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Stock Recommendation | WONDERLA HOLIDAYS LIMITED – BUY – Target Price : 336
Publish date: JANUARY 16, 2019
Wonderla Holidays Ltd (WHL) had faced challenges in Q2FY19 due to flood in Kerala and rainfall in south impacting its growth in footfalls. We believe that its footfalls in Kochi park to remain weak in Q3FY19 and expect it to come back on track in the next 1-2 quarters. However, the performance of Hyderabad and Bangalore parks in Q3FY19 is expected to remain strong.
■ WHL has adopted various measures to revive Kochi park which includes reaching out to various districts, approaching corporates and schools for group booking, offering discounts, rationalizing F&B rates, etc. We expect the footfalls in Kochi park to normalize in the next 1-2 quarters.
■ The company has maintained FY19 guidance for growth in footfalls in Bangalore and Hyderabad parks and targets to achieve 8-9% growth and 13-15% growth rate respectively.
■ We expect slower earnings growth of 8.4% yoy in Q3FY19 as we expect decline in footfalls in Kerala nullifying improved growth in Hyderabad and Bangalore.
We are positive on future potential of theme parks in India and maintain our long term positive view on the company for running the business efficiently despite challenges. We maintain our estimates for FY19E and FY20E and maintain Buy rating on the stock with unchanged DCF based target price of Rs 336.
WHL’s Kochi park faced several challenges in FY19 which includes impact of Nipah virus, floods in Kerala and political unrest due to Sabrimala issue. The operations at Kochi park got affected in Q2FY19 due to floods in Kerala and it was closed for about a week. However, its property and rides were not affected due to the same. Due to this, the volume of Kochi park declined by 61% yoy in Q2FY19. In order to revive footfalls in the Kochi park, the company has adopted several measures. It has done a lot of market activation in Kochi and other districts. As per our channel checks, mood in Kerala is changing. The company is approaching corporates and schools to improve footfalls. It is giving discounts (though not very aggressively) to ensure footfall improvement.
The company has rationalized F&B rates as it had got general feedback that the F&B rates were very high. Further, the company keeps on adding rides to attract visitors. It invested Rs 250-300 mn for adding new attractions in Kochi in 2016. Further, Kochi has highest number of rides and has space to expand in the future which will keep on attracting visitors in the longer run. Based on all these, we expect the footfalls in Kochi park to normalize in the next 1-2 quarters.
In the past two quarters, the footfall growth in Hyderabad was volatile (Q2FY19 witnessed 5.9% yoy decline) while Bangalore witnessed low single digit growth. In H1FY19, the growth in footfalls in Bangalore and Hyderabad was 3.6% and 12.9% respectively. The growth rates got affected due to high rainfall in Q2FY19 and shift in festive seasons. The company expects improvement in footfalls in Hyderabad and Bangalore as it witnessed sharp yoy growth of 57% and 39% in month of October 2018 respectively due to festive season falling in the month. Further, the company has not increased the price and has focussed on improving the mix. The company has maintained FY19 guidance for growth in footfalls in Bangalore and Hyderabad parks and targets to achieve 8-9% growth and 13-15% growth rate respectively.
The company is awaiting clarity on local body taxes for the amusement park industry in the state before starting construction of park in Chennai. The company has invested Rs 750 mn in acquiring 62 acres land in Chennai. The total capex in the project is estimated at Rs 3.5 bn. Further, the company is not focusing on any other new park in the near future. The company targets Rs 150 mn capex in the current year which will be utilized for refurbishment/maintenance of existing rides. It is not planning for any major capex in the current year on new rides.
WHL introduced the Wonder pass in the month of September 2018 in order to enhance footfalls and increase repeat visit by the visitors. This pass has a 2-year validity across all three parks and provides upgrades and deep discounts on entry tickets as well as on F&B. If there is an entry of 4 members into the park, they will get a Wonder pass free of charge. The pass can also be transferred and gifted. The company has given a target to every park to give 5,000 such passes in the current financial year. So if this is successful, the company will have 15,000 such passes by end of March 2019.
Over the years, the company has been growing its revenue pie from non-ticket revenue segment which includes food and beverages, merchandise, etc. The contribution of non-ticket revenue has been increasing over the past 5-6 years from 14% in FY12 to 28% in FY18 and this is expected to increase further to 32% by FY20E. We believe that there is enough scope to grow non-ticket revenue pie as it is much lower as compared to 50-55% in international parks. Increase share of non-ticket revenue will have positive impact on margins of WHL in the longer run.
