By Geetanjali Kedia

UFO Moviez is entering the primary market on Tuesday 28^th April 2015, through a Rs. 600 crore offer for sale by promoters, employees and 2 PE investors, priced in the band of Rs. 615 to Rs. 625 per share. The issue, comprising sale of 96 lakh to 98 lakh equity shares of Rs. 10 each, which represents 37.07% and 37.67% of the post issue paid-up capital at the upper and lower price band respectively. To be listed on NSE and BSE, the issue closes on Thursday 30^th April.

UFO Moviez is India’s largest digital cinema distributor, reaching out to 4,911 screens (covering ~54% of Indian market, in terms of screens) and 1,715 screens across Nepal, Middle East, Israel, Mexico and US, and releasing majority of the movies in the country on its platform. Company earns revenue from three sources:

1. From distributors (accounted for half of FY14 revenue): Earned on per show basis, for digit film prints delivered on its network.
2. From exhibitors (quarter of FY14 revenue): Sale and monthly lease rentals of digital equipment at individual cinemas.
3. In-house advertising (quarter of FY14 revenue): Connecting 1,669 advertisers to its ad-inventory of 3,770 in-cinema screens, mostly single-screen halls.

For FY14, company reported consolidated revenue of Rs. 421 crore, earning EBITDA of Rs. 132 crore. While its profit before tax (PBT) was Rs. 50 crore (11.8% margin), thanks to deferred tax credit of Rs.11 crore, net profit after minority interest stood at Rs. 47 crore, leading to an EPS of Rs. 18, on equity of Rs. 25.90 crore. For nine months ended 31^st December 2014, consolidated revenue rose to Rs. 357 crore with EBITDA of Rs. 121 crore and PBT of Rs. 52 crore (14.6% margin). While EBITDA and PBT margins expanded in FY15 with business growth, profit after tax and minority interest has not kept as-much pace, as carried forward losses of previous years have been exhausted and company is now paying taxes at the maximum chargeable rates. Thus, 9MFY15 net profit after minority interest is Rs. 37 crore, leading to an EPS of Rs. 14.23 for 9 months.

As of 31^st December 2014, company had total debt of Rs. 164 crore and cash equivalents of Rs. 63 crore. Its net worth stood at Rs. 442 crore, indicating a debt-equity ratio of 0.23:1. Networth of Rs. 442 crore largely comprises of security premium of Rs. 348 crore while the P&L carried a debit balance of Rs. 37.6 crore, as of 31^st March 2013. Since the IPO is a 100% secondary offering, no money will flow into the company’s books. Partial exit will be provided to PE investors UK’s 3i and US’ Providence Equity who are shareholders since 2008 and 2011, owning 21.40% and 35.73% stake as of date, respectively. Promoters Sanjay Gaikwad and Narendra Hete of Valuable Group will also participate in the offer for sale, in addition to some 25 odd employees.

Annualizing 9MFY15 earnings leads to FY15 expected EPS of Rs. 19, which discounts the offer price of Rs. 625 (at upper end) by PE multiple of 33 times, based on FY15 earnings. PE multiple of 33 times in a primary offering cannot be termed cheap!

Eros International, an Indian film distributor and co-producer, operating in the similar industry, having a bigger topline of Rs. 1,250 crore and higher net margins of 17-18% is currently trading at a PE multiple of 20 times. Another peer in the entertainment space, Zee Enterprises, with topline of Rs. 4,800 crore and net margins of 20% plus, is currently ruling at a PE multiple of 33 times. However, cinema exhibitors like PVR and Inox Leisure are ruling at PE multiples of 40x to 45x, which may be largely due to low float and some market making seen in both these stocks.

While the Red Herring Prospectus (RHP) dated 16^th April 2015 mentioned the company ‘may consider’ retail discount, none is being offered. It’s like taking away an ice-cream promised to a child! On a more serious note, retail discount would have been looked upon as a very investor-friendly move, as also, being relatively inexpensive for the selling shareholders, which would bode well for the company in the long term, given that the current pricing has not left much on the table.

In June 2014, promoters and PE investors had appointed bankers to sell the company for Rs. 800-1,200 crore. Today, the asking market cap is Rs. 1,619 crore (at Rs. 625 per share) and enterprise value of Rs. 1,719 crore. Thus, current momentum in the primary markets may have probably boosted their confidence to ask for this kind of rich valuations.

It is seen that current IPOs are being priced quite expensive by the issuers, which is largely based on the secondary market valuations of comparable listed peers, that too on the forward earnings. Despite forward earnings being prohibited by SEBI, while convincing an analyst to accept such exorbitant valuations, many-a-times, issuers and BRLMs compare them with forwarding PE multiples of listed peers, of course only off-the-record or unofficially. Also, some issues witness huge over-subscription in HNI category, which has interest cost as well, running into anywhere between 15% to 40% of the issue price, thus making the allotment to be finally a loss making investment. Post-listing price is shown as profitable and in good spirit by analysts and media, which actually includes the disguised interest cost which is not directly getting reflected, thus making the allotment simply non-profitable on a net basis.

For net margins in low-teens and moderate growth, the valuations do not appear very cheap. Already-listed peers in the entertainment vertical are available at attractive multiples, especially after the recent on-going correction in the broader market.

Disclosure: Not applying in the issue.