Feature

Hop on to <br> the ride </br>

What makes Wonderla Holidays an attractive bet in the amusement park space

RA Chandroo

In a world where there are new restaurants and attractions opening up every day for lonely urbanites and weary travellers alike, travel listings and must-see lists on popular web portals serve as the greatest indicators of the popularity of these establishments. And if you were to check such sites in verdant Bengaluru, No.1 on the list of 248 things to do in the city happens to be a visit to an amusement park and in God’s Own Country, Kerala; No.4 on the list of 152 things to do in Kochi, too, is an amusement park. 

For 65-year-old Kochouseph Thomas Chittilappilly, the promoter of Wonderla Holidays, which runs both the parks, this is a rather unexpected outcome, considering that the founder of the Kerala-based V-Guard Industries had ventured into the business in 2000 to de-risk his manufacturing business, which was back then battling labour issues and weak demand.

What started off a single theme park called Veegaland in Kerala is now a successful zero-debt amusement business steered by Chittilappilly’s son Arun, largely spanning the south, with revenue of ₹182 crore and cash flows of ₹56 crore. And with plans to foray into newer markets such as Tamil Nadu and Andhra Pradesh, Wonderla has its eyes set on making a big splash in the amusement park business. 

The more the merrier

Footfalls should witness an uptick with the

commissioning of a new park in Hyderabad in 2016

A successful listing in 2014 is still paying off for investors. At ₹290, the stock is quoting a 132% premium over its issue price of ₹125, despite the biggest-ever sell-off by FIIs in August. At current prices, it is still reasonably valued at 22X estimated FY17 earnings, particularly in the light of growth over the next three to four years, driven by its upcoming Hyderabad project (see: The more the merrier).

There are very few businesses that can pass on the inflationary pressure and yet remain competitive without denting growth, and the amusement park business is one such example. Since 2009, Wonderla, wherein the promoters hold 71% stake, has seen a revenue CAGR of 15%, driven by rising footfalls and an average 11% annual hike in ticket prices (see: One-way ticket).

While its parks are now maturing — with the one in Kochi turning 15 years old and the Bengaluru one completing a decade in service -— the company is now looking to replicate the growth story on a bigger scale with a debut in Hyderabad and Chennai, for which it has already raised ₹181 crore by going public in 2014.

Betting on a wild ride

While amusement parks are nascent businesses in India and probably hold a lot more potential in terms of scale, buying them could make for a good compounding story. The world’s largest and oldest listed amusement park company in this space is the US-based Walt Disney World, which has become a 100-bagger over a span of 30 years, compounding its share price at 17% (excluding dividends of close to $1 per share; similar to its share price in 1984) and boasting of a market capitalisation of $174 billion (or close to ₹11.5 lakh crore in rupee terms).

One-way ticket

There has been consistent growth in revenue,

driven by footfalls and a hike in ticket prices 

Disney is an over 90-year-old company operating in one of the most mature markets of the world and its size and brand name by themselves serve as a great advantage. In comparison, India is a minuscule market, and the market cap of India’s two largest park operators — Wonderla and Adlabs Entertainment (Adlabs Imagica) -— is a mere ₹2,600 crore.

“It is difficult to compare them with their global peers as Indian parks are still pretty small. We do not know if some of these companies can actually scale up as this is not a simple business and it requires a huge amount of capital,” opines Vetri Subramaniam, chief investment officer of Religare Mutual Fund.

“In India, there have been only few success stories and to identify some of them, one needs to check whether their return on capital and business model is suited for the Indian environment,” adds Subramaniam. As on August 31, the fund house held ₹11 crore worth of Wonderla stock across three of its schemes, according to data from Value Research. 

Vetri Subramaniam, CIO, Religare Mutual FundWonderla, which has over 15 years of experience in managing two large-size parks, is currently making a return on capital of close to 46% after adjusting for the capital that is yet to employed in the business, such as investments and capital work in progress. What makes this capital-intensive business interesting and does it really reward capital? “Our Bengaluru and Kochi parks achieved break-even in the first year of their existence and at the park level, we still make close to 30-35% return on capital. It is a viable business if you use capital judiciously,” says managing director Arun. Though it is possible to break even soon depending on the project cost and customers, with this type of business, investors need to take a long-term view of how operating leverage will play out and what could be the future pay-offs. 