Last few years have been challenging for WHL’s business due to service tax issue, political issues in southern states, demonetization, GST, floods in Kerala, etc. As a result, the footfall in its parks took a hit. Changes in service tax/GST rates have also resulted in pricing confusion. Since the taxation related issues are resolved post reduction in GST rates from 28% to 18% and the company also not taking any hike in ticket prices. We believe that the stable pricing environment would help in reviving footfall in the next one year across its parks. On a low base effect and company adopting several measure to increase footfalls, FY20E is expected to see strong volume growth across all parks. We expect 13.7% yoy growth in footfalls in FY20E with overall normalcy expected in the year.
In the last one to two years there were changes in the top management which included, MD, CEO and CFO. After its Managing Director, Mr. Arun Chittilappilly went on sabbatical in early July 2018, the founder and promoter Mr. Kochouseph Chittilappilly took the role of executive Vice Chairman and Mr. George Joseph (executive Vice Chairman) took role of Joint Managing Director. As per company, Mr. Arun Chittilappilly is expected to resume office in the next 3 months. The company has also appointed Mr. Jacob Kuruvilla (ex V-Guard CFO) as interim CFO after Mr. Nandkumar resigned in November 2018. The company is in process of searching full time CFO. As per the management, these changes will not affect the day-to-day operations as well as long term growth plans of the company. Its permanent top management team is expected to be in place in the next 3-4 months. Also, there is no issues at park level which has stable management in place and is responsible for park level decisions. As per management, Mr. RaviKumar who is the General Manager of Kochi Park, has been with the company since 2010. In Hyderabad, its park head, Mr. Madhusudan Gupta is there since inception of the park and is doing well.
The management has remained optimistic about the performance of three parks in Bangalore and Hyderabad, although there are short term challenges in terms of footfall growth in Kochi. The management is expecting 13-15% growth in footfalls in Hyderabad park and 8-9% growth in Bangalore in FY19E. The company has not given any guidance for Kerala as the market would take some time to pick up due to floods in the state. The company has maintained guidance for 300-400 bps improvement in EBITDA margins in FY19E.
We have assumed a soft performance in Q3FY19 for WHL, as we expect 56% yoy, decline in footfalls and 55% yoy decline in non-ticket revenue in Kochi park on conservative basis as demand during festive quarter Q3FY19 took hit due to floods and political unrest in Kerala (due to Sabrimala). We have assumed strong growth in Hyderabad and Bangalore parks with footfalls estimated to grow at 14% and 13% respectively in Q3FY19 based on shift in festive seasons and Christmas & New Year demand. Based on this, we have assumed 18% and 21% growth in park revenue in Bangalore and Hyderabad parks respectively. Factoring all these, we have assumed 5% yoy decline in Q3FY19 revenue and 8.4% yoy growth in PAT with 120 bps yoy improvement in EBITDA margins.
We are positive on future potential of theme parks in India and maintain our long term positive view on the company for running the business efficiently despite challenges. We maintain our estimates for FY19E and FY20E and expect the company’s revenue and PAT to grow at a CAGR of 10% and 29% respectively in FY18-20E, led by 1) 6.9% CAGR in ticket income 2) and 16.3% CAGR in non-ticket income3) 3.2% CAGR in footfall and 4) 4.9% CAGR in average revenue per footfall. We expect 600 bps improvement in EBITDA margins in FY18-20E. This should have positive impact on earnings and returns ratios. The stock is presently trading at FY19E and FY20E PE of 34.8x and 23.9x based on EPS of Rs 7.8 and Rs 11.3, respectively. We maintain Buy on the stock with unchanged DCF based target price of Rs 336.
Wonderla Holidays Ltd (WHL) is the largest amusement park chain in India with over 17 years of successful operations. It has entertained over 30 mn visitors across its parks in Kochi, Bangalore and Hyderabad. The company is promoted by Mr. Arun Chittilappilly and Mr. Kochouseph Chittilappilly, who also incorporated VGuard Industries Ltd. The promoters have operational experience in the amusement park industry since 2000. The promoters launched the first amusement park in Kochi in 2000 under the name Veegaland, later successfully launched the second park in Bangalore in 2005 and third park in Hyderabad in 2016 under the name “Wonderla”. The company also operates Wonderla Resort attached to its amusement park in Bangalore. It is a three Star leisure resort with has 84 luxury rooms and 4 banquet halls / conference rooms. WHRL has vast experience in running amusement parks resulting in understanding customer preferences. This enables it to conceptualize and develop innovative rides. The company has an Inhouse manufacturing facility located at Kochi which manufactures /constructs rides and attractions for all of its parks.
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