Subscribe to Adlabs IPO with long term view: ICICIdirect

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Subscribe to Adlabs IPO with long term view: ICICIdirect

Adlabs Entertainment IPO review by ICICIdirect: Adlabs Entertainment (Adlabs) is one of the leading amusement park operators in India. The company’s theme park under the brand name Imagica became fully operational on November 2013. In addition, the company has also commissioned a water park in October 2014 and is also in the process of launching a hotel, which is expected to be operational in March 2015 with 116 rooms. In the process of this expansion the company leveraged its balance sheet to the tune of Rs 1,256 crore. Through this IPO, Adlabs intends to de-leverage its balance sheet by Rs 330 crore, which is the objective of the IPO. In H1FY15, total revenues and loss after tax were Rs 73.3 crore and Rs 53.5 crore, respectively. We expect revenues to increase at a CAGR of 42 percent over FY15E-18E. Investment Rationale Strategically located in attractive catchment area Adlabs is strategically located near the Mumbai - Pune Expressway, which attracts guests from Mumbai, Pune, the rest of Maharashtra and Gujarat. It can also attract pan-India guests and International tourists due to the proximity and connectivity of Adlabs Mumbai to Mumbai and Pune through the Mumbai - Pune Expressway. The proximity to Lonavala and Khandala will also help it to attract tourist. Competitive advantage through entry barriers Adlabs has first mover advantage in the business of theme and water parks as it is difficult to replicate a project of similar scale and size in the company’s catchment area due to high capex, scarcity of suitable land parcels on commercially viable terms and long gestation time. Well integrated player Apart from theme and water park, the company is launching a hotel (which will attract guests for a longer stay) and a snow park. The company aims to take advantage of cross selling opportunities by offering various cost promotion and combination packages of admission tickets and stay at the hotel. In addition, the company also aims to boost revenues by hosting wedding receptions, parties, conferences & meetings and other corporate events. Concerns -Scalability issues due to highly leveraged balance sheet -High fixed cost structure and debt restricts PAT margin expansion -Risk of accidents or mishaps at any of the parks Valuation At the IPO price band of Rs 221-230, the stock is available at 10.7x-10.4x in FY18E post issue diluted EV/EBITDA. 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. 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 o ffer enough incentives for a long term investor to subscribe to the IPO. We recommend subscribe to this issue.