Wonderla Holidays Ltd: Niche business with strong competitive advantage
Wonderla Holidays Ltd (WHL) is the largest amusement park chain in India with over 17 years of successful operations. WHL has been running amusement park in southern India through 3 operational parks in Kochi, Bangalore and Hyderabad. The company follows low capex model with its parks located near large cities with less than 7 years of payback period as against capex intensive holiday destination model. In order to tap huge opportunity in the sector, WHL is expanding its presence to Chennai where it has finalized land and is further targeting new geographies particularly in western India.
Amusement park business: Huge opportunity to grow
Indian amusement park sector valued at Rs 29.3bn in 2016 grew at 10.25%. The sector is very small as compared to Rs 1.675trn (USD25 billion) global amusement park sector. It is at a nascent stage in India and is on the verge of transition. The park to population ratio is remarkably lower in India as compared to the USA market which has 400 theme parks for a population of 319 million.
The Indian amusement parks sector comprises more than 150 operational small, medium and large Parks, with only 10-15% classified as large parks. Key players in the sector are Wonderla, Essel group, Adlabs, Nicco Park, etc. With rising income levels, increasing domestic tourism and favorable demographics, the sector is estimated to grow at a CAGR of 19% over the next 5 years to Rs 69.8bn by end of 2021.
Efficient business model with strong track record:
The company follows low capex model where its parks are based on concept of giving an alternative option for leisure and entertainment near large cities as against capex intensive holiday destination model (like Adlabs). The company does not invest a large sum in creating huge real estate and aims for payback of less than 7 years from its parks. The asset light model helps it to generate high RoCEs of over 20% with zero debt balance sheet and strong operating cash flows.
New and upcoming parks to drive growth:
As part of its growth strategy, WHL intends to expand its presence in new geographies by leveraging its brand equity and experience in the amusement park industry. In 2017, it rolled out operations in Hyderabad which got robust response in first year of launch. The company targets to attain 1 mn plus footfalls in 4-5 years of operations as against 0.62 mn in FY17. Further, the company has acquired 57 acres of land for its upcoming park at Thiruporur, near Chennai. The company would be investing Rs 3.5 bn in Chennai park (including the cost of land). This park is expected to be operational by FY20. WHL intends to setup new park every 3 years which would be funded through its internal cash flows and some debt. It is looking to expand in Maharashtra and Gujarat in future. The cash generation from old parks would help it in meeting funding requirement for new parks.
Increasing share of non-ticket revenue
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 25% in FY17 and this is expected to increase further to 28% by FY19E. 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 The margin in non-ticket revenue segment is far higher. Hence increased share of non-ticket revenue will have positive impact on margins of WHL.
Volume growth to revive as most of the negatives already factored in:
Last two years have been challenging for WHL’s business due to service tax issue, political issues in southern states, demonetization, GST, etc. As a result, the footfall in its parks took a hit. Further, the company has taken price hike for its parks keeping GST rates in mind. Hence, we expect some impact on total volumes which would grow at slower pace of 2.3% in FY18 due to rise in ticket prices. We expect volume growth to revive to nearly 6% with the overall normalcy expected in FY19.
We expect the company’s revenue to grow at 18% CAGR over the next three years led by revival in footfalls and increased ticket prices. We believe that the increased contribution from non-ticket revenues, operating leverage will lead to margin expansion. We expect 900bps improvement in EBITDA margins over the next three years. Led by volume growth and expansion in operating margins, we expect the PAT to grow at 45% CAGR during the next three year period.
It will not be justified to value the stock purely on PE basis keeping in mind the capex oriented nature, annuity income and cash flows that accrue every year. The company operates at a healthy EBITDA margin of over 30%. Post commissioning of the Chennai property the company could easily fund its future capex from internal accruals. Keeping in mind the future potential of theme parks in India, we believe WHL will create substantial returns over the long term. Investors with long term horizon can start investing in this company.