Adlabs

Update (13^th March 2015, 12 noon): Due to lower appetite from institutional investors, price band of the issue has been lowered to Rs. 181-215 per share and issue closing has been extended to Tuesday, 17^th March 2015. The fundamentals of the issue however remain intact and we maintain our positive view and continue to recommend a ‘susbcribe’.

By Geetanjali Kedia

Adlabs Entertainment is entering the primary market on Tuesday 10^th March 2015, through an IPO of 2.03 crore equity shares of Rs. 10 each, in the price band of Rs. 221 to Rs. 230 per share, with retail discount of Rs 12 per share. The issue comprises a fresh issue of 1.83 crore equity shares and offer for sale of 0.20 crore shares by promoter. The issue represents 25.44% of the post issue paid-up capital and will raise Rs. 447 crore and Rs. 465 crore, at the lower and upper price band, respectively. To be listed on NSE and BSE, the issue closes on Thursday 12^th March.

Since the IPO is under Regulation 26(2) of SEBI ICDR, retail portion of the issue is very low, at just 10%, against the regular 35% portion size (QIB portion is higher at 75%). So, at the upper band, company is seeking to raise under Rs. 47 crore from retail investor i.e. about 2,400 retail applications of Rs 2 lakh each will suffice for the retail book to sail through. Thus, retail portion being small, may see good participation, with high probability of over-subscription.

Incubated by Manmohan Shetty, Adlabs Entertainment operates a large format theme park under the brand ‘Imagica’ in Khopoli, near Mumbai Pune Expressway, since April 2013, with daily guest capacity of 15,000 persons. A water park named ‘Aquamagica’ is operational since October 2014, with per day guest capacity of 5,000 persons, while a 287-key family hotel, adjoining the park and under management contract with Novotel, is expected to commence operations in phases, with 116 keys scheduled to be operational from April 2015.

The entire project (theme park, water park and hotel) was set-up at a very competitive cost, with investment of just Rs. 1,650 crore, against estimates of Rs. 2,200 crore, and in a record time of about 2 years. The funding mix comprises Rs. 550 crore of equity and Rs. 1,100 crore of debt. This IPO is primarily being undertaken for part-repayment of debt to the tune of Rs. 330 crore, and balance for general corporate purposes. Promoters are cashing-in 2 million shares, to the extent of Rs. 46 crore, shrinking their holding to 56.84% post IPO, from current 77.01%.  

Being operational for less than 2 years now, Imagica has seen good ramp-up of footfalls, with Q3FY15 footfalls at 2.92 lakh, as against 1.81 lakh and 2.01 lakh in Q1 and Q2 FY15 respectively. Company clocked income of Rs. 73 crore during H1FY15, as against Rs. 107 crore earned in FY14. Since H2 accounts for 60-65% of the footfalls for Imagica, its FY15 revenue is likely to grow by 70% YoY to over Rs. 180 crore.

In the first year of operation itself, company turned EBITDA-positive, recording EBITDA of Rs. 6.97 crore in FY14. EBITDA for first half of FY15 stood at Rs. 4.57 crore. Since theme parks are primarily fixed cost business; thus having high operating lever, as footfalls ramp-up, company has potential to clock EBITDA margins of anywhere between 44%- 50%. As depreciation burden is quite high at Rs. 30.50 crore for FY14 and Rs. 36.80 crore for H1FY15, coupled with substantial interest burden of Rs. 43 crore for FY14 and Rs. 54 crore for H1FY15, capex being largely debt-funded, company reported a negative bottomline of Rs. 52.5 crore and Rs. 53.5 crore for FY14 and H1FY15 respectively. 

As of 30^th September 2014, company’s equity was at Rs. 48.46 crore, while net worth stood at Rs. 260 crore, resulting in BVPS of Rs. 54. Company had debt of Rs. 1,117 crore (excluding compulsorily convertible debentures worth Rs. 144 crore, converted to equity at present) and liquid investments of Rs. 20 crore. Post IPO, net debt will decline by about 30% to Rs. 767 crore, which will proportionately reduce interest outgo from FY16 onwards.   

In October 2014, company had undertaken a pre-IPO placement worth Rs 50 crore to PE fund NYLIM Jacob Ballas, at an effective price of Rs. 187 per share. Post CCD conversion and pre-IPO placement, company’s equity has expanded to Rs. 61.57 crore currently, which will further rise to Rs. 79.90 crore, post the IPO.  

Since company is loss making and has only marginal EBITDA, EV/EBITDA or PE multiple based valuation cannot be undertaken. We have tried to analyze the IPO based on the project cost and investment made till date, which is as under:

(in Rs. crore, except when otherwise mentioned)

In the above table, adding net debt of Rs. 767 crore to the pre-money equity value, we get the enterprise value (on pre-money basis) at both lower and upper price bands. Since project cost and operating cash losses for FY14 and FY15 are already funded by the company, they are reduced from the enterprise value. Also, retail investor will not pay Rs. 221 or Rs. 230, as discount of Rs. 12 is being offered. Hence, deducting retail discount, we arrive at a premium of Rs. 399 crore to the investment made by the company till date, at the upper price band. This premium approximately equals to interest cost @ 12% per annum on Rs. 1,650 crore for 2 years. Note that company is currently servicing debt at interest rate of 13%+ from a consortium of lenders. Thus, the offer is being made at cost, which is both fair and attractive, given the minimum capex risk now and its operations being at a tipping point.

As the retail book is just 10%, retail discount of Rs. 12 reduces issue size by just Rs. 2.40 crore. Besides a win-win, this move is seen very investor-friendly. Since company’s bottomline is in the red, pricing is attractive. If it was earning positive net profit, pricing would have definitely been at a hefty premium, given the company’s growth rate, strategic location, unique offering in the recession-proof entertainment industry and upcoming hotel getting operational very soon.

Fundamentally the issue is both impressive and attractively-priced. Company is a unique play with strong managerial capabilities and good brand recall among customers. IPO is sure to give listing gains, but we advise to look at this as a long term investment, which will give respectable returns over next 3-5 years.

Disclosure: Planning to apply in the issue.