UFO Moviez-Q4 FY17 and 12 Month FY17 Results Update

India focused Portfolio Advisory - Exp of 40+years, Das Capital Management and Advisors

Arun Thirumalai

India focused Portfolio Advisory - Exp of 40+years

Das Capital Management and Advisors

Das Capital is a research boutique with an aim to continuously map and plan the investment needs of investors focused on India. We have a six member research team with a combined experience of over 40 years as a part of our investment wing. Our team assisted in the setup of Premji Investments, which was one of India’s first family offices focused to managing Mr.Azim Premji personal wealth. We also serve as a research team to two Indian private equity energy funds “Small is Beautiful” and “KSK Emerging India Energy Fund”.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/24124" target="_blank" data-smartkarma-citation="entities:24124:1">UFO Moviez India Ltd (UFOM IN)</a> is a market leader in digital theatre cinema space with nearly 50% market share. The company digitises and distributes movies in Cinema halls across India through its platform.It generates revenue by charging a virtual print fee from distributors for use of its digital platform, equipment lease rentals from exhibitors for using its slide projector and In-Cinema advertisement which is a high margin and fast growing segment.The promoters lead by Mr.Sanjay Gaikwad own 28.97% of the company as of FY17.Gradual shift from pure distribution model to low CapEx and high margin businesses <ul><li>The company is heavily focussing on In-Cinema advertising that is growing at a rapid pace and the management expects it to contribute near 50% of the total revenue in FY19 from 27% in FY16.This is also a high margin business with nearly 40% operating profit that may eventually improve the blended margin from around 30% in FY16.</li><li>At the same time, the company is toning down its CapEx intensive segments that are also low margin businesses. The company’s contract with major Hollywood studios to run their films in its platform i.e. D-Cinema (discussed later in this report) is expiring in FY19. Although this segment contributes near 27% of revenues as on FY16, the company doesn't intend to renew the contract as it is low margin and working capital intensive. Although the sales will come down in the medium term due to this but cash flow generation and profitability is expected to improve.</li></ul>Future growth drivers are also high margin businesses <ul><li>The company is expanding the advertisers reach in deep rural areas through its Caravan model where it shows movies in remote rural pockets that are outside the reach of traditional mediums like Television etc. The company expects an operating margin of 45-50% from this business model as well.</li><li>The company has developed an asset light Franchise model called UFO Novo cinemas to build 2-3 screen miniplexes where it provides its technology to the franchisee who invest a majority of the CapEx, for a better consumer experience.The company expects near 45% operating margin from this business as well going forward.</li></ul>Valuation<ul><li>We believe that In-Cinema advertising will be the key growth driver for the company in the coming years as it represents only 1% of total advertising spend in India which in our opinion is significantly low as this format has relatively better attention span compared to other mediums.Along with that, the advertising inventory for UFO is only 4 min in FY16 and the company intends to scale it up to 15 min in 5-7 yrs, giving ample scope for growth.</li><li>The company trades at a PE of 18x FY17e,12x FY18e and 11x FY19e EPS and an EV/EBITDA of 6x FY17e, 4.2x FY18e and 4x FY19e EBITDA  which we believe is fairly valued and is pricing in the medium term drop in sales growth, mentioned above. It has started to generate Free Cash Flow in recent years as its CapEx cycle that started in 2004 is nearly complete. As a result, the company will have a significant cash that may also help in higher dividend payout as reflected in recent years.</li><li>Further, the realignment of the business model towards high growth and high margins businesses should help company bridge the valuation discount it currently trades at as compared to its peers like PVR and INOX Leisure.</li></ul>

UFO Moviez India Ltd (UFOM IN) is a market leader in digital theatre cinema space with nearly 50% market share. The company digitises and distributes movies in Cinema halls across India through its platform.It generates revenue by charging a virtual print fee from distributors for use of its digital platform, equipment lease rentals from exhibitors for using its slide projector and In-Cinema advertisement which is a high margin and fast growing segment.The promoters lead by Mr.Sanjay Gaikwad own 28.97% of the company as of FY17.Gradual shift from pure distribution model to low CapEx and high margin businesses  The company is heavily focussing on In-Cinema advertising that is growing at a rapid pace and the management expects it to contribute near 50% of the total revenue in FY19 from 27% in FY16.This is also a high margin business with nearly 40% operating profit that may eventually improve the blended margin from around 30% in FY16.At the same time, the company is toning down its CapEx intensive segments that are also low margin businesses. The company’s contract with major Hollywood studios to run their films in its platform i.e. D-Cinema (discussed later in this report) is expiring in FY19. Although this segment contributes near 27% of revenues as on FY16, the company doesn't intend to renew the contract as it is low margin and working capital intensive. Although the sales will come down in the medium term due to this but cash flow generation and profitability is expected to improve.Future growth drivers are also high margin businesses The company is expanding the advertisers reach in deep rural areas through its Caravan model where it shows movies in remote rural pockets that are outside the reach of traditional mediums like Television etc. The company expects an operating margin of 45-50% from this business model as well.The company has developed an asset light Franchise model called UFO Novo cinemas to build 2-3 screen miniplexes where it provides its technology to the franchisee who invest a majority of the CapEx, for a better consumer experience.The company expects near 45% operating margin from this business as well going forward.ValuationWe believe that In-Cinema advertising will be the key growth driver for the company in the coming years as it represents only 1% of total advertising spend in India which in our opinion is significantly low as this format has relatively better attention span compared to other mediums.Along with that, the advertising inventory for UFO is only 4 min in FY16 and the company intends to scale it up to 15 min in 5-7 yrs, giving ample scope for growth.The company trades at a PE of 18x FY17e,12x FY18e and 11x FY19e EPS and an EV/EBITDA of 6x FY17e, 4.2x FY18e and 4x FY19e EBITDA  which we believe is fairly valued and is pricing in the medium term drop in sales growth, mentioned above. It has started to generate Free Cash Flow in recent years as its CapEx cycle that started in 2004 is nearly complete. As a result, the company will have a significant cash that may also help in higher dividend payout as reflected in recent years.Further, the realignment of the business model towards high growth and high margins businesses should help company bridge the valuation discount it currently trades at as compared to its peers like PVR and INOX Leisure.

UFO Moviez India Ltd

UFO Moviez - See You at the Movies!!