There's Magic in the Air

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Shankar Nath <[email protected]> Wed, 28 Feb, 2024 at 9:29 am
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There's Magic in the Air

In Issue #007, we examine Imagicaa's magical rise from bankruptcy
to a highly profitable & growing franchise. This issue also includes
my 2024 Magic Formula Investing stocks for your consideration
SHANKAR NATH

FEB 28

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🎢 Imagicaa’s Abracadabra

Reading time: 5 mins

Imagicaa started in April of 2013 as a 130-acre theme park in Khopoli,

Maharashtra. It has dozens of rides, F&B, large banqueting facilities, a water
park, a 287 room 5-Star hotel & even a snow park. The facilities are grand and
very well-managed

On the other hand, the financials were shoddily-managed and in just a few
years, Imagicaaworld Entertainment Limited was trapped under ₹1,600 crores
of debt, rising costs and a Covid induced 2-year lockdown
Then in June of 2022, the Malpani Group settled with 10 consortium banks
for ₹575 crores and now has majority controlling stake in Imagicaa (news)

Incidentally, the Malpani Group was not new to this business and already
operated water parks under the “Wet n Joy” brand in Lonawala and Shirdi –
which brings us to what transpired earlier this month

On the 8th of February, the Imagicaaworld Board approved the acquisition of

FOUR operational parks I mentioned above — for a total consideration of
₹630 crores (announcement)

This includes:

TWO Wet n Joy water parks in Lonawala & Shirdi

ONE amusement park in Lonawala (also under Wet n Joy brand name)

ONE devotional theme park in Shirdi (named Sai Teeth)

Further, Imagicaaworld is also acquiring an upcoming water park in Indore for
a consideration of ₹140 crores from Malpani Parks Indore Private Limited

👉 What’s the impact of these acquisitions?

The parks Imagicaaworld is purchasing are already operational which means:

1. There is no execution risk as these are established & on-going park

operations,

2. The company can pay some part of the acquisition cost from the
cashflows these parks generate and,

3. Imagicaa saves many years of wait & blocked capital by not opting for a
greenfield project (case in point is Wonderla in Chennai where the MoU was
signed in 2015 & work started only in 2023; article)

Essentially, Imagicaaworld is posed to double its footfall, double the EBITDA

and grow revenue by 50% from as early as next quarter i.e. Q1 of FY25

To this, when I add the Indore park estimates (FY26 will be its full-year of
operations), it does make one pretty picture for Imagicaa

Noticeably, this Wet n Joy acquisition (Lonawala & Shirdi) is being done at an
EV-EBITDA multiple of just 7.4x (₹630 crs divided by ₹84.6 crs). This is pretty
cheap when compares it with Wonderla Holidays (the biggest player by
market cap) that is valued at a multiple of 20x

Remarkably, the businesses that are being acquired have a higher EBITDA
margin (57% combined) as compared Imagicaa’s existing parks (36%).
Infact, the 57% margins are FY23 numbers and on a trailing 12-month basis,
the management estimates this to be closer to 65%

As a combined entity and as new attractions contine attracting more

footfalls, it is generally accepted that companies like Imagicaaworld &
Wonderla should see their EBITDA as a % of sales to inch closer to the 50%
mark

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👉 All right, the acquisitions seem to be adding value. How is Imagicaaworld

paying for all this?

For all that’s happened to it in the past, Imagicaaworld starts from a position
of strength with over ₹70 crores of cash in books and zero debt. Further, it
doesn’t need any capex funding having already completed it’s investments for
the year — ₹30 crores in existing parks & ₹25 crores in the acquiring parks

OK, so it’s only the acquisition money of ₹770 crores we need a plan for —-
₹630 crores for Wet n Joy & Sai Teerth plus ₹140 crores for the Indore park

The ₹140 crores is upfront payment – so pretty straight forward. But

interestingly, the ₹630 crores is not fully payable at the time of acquisition
but is staggered over a 30 month period

So similar to buying a house to put it on rent and then convincing the seller to
accept the purchase value in instalments, Imagicaaworld can use the cash
flows it receives from these operational parks to pay the seller in tranches —
a truly unique deal!

The management has further assured that if any financing is required, then
the borrowings exceed 2-2.5 times of EBITDA — which’ll come to ₹350 to
₹400 crores and is acceptable from an interest coverage ratio standpoint

Pleasantly — 1. the company won’t have to pay any taxes for some time as it
is allowed to carry forward it’s earlier losses (so high net profits) plus,

2. the park in Indore comes with a 30% capital subsidy under the MP Tourism
policy i.e. the ₹140 crores will come down by 30% as the subsidy flows in over
the next 3 to 4 years

So very clearly, the new management at Imagicaaworld is showing a lot more

financial prudence than what we saw in the pre-Malpani Group era

👉 Looking good .. so what are the company’s expansion plans?

