The Hindu Business Line : Adlabs Films: Buy

Investors with a high-risk appetite can consider an exposure in Adlabs Films. The changing revenue mix in favour of content, distribution and film exhibition has transformed Adlabs’ business model into a highly scalable, although more risky, one. A promising line-up of films over the next couple of months and swift execution of its expansion in multiplexes are some of the growth triggers. Adlabs business blueprint could be closely tied to Reliance ADAG’s moves in the entertainment space.

At the current market price of Rs 471, the stock trades at about 24 times its likely one-year forward earnings per share, factoring in equity dilution. The June quarter numbers are yet to be announced, as the company has extended its financial year to June to give effect to the de-merger of the radio business.

The quarter is likely to have been a strong one given the continuing ramp up in theatre screens and its distribution of box-office hits such as Spiderman 3 and Bheja Fry.

Considering the nature of the business, where one or two hits have the ability to magnify profits, we would, however, prefer to take a longer-term view rather than go by quarterly performance. The stock would be suitable for investors with a two- to three-year perspective.

Led by content

In just about two years, Adlabs has seen its revenue mix change quite dramatically. The company previously derived a chunk of its revenues from the film processing business. It has been making rapid strides in the film exhibition space and with 100 screens under its fold, it is the larger of the multiplex operators and now ahead of PVR Cinemas.

Adlabs forayed into film distribution in 2006, bagging the overseas distribution rights for blockbuster hit Krrish. Subsequent moves in the distribution and production space have been so significant that almost half its revenues now come from this segment, as against less than 15 per cent a year earlier.

These forays have resulted in significant increase in consolidated revenues. For the 12-month period ended March 2007, consolidated revenues jumped 166 per cent to Rs 350 crore.

However, its fortunes have now become closely linked with success at the box office, which brings with it less predictable performance.

Margin pressures

There have, for one, been pressures on margins. Unlike 2006, when theatres were running full with Bollywood churning out a hit every month, 2007 has seen less inspiring content. With Adlabs also ramping up its theatre presence, more than tripling its screens from 31 in 2005-06 to 100 recently, it is bound to have felt the pressure of lower occupancy rates. Adlabs has also not had any significant success from its own production division so far, which has also acted as a drag on margins.

However, we expect profitability to improve over the next year as the new theatres stabilise operations. Better content from the film industry will also significantly boost profitability. Its production business, however, will be banking on getting at least a couple of hits out of its large portfolio of releases.

Promising pipeline

From a long-term perspective, we are inclined to be more positive about Adlabs’ production and distribution work. Now deeply entrenched in the film business with its corporate model of production funding, Adlabs works with reputed names in the business. It is in a tie-up with Ashok Amritraj’s Hyde Park Entertainment to produce cinema for international audiences. Together with MTV networks, it plans to release movies targeting the youth segment. The animation movie based on superstar Rajnikanth is also underway and likely to attract tremendous interest after the success of Sivaji. In the near-term, releases such as Ram Gopal Varma Ki Aag (loosely based on Sholay) and S arkaar 2 may hold promise.

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