  • Syngene has a good track record in compliance, getting a clean chit in three audits conducted by the US Food and Drug Administration (USFDA) over the past 18 months.
  • Syngene has already signed commercial supply contract for 3 molecules with its clients. Besides, the company has a list of potential molecules lined up from its clients to sustain its base business over the medium term.
  • Syngene is the first listing of an Indian pharma CRO firm. It is thus a leader and an innovative company and may receive a premium valuation.
  • There is a good synergy between the Biocon (pharma manufacturing) and Syngene (CRO). This will help Syngene in its planned growth.

Negatives and Risks

  • Syngene’s top 10 clients gave 72% of its revenues in FY15. There is a dependency on a few large clients, and the financials of Syngene can be affected in case loss of any of these clients.
  • There are a number of pending litigations against Syngene, under heads Tax Matters, Threatened Litigation and Pending CIL Litigation (former subsidiary); and Litigation by and against the Promoter, all numbering close to 100. An adverse outcome in these proceedings may affect the reputation and financials, and harm future business.
  • The FY14 balance sheet showed Contingent Liabilities totaling to Rs. 181.3 cr. which if materialized may adversely affect the profitability of the company.
  • Intensifying competition for pharma CRO services.
  • The Syngene financial performance can be affected by INR/ USD price fluctuations. In addition, international economic, taxation and outsourcing policy changes can materially affected operations.
  • Ability to attract, retain and develop key personnel and R&D talent.
  • The pharma sector faces many IP related compliances and legal challenges. Syngene needs to ensure it stays protected and safe from such issues.
  • Clients need high secrecy and confidentiality as R&D work is for multi-billion dollar new drugs. Syngene needs to ensure that at the group and employee level, information stays safe.
  • Regulatory tightening of clinical trials in India has slowed the work on Indian clinical trials.

Benchmarking

As there are no listed companies in India that are directly comparable to Syngene, we benchmark the firm against IT services, KPO and PHARMA firms like Biocon, eClerx, Glenmark and Mphasis Ltd.

Benchmarking, JainMatrix Investments

Fig 6 – Benchmarking of Syngene, JainMatrix Investments

  • Based on Fig 6, we come to the following conclusions.
  • Syngene revenue growth is impressive. On margin parameters, it ranks second after eClerx.
  • Syngene rates high on RoCE and RoE.
  • For an early stage company, Syngene appears good in terms of low debt and financials.
  • Syngene’s closest listed peer outside India is a Chinese firm, Wuxi Pharmatech, which is four times bigger in revenues, and is trading at a PE of 30.

Overall Opinion

  • The Syngene IPO is a first time listing from a new and high potential sector of pharma CRO.
  • This business builds on Indian advantages in IT services and KPO, with a pharma sector focus. The benefits have shifted from cost arbitrage to enhancing R&D productivity and reducing time to market.
  • The promoters have an average record of providing returns to shareholders in Biocon. However, Syngene represents a high potential business segment, which is being spun off.
  • The success of competition, eg Wuxi Pharmatech, indicates that there are ample opportunities for Syngene to grow and compete in the global market.
  • We are positive on the prospects of Syngene in this IPO offering. Buy at cut off with a 2-3 year investment perspective.

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 Syngene International Limited 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.

Adlabs IPO – Last Day Update

———————————————————————————————————-

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

_______________________________________________________________________

  • 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.

JainMatrix Knowledge Base:

See other useful reports.

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