 Imagicaaworld signed an MoU to set-up a park in Uttarakhand
(announcement)

Although no MoU has been signed in Goa, discussions are on with the
industries department – but nothing definitive

Actively evaluating options in NCR, Gujarat, Punjab and Tamil Nadu –

talks with state governments at different stages

Exploring expansion of devotional theme parks in cities like Ayodhya,

Dwarka and Varanasi

A lot of this is conjecture but as stated by the management, Imagicaa is open

to more acquisitions via an asset-light model (operate a park on someone
else’s land) which frees up even more capital for further expansion

👉 My Viewpoint

As always, I did a back-of-the-envelope calculation and I did NOT find much

margin of safety here

This is due to the recent run-up in stock price (+63% in last 3 months) and as
it stands: a) Imagicaaworld’s estimated FY25 EV-EBITDA ratio is comparable
to Wonderla Holidays (it’s closest competitor) and b) theme parks as a sector
have been in the 20 to 25 EV-EBITDA range for many years now
But then in my view, Imagicaa is not a value but more of a growth story

There are two areas for us to consider and to look out for:

[Theme 1] The first is entertainment parks being a direct beneficiary of three

concurrent macro plays:

1. India’s growing middle class .. wherein 1 in 2 households will be in the ₹5-

30 lakh annual income bracket by FY 2031 (higher discretionary spending)

2. Boost in domestic tourism .. will see 500 crore Indians travelling for leisure
within the country by 2030 (from 170 crore in 2022)

3. Improvement in road, rail & transport infrastructure .. making it easier for

people to reach entertainment parks that are typically at a distance of 15 to
80 kms from the city centre

[Theme 2] The second possibility is an expansion in the PE multiple

For theme parks — proving the concept, building infrastructure, attracting

footfalls & stabilising operations is a multi-year exercise. And much of the
last 10 years went in doing that, a period which also included 3 tough
pandemic years

With park revenues growing, almost 50% margins, rising consumer demand,
more parks & the government’s tourism boost – I believe this is the start of a
structural shift in the recreation & amusement park industry which’ll
eventually get reflected in the multiple it receives

► Outside of these two larger themes, Imagiccaworld does have some strong
long-term cards to play with, in regards to:

1. Revenue – wherein we’ll see atleast a 50% jump in FY25. And then as
operations mature, more rides, new parks & higher non-ticketing revenue gets
added, I reckon this business could see a 15-20% growth for many years

2. EBITDA margin – From 36% currently to 42-43% next year to around 50%
operating profit margin. Over time, scale advantages will also kick in with
better terms, cost synergies & lower marketing costs

3. Owner-Operator – Imagicaaworld has a strong & experienced promoter in

the Malpani Group with Mr. Jai Malpani at its helm (article). They seem keen
to expand this business and are financially prudent about it

Net net, Imagicaaworld & the Indian theme park industry is at a very nascent
stage and seems poised for a multi-year phase of growth on the back of
favourable demographics, a burgeoning middle-class, infrastructure boom
and the government’s tourism boost

Personally, I am undecided on investing in Imagicaaworld. The play seems

solid with good tailwinds but maybe the lack of a margin of safety is
confusing me. I look forward to your views/thesis (for or against) in the
comments box below

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please encourage them to subscribe to my newsletter. Thanks for your support!

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🎩 Magic Formula Investing: Stocks

for 2024
Reading time: 1 mins

Last week, in a post on X, I reported the 1-year stock price performance of a

Magic Formula Investing portfolio I had simulated in January of 2023

That list had 29 stocks in it and I was pleasantly surprised to find that this
equally-weighted stock-basket had yielded a 75% return

While the formula doesn’t work in every year, this was enough motivation for
me to release a 2024 version - a new list of 30 stocks (compiled on 27th Feb)
per the methodology explained in my Youtube video (watch)

This list was pruned from a starting universe of 690 stocks and much like the
2023 list, you’ll see a generous sprinkling of metal, oil and construction
stocks here. For more details on the ranking & scores, please access this
worksheet

I should add that many of these stocks are cyclical in nature which is also why
they are currently showing a high earnings yield and a high return on capital.
Not everyone will be comfortable with such a list and as a band-aid, I have
provided an optional & additional list of 20 stocks in the worksheet that you can
mix & match as you please.

As required by Greenblatt, do keep these stocks for an year & refresh

annually. I’ll certainly revisit the performance of these 30 stocks (and the
optional 20) from time to time

I sincerely hope you liked this issue and look forward to hear your own
perspectives on the stories we’ve discussed here.

As always — do your own research aswell & be highly convinced before

dipping your investing toes
Wishing you a pleasant week ahead,

Shankar

Disclaimer: I am not a SEBI registered investment advisor or research analyst.

I am not registered with PFRDA or IRDAI either. The content posted on this
platform is purely for educational purposes and none of it constitutes
investing or trading advice. Readers should do their own research and
diligence before investing or acting on the information presented. Some of
the links posted might be affiliate links

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