“One should understand that these properties have a life of 15-20 years and you cannot make money right in the first year. There is a huge amount of operating leverage that starts to kick in after the first two to three years of operation, which is when you start to make huge cash flows and return on capital,” says Kapil Bagla, CEO and director, Adlabs Entertainment. As far as capital is rewarded with decent return, even a capital-intensive business like an amusement park can be rewarding. And what could be the sources of such returns?

“In this business, first-mover advantage is very important. The second and the third player in the same market might lose out on costs, due to high real estate prices and the cost of imported rides,” says Vinay Khattar, senior vice-president and head of research at Edelweiss Financial Services. Because of their size and location, companies such as Wonderla have negligible competition, which allows them to gradually leverage on footfalls and increase ticket prices. Wonderla’s Kochi park, which was built about 15 years ago, has seen 4.3% compounded growth in footfalls and 11% growth in realisations since 2010. 

Right time, right place

“Today, to set up a park similar to the one we have in Bengaluru will require capex of close to ₹300 crore-350 crore, whereas we built this park for around ₹100 crore. Because of its cost, the new park would have to really work hard to compete at our ticket price,” says Arun. Based on the current footfalls, revenue mix and net profit margins, even to make an RoE of 20%, the new entrant will have to price its tickets at ₹1,300 per visitor.

Kapil Bagla, CEO and director, Adlabs EntertainmentWonderla Bengaluru’s average ticket price is ₹673 and the park makes an operating margin of 54% and return on capital in excess of 40%. Wonderla’s existing properties, which are built at one-third of today’s replacement cost, are its biggest advantage.

Today, to make the same kind of returns from a similar park, the payback period would have to be higher or the company would have to charge an extraordinarily high price to compensate for the cost. “The second important aspect of our strategy is that we have been looking for medium-sized projects so that the tickets are affordable,” adds Arun.

Imagica in Mumbai, the other listed player in this space, is much larger in size. In FY15, Imagica generated revenue of ₹191 crore and drew footfalls of 10.64 lakh. This is much less than Wonderla’s ₹100-crore Bengaluru park, which registered close to 12.5 lakh visitors. While the operating leverage might be high in the long run for Adlabs Imagica, its model is relatively safe because to fund such a project, one needs a huge capital outlay and an added component of debt.

The company has invested ₹1,600 crore in building the amusement park. To recover such huge costs, the burden has to be passed on to customers through higher ticket prices. While the size and quality of the experience might be different, Imagica charges close to ₹2,000 per visitor, compared with Wonderla, which charges one-third of Imagica’s ticket price. Even the Mumbai-based EsselWorld, which was established in 1989, currently charges ₹1,190 per adult and ₹890 per child and gets close to 20 lakh footfalls annually. If you have borrowed funds, it gets even more difficult to keep ticket prices low due to the interest cost.

Room for more

Amusement parks still have leeway in terms of unlocking growth through increase in

footfalls, non-ticket revenue and adding more rides

In the case of Imagica, which incurred annual interest costs of ₹114 crore in FY15, interest cost per visitor works out to ₹1,077, which is on top of the operating cost. As a result, the company’s losses have doubled to ₹107 crore in FY15. While it is not comparable with Wonderla given that Imagica is a new park, if you do not have debt on your books, there will correspondingly be less pressure on the ticket price. Wonderla has not relied on debt and using cash flows from its already operational parks has allowed it to remain competitive in the market. Its own manufacturing facility for the rides and other related machinery is also a key advantage to its business.

“The land cost of the total project is not more than 17-20%. The larger cost, instead, is from the rides, which account for 35-40% of the total project cost,” says Arun. Close to 40% of its requirements for the rides are fulfilled by in-house facilities, while the remaining 30% comes from imports and another 30% from local markets. Besides pricing, the company saves on import duties and transport costs, and so the rides are 30-40% cheaper than imported rides. A back-of-the-envelope calculation suggests that on a ₹300 crore project, a company can save close to ₹21 crore, or 7% of the total cost, this way.

Vinay Khattar, senior VP, Eleweiss Financial Services “It not only helps the company save on import costs, but also lowers its maintenance charges. When the company grows and has more parks, the impact of this will be more pronounced,” says Khattar. While these are some of the advantages that have worked in favour of the company so far, the biggest questions are: how will the company drive growth at its existing parks, which have matured, and how does it plan to bring incremental growth?

