Demonetisation has taken a toll on the stock price of companies whose sales depend on discretionary cash spending. One such is entertainment theme park operator Wonderla Holidays (Wonderla). Its share price dropped from over ₹390 in early November to ₹327 currently, due to a 75 per cent y-o-y dip in September quarter profits and worries about demonetisation impact.

After the steep fall, the current stock price discounts Wonderla’s trailing twelve month earnings by 40 times, higher than the stock’s average valuation of 35 times since listing in May 2014. Also, there may be challenges in the near-term.

Revenue and profit, which had grown annually at an average of 15 and 19 per cent respectively in the last four years, may dip in 2016-17. But once the dust settles, the company should be back on the growth path.

Investors with a long-term perspective can use the current negative sentiment to buy the stock. The young demographics in the country and growing purchasing power of the middle-class make the theme-park industry a promising one. And Wonderla is the leading name in the space with a long and proven track record, cash positive operations, low debt (total debt to equity ratio of 0.01 times) in an asset-heavy business. Short-term issues notwithstanding, its fundamentals remain intact. This, along with the lack of other strong players in the segment, should enable the company to grow its revenue and profit and command premium valuations.

Revenue growth

Wonderla’s revenues are primarily from ticket sale for its dry and water rides in its three parks. The parks in Kochi and Bengaluru have been in operation since 2000 and 2015 respectively. Operations in Hyderabad started only recently, in April 2016. Food and merchandise sales from the park are another source of revenue. The company also operates a three-star resort at its park in Bengaluru.

Footfalls to the parks increased nearly 9.5 per cent year-on-year in the first half of 2016-17 to 12.9 lakh visitors. This was in spite of a drop in footfalls in Bengaluru during the September quarter due to Cauvery issue. The park in Kochi recorded over 6 per cent year-on-year increase in footfall, thanks to marketing efforts. This is encouraging, as visitor growth was flat or tepid at this park.

Average revenue per visitor increased 15 per cent year-on-year to ₹1,057 in the first half of 2015-16, after nearly 19 per cent year-on-year increase in 2015-16. Non-ticket revenue increased at a healthy 33.5 per cent y-o-y to ₹227 per visitor in the first half of 2016-17; this beat the nearly 29 per cent y-o-y growth in 2015-16.

Revenue from its resort was up 13 per cent y-o-y to ₹3 crore in the first half of 2016-17, helped by increase in occupancy (from 40 per cent to 56 per cent). The company plans to expand in other cities in a phased manner, which should aid footfalls. Nominal increases in ticket prices and higher non-ticket sales would continue to aid revenue growth.

Margin to stabilise

Wonderla’s operating margin, which averaged over 40 per cent in the last five years, has been under pressure. In the September quarter, margin plummeted 13 percentage points to 20.2 per cent. One reason for the steep fall was the advertisement and promotional expenses to revive footfalls in its existing parks. Mainly, expenses for the Hyderabad facility — which is ramping up — pulled down margin. The management estimates the new park will achieve 40-45 per cent margin by 2019-20. There is potential for higher profit from non-ticket revenue in this park as Wonderla operates the restaurants.

Rather than import, about 30 per cent of its rides are made at its in-house manufacturing facility. The parks also use solar energy for a part of their requirement. These aid margin by lowering maintenance and operating expenses.

In 2015-16, Wonderla’s revenue and profit increased 12.9 and 18.1 per cent y-o-y respectively to ₹205 crore and ₹60 crore. In the first half of 2016-17, revenue increased 26 per cent y-oy to ₹139 crore; profit, however, dipped 36 per cent to ₹25.4 crore as operating expenses and depreciation increased due to new park addition.

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