Wonderla Holidays Q4FY17 and 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/8682" target="_blank" data-smartkarma-citation="entities:8682:1">Wonderla Holidays Ltd (WONH IN)</a> is one of the top operators of amusement parks in India predominantly in South Indian cities of Cochin, Bangalore, and Hyderabad. While Cochin and Bangalore parks are mature parks with over 10 yrs of operations, Hyderabad is a new park that commenced operation in FY16. The company is run by Chittilappilly family lead by founder and Vice-chairman Mr. Kochouseph Chittilappilly. He is also the chairman of one of the largest consumer durables in South India, V-Guard Industries.  The promoters own 71% interest in the company as of December 2016.Investment Rationale: <ul><li>Underpenetrated market- India has only 15 large amusement parks for a country which has 30 cities having a population of greater than 1.5 mn who are young and moving up the economic scale. Most of these parks are theme based parks, which provides Wonderla a general purpose amusement park a significant competitive advantage in a highly underpenetrated market.  For e.g. Hyderabad has Ramoji Film Studio which is also categorized as an amusement park but provides only film/Bollywood based entertainment options compared to Wonderla Hyderabad which has land and water rides.</li><li>Urbanisation- Rising urbanisation trends in India will see an increase in city population, the young population who have an improving discretionary spending will lead to higher footfalls at these parks which provide wholesome entertainment for the family at a reasonable price.</li><li>Highly cost competitive - The company’s CapEx for a park is substantially lower compared to its peers, as  30% of the rides in the park are manufactured in-house. Inhouse rides are 100-200% less expensive as compared to imported rides. In addition, the company has an in-house team for maintenance of both indigenous and imported rides, which provides significant savings on operating expenditure as well.</li></ul>Revenue growth-visibility<ul><li>We expect the net sales to grow at a CAGR of 21% till FY19e, with the newly launched Hyderabad Park being the main driver. The company intends to add 1 park in every 3-4 yrs which give visibility of revenue growth for a long period.</li><li>The company generates only 25% of its revenue from the non-ticket segment as on Q2 FY17. We expect this to converge towards the global standards where non-ticket revenues represent near 50% in the revenue mix.</li></ul>High FCF generation may lower external funding needs for future projects<ul><li> The company expects the Hyderabad park to generate Free Cash Flow from its 2nd year itself owing to low CapEx (30% in-house manufacturing) and an almost nil debt funding (funding through IPO proceeds). And with the commencement of Chennai Park between FY19-20, the company would be able to generate enough Free Cash Flow from its parks to develop all of its future projects majorly through internal accruals.</li></ul>Key risk<ul><li>Any competition in its area of operation may affect the profitability significantly. Although this scenario is unlikely as the pay-back period from an amusement park is near 8-9 yrs for Wonderla itself who’s CapEx is significantly lower compared to competitors. Hence it may be a lose-lose situation for both Wonderla and the competitor to establish their parks in the same city which may affect profitability on divided footfalls.</li><li>Any casualty or accidents from the rides may affect the footfalls for the firm. However, the Company takes immense care in this aspect which is evident from the fact that till date the company hasn’t witnessed any accident from a ride failure.</li></ul>Valuation and ViewThe company trades at an EV/EBITDA of 33x FY17e EBITDA, 21x FY18e EBITDA, 15x FY19e EBITDA and a PE of 50x FY17e EPS, 32x FY18e EPS  and  24x FY19e EPS. Although the valuation seems expensive, we believe that earnings growth will be strong in the medium term driven by higher utilisation of the Hyderabad Park. However, we also expect the growth trajectory of earnings to remain volatile as the company adds a new park in every 3-4 years as stated by the management. We are positive on the long-term prospects of this business given the low penetration and increasing economic prosperity of the young population.

Wonderla Holidays Ltd (WONH IN) is one of the top operators of amusement parks in India predominantly in South Indian cities of Cochin, Bangalore, and Hyderabad. While Cochin and Bangalore parks are mature parks with over 10 yrs of operations, Hyderabad is a new park that commenced operation in FY16. The company is run by Chittilappilly family lead by founder and Vice-chairman Mr. Kochouseph Chittilappilly. He is also the chairman of one of the largest consumer durables in South India, V-Guard Industries.  The promoters own 71% interest in the company as of December 2016.Investment Rationale: Underpenetrated market- India has only 15 large amusement parks for a country which has 30 cities having a population of greater than 1.5 mn who are young and moving up the economic scale. Most of these parks are theme based parks, which provides Wonderla a general purpose amusement park a significant competitive advantage in a highly underpenetrated market.  For e.g. Hyderabad has Ramoji Film Studio which is also categorized as an amusement park but provides only film/Bollywood based entertainment options compared to Wonderla Hyderabad which has land and water rides.Urbanisation- Rising urbanisation trends in India will see an increase in city population, the young population who have an improving discretionary spending will lead to higher footfalls at these parks which provide wholesome entertainment for the family at a reasonable price.Highly cost competitive - The company’s CapEx for a park is substantially lower compared to its peers, as  30% of the rides in the park are manufactured in-house. Inhouse rides are 100-200% less expensive as compared to imported rides. In addition, the company has an in-house team for maintenance of both indigenous and imported rides, which provides significant savings on operating expenditure as well.Revenue growth-visibilityWe expect the net sales to grow at a CAGR of 21% till FY19e, with the newly launched Hyderabad Park being the main driver. The company intends to add 1 park in every 3-4 yrs which give visibility of revenue growth for a long period.The company generates only 25% of its revenue from the non-ticket segment as on Q2 FY17. We expect this to converge towards the global standards where non-ticket revenues represent near 50% in the revenue mix.High FCF generation may lower external funding needs for future projects The company expects the Hyderabad park to generate Free Cash Flow from its 2nd year itself owing to low CapEx (30% in-house manufacturing) and an almost nil debt funding (funding through IPO proceeds). And with the commencement of Chennai Park between FY19-20, the company would be able to generate enough Free Cash Flow from its parks to develop all of its future projects majorly through internal accruals.Key riskAny competition in its area of operation may affect the profitability significantly. Although this scenario is unlikely as the pay-back period from an amusement park is near 8-9 yrs for Wonderla itself who’s CapEx is significantly lower compared to competitors. Hence it may be a lose-lose situation for both Wonderla and the competitor to establish their parks in the same city which may affect profitability on divided footfalls.Any casualty or accidents from the rides may affect the footfalls for the firm. However, the Company takes immense care in this aspect which is evident from the fact that till date the company hasn’t witnessed any accident from a ride failure.Valuation and ViewThe company trades at an EV/EBITDA of 33x FY17e EBITDA, 21x FY18e EBITDA, 15x FY19e EBITDA and a PE of 50x FY17e EPS, 32x FY18e EPS  and  24x FY19e EPS. Although the valuation seems expensive, we believe that earnings growth will be strong in the medium term driven by higher utilisation of the Hyderabad Park. However, we also expect the growth trajectory of earnings to remain volatile as the company adds a new park in every 3-4 years as stated by the management. We are positive on the long-term prospects of this business given the low penetration and increasing economic prosperity of the young population.

Wonderla Holidays Ltd (WONH IN) Wonderla Holidays- A Ride on Young India!!!