In the June 2015 quarter, the company’s footfalls fell by 7% and on a yearly basis and growth from the existing parks is tapering. In FY15, growth in footfalls at Kochi was flat and at Bengaluru, it was 5% compared with FY14. This was partly because of unseasonal rains and a 20% price hike in April and June 2015 as a result of hike in applicable service tax on amusement parks to 14%. However, service tax is an industry-wide phenomena and pressure will mount on companies that are inefficient because of their capital structure and operational costs. 

Battling challenges

While the company has reached scale as two of its existing properties are now able to garner strong footfalls, the next important step would be to leverage its existing infrastructure (see: Room for more). Estimates suggest that globally, amusement parks generate close to 30-35% revenue from entry fees or tickets, while another 35-37% comes from resorts and rentals, followed by food and beverages and merchandise, which account for 32-35%. In case of Wonderla, the revenue mix is still heavily tilted towards tickets or entry fees, which account for 75% of the total revenue.

Exciting add-ons

Wonderla has thus far managed to improve its F&B contribution

While contribution of non-ticket sales has improved from 15% in 2010 to 25% in 2015, there is further scope that is important in terms of both retaining margins (high margins in food business) and sales growth (see: Exciting add-ons).

“The company has entered into 25% revenue-sharing agreement with six restaurants operating inside the park and operates a restaurant on its own. Average F&B realisation per footfall grew 28% annually from ₹14 in FY10 to ₹37 by FY14. We expect this to rise to 46% over FY14-17, thanks to the addition of the Hyderabad park and sustained footfall growth at existing parks,” mentions analyst Niket Shah, who tracks the company at Motilal Oswal Securities, in a report.  

The company continues to add one or two new rides every year at its existing parks, which are yet to be utilised fully. For instance, of the total land parcel of 93 acre in Kochi, the company has thus far utilised only about 29 acre. Similarly, only 47% of the land in Bengaluru has been used thus far, indicating more leeway in terms of growth.

In fact, in 2012, the company experimented with the launch of a three-star leisure resort at the Bengaluru park, which has now turned positive at the Ebitda level with an occupancy ratio of 45% (see: On the right track). The resort has 84 rooms and four banquet or conference halls.

On the right track

Rising occupancy levels are helping the resort business slowly turn around

The company is, in fact, planning to replicate this by launching one more resort-cum-hotel at the Kochi park as well. “In Kochi, we have enough land to build one more park, but at a later stage. Our cost of land acquisition was low then, so we are not concerned about the cost of idle land,” says Arun. In terms of footfalls as well, the company is gradually building on off-season customers such as schools and corporates on particular days of the week and month to improve utilisations, as 25% of its rides are meant for kids. The period between April and June is considered to be busy because of school holidays. 

All these steps will ensure that incremental volume growth keeps on coming, but the rest of the growth is going to be led by the company’s ability to raise prices. “We usually effect 11% hike every year, as our base ATP is low at around ₹700 per ticket,” adds Arun. The company also plans to stick to its pricing policy, as it does not want to confuse customers with different price points. Wonderla’s focus is now on creating new properties and establishing a pan-India presence, thereby, utilising its expertise and bringing in incremental growth.

In FY15, the company drew in ₹56 crore cash from operations, which, added to the net IPO proceeds of about ₹170 crore imply that the company is sitting on decent cash; this will largely be utilised for its Hyderabad project (on 50 acre), which is expected to be operational by April 2016. Here, the company also aims to build a resort or a hotel after it crosses 1 million visitors annually. Even at ₹800 per visitor realisation, the project should be possible to rake in ₹65 crore-70 crore of revenue in the first year with average annual footfalls of 8-10 lakh. In the first year, the company hopes to be profitable at the operating level, and within three years, expects to be profitable at net profit levels. 

The company aims to add one additional property after every two to three years and the next location it is looking at is Chennai, a project that is expected to be in the region of ₹300 crore. Its internal annual cash flow from operations is expected to jump to ₹70 crore in FY17 and ₹90 crore-100 crore in FY18. This essentially means that the company should have enough cash to part-finance the Chennai project, half of which it is planning to fund by debt. Based on the project cost of ₹300 crore, even a ₹150-crore debt will not touch half of its expanded equity, which is supposed to reach ₹400 crore in FY17. “We are very conservative and taking on debt at this juncture makes sense when we have enough equity and cash flows to service the loan,” says Arun. 

That’s reflected in the company’s earnings per share, which has nearly doubled over the past four years from ₹5 in FY12 to ₹9 by FY15. And if Wonderla continues to allocate capital prudently in scaling up the business, at current valuations, investors could well make the most of what promises to be a fun-filled ride. 

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