CRISIL Research has assigned CRISIL IPO Grade ''4/5'' to the proposed initial public offering (IPO) of Wonderla Holidays (Wonderla). SEBI, in February 2014, made the IPO grading exercise voluntary for issuers. In spite of it being a voluntary exercise, companies continue to opt for IPO grading.
Says Mukesh Agarwal, President, CRISIL Research, ''We believe that IPO grading adds immense value to investors. Companies with good corporate governance and investor-friendly processes would come forward and proactively opt for IPO grading, even after it has become optional.''
Wonderla's grade indicates the fundamentals of its IPO are 'above average' relative to other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy, sell or hold the securities to which it relates (or any other securities), or a comment on the graded instrument’s future market price or its suitability for a particular investor.
The grade is driven by Wonderla's position in the Indian amusement park industry, where it has been present since 2002 and currently operates two parks - one in Kochi, Kerala, and one in Bengaluru, Karnataka. Over the years, by continuously adding new attractions, keeping entry charges affordable, and maintaining safety and hygiene standards, Wonderla has been able to grow footfalls-including repeat visitors-at a CAGR of 10.4% between fiscals 2008-09 and 2012-13. The company has set up an in-house ride manufacturing facility which enables it to reduce capex and maintenance costs. Wonderla is also strengthening its position in south India by setting up amusement parks in Hyderabad and Chennai.
The grade has also taken into account risks such as inability of the company to acquire suitable land parcels for expansion, and a likely decline in returns due to increase in scale of operations and competition. Considering that large investments are necessary to set up new parks and returns generated are low in the initial years of operations, any new project will likely pull down overall returns. Also, increasing competition, especially a new entrant at Wonderla’s existing or proposed locations, can impact footfalls.
Further, the company’s inability to maintain safety and hygiene standards, a decline in discretionary spending and changes in seasonal patterns can adversely impact the business.
Wonderla's grade is supported by healthy operating margins, strong cash flows and an average RoCE of 40.1% over the past three years. It also takes into account a highly experienced top management and a strong second line.
CRISIL Research believes given the paucity of entertainment avenues in India, a large population of youth (the main target audience for amusement parks) and increasing spend on leisure and entertainment owing to rising income levels, prospects of the domestic amusement park industry are bright.
