Adlabs Entertainment IPO opens: Should you subscribe?

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Adlabs Entertainment has opened its Rs 470 crore public issue for subscription today. The issue, which will close on March 12, consists of a fresh issue of 183.26 lakh shares and an offer for sale of 20 lakh shares by Thrill Park.

The company, which runs an amusement park - Adlabs Imagica, is going to issue 203.26 lakh equity shares at a price band of Rs 221-230 apiece.

Adlabs, promoted by Manmohan Shetty (the former promoter of Adlabs Films) and Thrill Park, intends to utilise the net proceeds (fresh issue money) for partial repayment or pre-payment of the consortium loan and general corporate purposes. Consortium loan stood at Rs 1,100 crore and the company will use Rs 330 crore for repayment of this loan.

“We believe that such repayment/pre-payment will help reduce outstanding indebtedness and debt-equity ratio,” says the company. Post issue, the promoters shareholding will decrease to 57 percent from 77 percent.

Brokerages have mixed opinion on the issue and all of them believe it is a long term story.

According to Motilal Oswal and Angel Broking, the issue is highly expensive even at its lower end of the price band. However, ICICIdirect, Emkay and Sharekhan advise subscribing to the issue with a long term view.

“Adlabs stands to gain from operating leverage once all three properties are fully functional and witness an increase in footfall. At an EV/CE of 1.7x we note that Adlabs demands a significant discount to both its domestic and global peers. We assign a subscribe rating to the IPO,” says Emkay.

Imagica – The Theme Park, is a part of Adlabs Mumbai, a ‘one-stop’ entertainment destination. Adlabs Mumbai also includes Aquamagica, a water park, which became fully operational on October 1, 2014, and a family hotel, Novotel Imagica Khopoli, the first phase of which is expected to be completed by March 2015 (with 116 rooms). Adlabs Mumbai, spread over an aggregate area of approximately 132 acres, is located at Khalapur, which is on the Mumbai – Pune Expressway.

According to ICICIdirect, the EV/EBITDA of 10.0x is in line with global peer average like Six Flags Entertainment Corp and SeaWorld Entertainment Inc. Adlabs’ strategic location near Mumbai and Pune, good business potential & brand name and an estimated hourly capacity of 15,000 (Imagica) and 5,450 (Aquamagica) make a strong case for long term play, feels the brokerage. Further, a large part of the company’s capex is already done. The loan repayment will help lower interest outgo while surplus land of 170 acres and diverse revenue streams offer enough incentives for a long term investor to subscribe to the IPO, it adds.

Sharekhan too believes the company is more suitable for the long-term investors looking at the asset-backed stable cash flow generating business.

However, Motilal Oswal says even in the most bullish case it does not see any upsides in the stock.

The brokerage feels the IPO price of Rs 230 apiece is valued expensively compared to its listed peer Wonderla Holidays and international companies.

Angel Broking, too, says even at the lower end of the price band, the company looks expensive compared to its close peers like Wonderla Holidays which is already making profits and has a healthy balance sheet.

"Although the outlook of the industry is promising, the company is still incurring losses due to initial debt funded expansion and has a limited operating history. Further, the management has only one year experience in managing parks.  The ability of the company to improve margins along with successful geographic expansion over the years remains to be seen," says Motilal Oswal.

Angel Broking believes lower utilization coupled with higher interest and depreciation is likely to keep the bottom-line in the red in the near-term.

For FY2014, Adlabs Imagica reported a topline of Rs 103.7 crore and a loss of Rs 52.4 crore on the bottomline front. For 1HFY2015, the company has reported a topline of Rs 72.2 crore and a net loss of Rs 53.3 crore.

Key concerns according to these brokerages are: higher operating cost, interest and depreciation cost to keep pressure on bottom-line; slowdown in the macro environment; risk of accidents that have a detrimental effect on brand value; competition from new theme parks in the region; and outbreak of contagious diseases.

Adlabs Entertainment on Monday raised Rs 60.16 crore by finalising allocation of 27,22,135 equity shares to anchor investors Daiwa India Stock Active Mother Fund, HDTC Infrastructure Fund, Axis Mutual Fund, L&T Mutual Fund and IL&FS Trust Co (Forefront Alternative Equity Scheme) at Rs 221 per equity share (at lower end of price band).

The minimum bid lot is 65 equity shares and in multiples of 65 equity shares thereafter. The issue constitutes 25.44 percent of the post-issue paid-up equity share capital of the company.

The company in consultation with the global co-ordinators and lead managers, offered a discount of Rs 12 on the issue price to retail individual bidders.

The equity shares are proposed to be listed on the BSE and the NSE.

Centrum Capital, Deutsche Equities India Private Ltd and Kotak Mahindra Capital Company are book running lead managers to the issue. Link Intime India Private Limited is the registrar.