Yet another IPO is here! This times it’s Adlabs Entertainment.

If you’re an old timer, you’re thinking, “What? Again?”

Manmohan Shetty is back. In his last avatar he headed Adlabs Films, which was sold to Reliance (Anil Ambani) and renamed Reliance Mediaworks, which delisted in 2014. That’s a different company – it processed films, owned and operated multiplex theaters and even an IMAX dome in Mumbai.

This one, Adlabs Entertainment, is about theme parks. We’ve seen theme parks earlier – as part of the Wonderla IPO, which we thought was a low priced IPO worth investing in. That stock has more than doubled, trading at Rs. 272 after the IPO at Rs. 125. (It opened in the markets at 160, we bought some, and exited after 230 or so)

What About This IPO?

Issue: 2.03 cr. shares at Rs. 221 to Rs. 230. (About 20 lakh shares to be sold by the promoters, rest to the company)

Proceeds of Rs. 420 cr. to the company.

A discount of Rs. 12 if you are retail (invest less than Rs. 200,000)

Lot size of 65 shares for the IPO.

Our Notes

They have a theme park between Mumbai and Pune , including a water park. One of the rides is a Dinosaur boat ride. We note this because it is of serious personal interest to us.

, including a water park. One of the rides is a Dinosaur boat ride. We note this because it is of serious personal interest to us. Tickets are 1900 for adults, 1600 for kids. Expensive, but this is the Mumbai crowd.

The park has 25 land rides and 14 water rides. (less than Wonderla which at IPO time was 20/35)

(less than Wonderla which at IPO time was 20/35) There’s a hotel with 116 rooms coming up soon, and another 171 will be added later.

coming up soon, and another will be added later. They are looking to expand into Hyderabad too. But this part is a little iffy.

into Hyderabad too. But this part is a little iffy. About 170 acres adjoining the Mumbai park, they want to develop properties . But approvals aren’t yet there, and that’s no mans land right now.

. But approvals aren’t yet there, and that’s no mans land right now. They’ve made losses in the first six months of this year (FY).

in the first six months of this year (FY). (6 months) 73 cr. revenue , and EBIDTA of about 4.6 cr .

, and EBIDTA of about . Loans of Rs. 1,060 cr. so interest costs alone were 54 cr. on the six months.

so interest costs alone were 54 cr. on the six months. Losses of more than 50 cr. for the first six months of the year

for the first six months of the year That big loan? They’ll use Rs. 330 cr from the IPO to pay back part of it . The company still has a loan of Rs. 730 cr. pending after this.

. The company pending after this. If they have Rs. 730 cr. of a loan at 13%, interest alone is Rs. 95 cr. a year

With just one park that’s currently generating Rs. 73 cr. revenue in 6 months.

With total 8 cr. shares post IPO, the Rs. 230 price values the company at Rs. 1800 cr.

Related Party Issues: Manmohan Shetty’s two daughters get paid Rs. 500,000 per month (each) for their consultancy and design services. That is higher than the gross compensation of their key executives and only marginally less than what they paid their CFO for FY 2014 (70 lakh per year approximately).

The company also has contracts to pay over 21 lakh rupees to Manmohan Shetty, per month, as rent. (But they haven’t used those properties recently, so no money was paid)

This is not a very big deal, but thought the public should know. It’s hidden in the print.

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Our Take

One park. Wonderla with three, and with an operational hotel, has done about Rs. 44 cr. of profits in nine months, and doesn’t have the debt burden. Adlabs has one park, will likely build one more, and has the only advantage that it’s close to Mumbai.

Adlabs is likely to struggle – it has to make 95 cr. of EBIDTA just to pay for the interest on the remaining loans after the IPO. The company gets Rs. 420 cr. from the IPO of which it will use 330 cr. to pay back loans. Of the remaining, we estimate about Rs. 20 cr. to Rs. 30 cr. will be issue expenses, and what’s left will be about Rs. 70 cr. which is not enough to make a huge difference in the future.

The company, in order to make this IPO worthwhile, would be at a 20 P/E number if

it made a net profit of Rs. 90 cr.

Add Rs. 80 cr. as interest,

another Rs. 20 cr. as depreciation,

and it has to make a gross profit of Rs. 200 cr.

Considering profit margins of 35%, that means revenues of around Rs. 500 cr.

Very very unlikely, considering current revenues will probably top out at Rs. 150 to 200 cr. max.

Essentially, the stock needs to see 2.5x revenue increases to only justify the IPO price. If we want the stock to double, we need to see an even more massive jump in revenue. Likely?

Wonderla is currently making about Rs. 200 cr. in revenues (trailing 12 months), in lower income cities (BLR, Cochin). Ticket prices are about half of what Adlabs charges (it charges Rs. 2000 per ticket, while Wonderla gets by with 1000 or so).

Remember also, Rs. 46 cr. of the IPO proceeds go to the promoter (a company called Thrill Park).

One bet could be property – which they plan to develop along side the park. We are not very kicked about property prices in such areas, or in fact anywhere in India nowadays.

This is ludicrously expensive for a company with one theme park, making losses, and which has very little chance of making the kind of money going forward. If you like these valuations you must buy a truckload of Wonderla, as it’s much cheaper in comparison.

Investors don’t seem to be kicked about it right now:

But of course the action’s all tomorrow, March 12, when the IPO closes.

Will we buy?

No.

But we’d like to take our kids there, for sure. Dinosaur boat ride sounds like fun! (But not at the Rs. 1900 per head price point)

Very important note: Look, we’re in a bull market. Any share can go up. In 2006, We didn’t like the GMR IPO issue. It went from 250 to 800. We looked like fools. Then after a 10:1 split the price is now less than Rs. 18 (which would be Rs. 180 for the 2006 IPO holders). That makes us look better. But remember, the price went 4x before it fell – anything can happen, don’t just trust us. We have effectively ditched a potential 4x return earlier. That’s our disclaimer.

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