Wonderla Holidays Ltd (WHL) is the largest amusement park chain in India with over 17 years of successful operations. WHL has been running amusement park in southern India through 3 operational parks in Kochi, Bangalore and Hyderabad. The company follows low capex model with its parks located near large cities with less than 7 years of payback period as against capex intensive holiday destination model. In order to tap huge 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 funded through its strong balance sheet and robust cash flows with negligible debt. The contribution from high margin non-ticket revenue has been increasing over the past 5-6 years from 14% in FY12 to 25% in FY17 and is expected to increase further to 28% in FY19E. We expect company’s revenue and PAT to grow at a CAGR of 18% and 46% respectively in FY17-19E (due to lower base of FY17). We recommend Buy on the stock with DCF based target price of Rs.465.
Key Investment argument
* Amusement park business: Huge opportunity to grow - Indian amusement park sector valued at Rs 29.3 bn in 2016 grew at 10.25%. The sector is very small as compared to Rs 1.675 trn (USD25 billion) global amusement park sector. It is at a nascent stage in India and is on the verge of transition. The park to population ratio is remarkably lower in India as compared to the USA market which has 400 theme parks for a population of 319 million. With rising income levels, increasing domestic tourism and favourable demographics, the sector is estimated to grow at a CAGR of 19% over the next 5 years to Rs 69.8 bn by end of 2021.
*Efficient business model with strong track record of running amusement parks - WHL has been running amusement park business efficiently for last 17 years with wide presence in southern India through 3 operational parks. The company follows low capex model where its parks are based on concept of giving an alternative option for leisure and entertainment near large cities as against capex intensive holiday destination model (like Adlabs). The company does not invest a large sum in creating huge real estate and aims for payback of less than 7 years from its parks. The asset light model helps it to generate high RoCEs of over 20% with zero debt balance sheet and strong operating cash flows.
*New and upcoming parks to drive growth. As part of its growth strategy, WHL 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 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 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 FY17and 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.
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.
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