The theme park business offers good growth with high margins, but brace for high capital needs and delayed payoffs from new parks

Investors with a high-risk appetite can subscribe to the initial public offering (IPO) of amusement park company Wonderla Holidays.

The company has been operating a theme park in Kochi since 2000 and another near Bangalore since 2005.

The IPO proceeds of over ₹175 crore will be primarily used to build a new park in Hyderabad.

Wonderla’s strong brand name in its local markets, healthy revenue and profit growth and stable financial position are positives.

But given the company’s growth prospects for the next two years, the offer is not cheap. The price band of ₹115-125 per share discounts the annualised 2013-14 earnings by 16-17 times on a post-issue basis.

There are no local peers and global comparables such as the US-based Six Flags and Cedar Fair trade at 15-30 times their estimated 2014 earnings.

Wonderla’s revenues have grown at an annual rate of 20 per cent in the last five years and net profits at 30 per cent in the same period. Ticket sales in its two parks made up 80 per cent of revenue. This, along with food and merchandise sales, brought in revenue of ₹103 crore in the first nine months of 2013-14.

Sustained growth

The three-star resort in Bangalore added ₹4.7 crore to the top line. This segment is expected to break-even this year. Annual sales increased 17 per cent and 24 per cent at Kochi and Bangalore respectively, thanks to growth in the number of visitors and revenue per visitor.

Revenue growth may remain in this range, although there was some slowdown in footfall growth in Kochi in the last two years. Growth is expected to pick up when the Hyderabad park is developed and ramps-up in two-three years.

Wonderla’s operating margin has been over 45 per cent and net margin over 25 per cent in the last three years.

Margins are likely to remain at these levels in the next two years; but in the ramp-up phase of new parks, net margin may drop to below 20 per cent. The company also makes rides at its in-house facility in Kochi. Of the 110 wet and dry rides in its two existing parks, nearly three fourths were built locally. In-house manufacture should help reduce foreign currency spending and also provide the skills for ongoing maintenance.

Stable financials

Wonderla has a low leverage, with a debt-to-equity ratio of around 0.1 times as of December 2013. Regularly paying off loans has helped the company maintain debt at low levels. Borrowings are, however, expected to increase in the next few years with its plans to expand its park in Hyderabad and possibly launch a park in Chennai.

Robust cash generation from operations, which was ₹42 crore in the nine months of 2013-14 so far, should help maintain debt at comfortable levels. The company has also been a regular dividend payer, giving out 15 per cent on a face value of ₹10 per share.

Risks

While the business is a good consumption play and Wonderla’s model has worked well so far, there are a few key risks that investors must brace for.

For one, payoffs from the planned park in Hyderabad may take time to kick in. Unlike in its other locations, in Hyderabad, Wonderla has to fend off competition from other established theme parks.

Two, theme parks in India do witness accidents and any episode of this nature can lead to tighter regulations and dent a brand’s credibility. There have been nine accidents in the past at Wonderla’s parks.

Three, the business is likely to prove quite capital-intensive, as wear and tear and replacement of equipment may have to be undertaken at periodic intervals; this is especially true of Wonderla’s older theme parks where the equipment are ageing. Attracting visitors also requires constantly adding new rides.

As amusement parks require large parcels of land, expansion could be held up by issues in land acquisition.

In Hyderabad where land has already been bought, pending litigation could affect future expansion plans.

There are, however, no issues for the planned first-stage development. The business is also seasonal as well as cyclical.

For instance, unexpected rains in Kochi last year during the vacation period impacted the number of visitors.

Investors can subscribe to the offer that is open from April 21 to 23. Of the total offer, 35 per cent is earmarked for retail investors.

(This article was published on April 20, 2014)
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