Adlabs Entertainment – IPO : Should you subscribe?

Investors usually subscribe to an IPO for one of the two reason; Listing gains or Long term potential. Since the Company is operating in a line of business which has seen another company receive massive response to its IPO, it makes sense to analyse the Company by keeping into mind its competitor.

The IPO scenario for 2015 has been lukewarm with only two Cos. hitting the primary markets with an IPO, out of which one had to call off the issue for lack of subscription even after an extension and the other had to cut down on the issue size to complete the offer.

If you are a risk averse investor, you should avoid the the initial public offering of theme park operator Adlabs Entertainment. Expensive valuation, limited operating history, high ongoing capital requirement as well as operating risks make the offer unattractive.

The company owns is currently operating two amusement parks — Imagica and Aquamagica — near Mumbai and revenue is primarily from park entry ticket sales, with food, other retail sales and rentals accounting for a fourth of the revenue. The company’s EBITDA for the first six months of 2014-15 was ₹4.6 crore. At the lower end of the IPO the valuation is at a high premium and depends a lot on the potential growth and success story of the Company.

In contrast, Wonderla Holidays, a listed player in this space, had its price band 115-125 at a P/E of about 16.08 – 17.48 and its EPS trades at around 15 times EBITDA and is also profitable at the net level. Wonderla also has a long operational history — its park in Kochi opened in 2000. As opposed to it Adlabs started its operations in only November 2013 and it goes back again to rest on the high operational uncertainties. The price band of ₹221-230 appears expensive, given that Adlabs is yet to generate net profits since its incorporation.

However, it needs mention that in the span of operations, the company has ramped up its operations well. In spite of ticket prices being at the high-end (compared with other parks in India), both Imagica and Aquamagica attracted over a million visitors in its first year of operations.

Risks:

Profitability: Revenue may get a boost as the first phase of its hotel is expected to be operational by March 2015. Other revenue sharing JVs such as the planned snow park in the same location could aid the sales growth. While the company’s revenue is growing, profitability remains a concern. Due to the high fixed cost, depreciation and interest cost, breakeven will take at least a couple of years.

High Debt: Having ramped up its operations in a small span of time, resulting in large capital expenses, Adlabs has racked up high debt. Its total debt was around ₹1,278 crore as of December 2014, mostly in long-term borrowings from banks. Loan servicing expenses (interest rate of around 13 per cent) was ₹54 crore in the first half of 2014-15.

The company plans to utilise the IPO proceeds to repay ₹330 crore of debt. Debt-to-equity ratio is expected to be around one time after the listing. However, in the next two-three years, debt may increase due to planned expansions in new locations such as Hyderabad, leading to higher leverage levels.

The issue opens on March 10 and closes on 12. The company plans to sell up to 20 lakh shares held by the current promoters along with a fresh issue of 183 lakh new shares. The price band is fixed at ₹221-230 per share. Retail investors (those investing less than ₹2 lakh) can get a discount of ₹12 on the issue price.

This is a high risk-return investment that could make or break wholly dependent on the market conditions in the next couple days. Wonderla received a terrific response to its IPO and has risen over 184% at its high of Rs.355 from its issue price of Rs.125. So one can expect decent listing gains assuming the shares get listed on a day when the market is not looking any adverse conditions. Also another factor to consider would be the fall in the share price of Wonderla since the announcement of Adlabs IPO. It means there is some interest in this counter and it could be worthwhile to take a risk.

If you are a long term investors not looking at listing gains, it is advisable to see how the listing plays out and get in when the interest in the stock cools down. It has a huge potential in the long term.

Follow up edit:

As was expected, the IPO received a lukewarm response with the issue being subscribed for only 20% of the total issue which has forced the company to not only extend the period by also slash the price band. The issue has been extension by three working days and is now open for subscription upto 17th of March and the revised price band is 180-215. It is evident that the company has a lot riding on the success of the IPO and the revision in the price band should infuse some interest in the issue.

As of 13th March, the portion allotted for QIBs has been subscribed for at 19%, NIIs at 11% & Retail investors at 42%, there by the total issue received a bid of only 20%.