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03/09/2016 Wonderla’s Indominous Rex
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Wonderla’s Indominous Rex
The Jurassic world has surely taken dinosaur’s share of the movie market. While the kids forced their parents totake them to the movie, the adults watched it to relive their childhood heroes (dinosaurs). The movie is 4thworld’s most worldwide grossers only after Avatar, Titanic and Star wars: The Force Awakens. You would think,such a movie would have some relevance to reality, even though they talk about organisms that lived 65 millionyears ago. Well, you are right, it makes a lot of business sense, if you care to look beyond the teeth! (You knowwhat I mean!)
In one of the scenes Claire (lead actress) introduces Indominous Rex to the investors. The scene goessomething like this..
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Claire: While yearoveryear revenue continues to climb, operating costs are higher than ever.Ourshareholders have been patient, but let’s be honest, no one’s impressed by a dinosaur anymore.……Claire: So, when you say you want to sponsor an attraction, what do you have in mind?OSTERLY (investor): We wanna be thrilled.Claire: Don’t we all?
She slides her finger across the screen and a DNA double helix reacts. Claire steps forward proudly.
Claire: The Indominus rex. Our first genetically modified hybrid.…
Claire:Every time we’ve unveiled a new asset (dinosaur), attendance has spiked. Global news coverage.Celebrity visitors. Eyes of the world.Osterly (Investor): When will she be ready?Claire:(beaming with pride): She already is.
A Scene From “Jurassic World”, 2015Picture Credits: Animal Adventures
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Today, all the theme/adventure parks across the world face the similar situation. On one hand, the consumerswant new rides and attractions to make the second visit and on the other, the shareholders are exasperated asthe new rides results in higher costs. Even the Disneys of the world face this. Thankfully their franchise is notmere rides. Their moat* comes from Characters like Mickey mouse, Donald Duck, Goofy and thanks to newchannels of entertainment like movies, TV shows , there is an auto catalyst working for Disneys. As Mungerpoints out in Poor Charlie’s Almanack
“Disney is an amazing example of auto catalysis…they had all those movies in the can. They owned thecopyright. …when the videocassette was invented, Disney didn’t have to invent anything or do anythingexcept take the thing out of the can and stick it on the cassette.”
Drawing a similar line to the Indian subcontinent, Wonderla, is the biggest amusement park in India. It caughtthe interest of many investors, when it came with an IPO in 2013. It was started in the backwaters of Kerala,then in 2000 was called Veegaland. Second of such was started in Bangalore in 2005. Founder of VGuardIndustries Ltd, Kochouseph Chittilappilly is also the Founder, CoPromoter & Whole Time Director of WonderlaHolidays Ltd. Kochouseph’s elder son Arun Chittilappilly who played the leadership role in setting up Wonderla’ssecond amusement park at Bangalore, is the Managing Director. Chittilappilly is a recipient of the RashtriyaSamman award from the government of india for being among the highest taxpayers. He has written a booktitled “Practical Wisdom 2 in Real Life and Management”. which reflects his business acumen and his decisionto donate his kidney to a truck driver (stranger) says where his heart lies.Kochouseph Chittilappilly has a terrificrecord of wealth creation for shareholders.The real question before investors is, Can wonderla be an other “VGuard” in terms of stock performance?
Even today, Wonderla remains one of the biggest attractions in Bangalore (we could even say south India).Wonderla is known for its unique rides and is one of the pioneers of 4D shows in the country. By the end of FY2015 they have close to 120 rides.
Indominous Rex, ©Jurassic WorldPicture Credits: Tanya Sagendrof
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So, what makes Wonderla an interesting business? Let’s look at their story…
Sales for the last 6 years have grown at 20 percent (CAGR) annually standing at Rs 1910 mn by the end of FY15,while the Net profit have grown even better at 28 percent standing at Rs 500mn. The revenues comemajorly (around 80 percent) from ticket sales, & remaining from food and beverages, merchandise andaccommodation. The costs are majorly billed for the ride operation and maintenance. But, the skill of any valueinvestor lies in the ability to decode the numbers meaningfully beyond the obvious. A skill my mentor (virtually)Warren Buffet has mastered over the years.
For this analysis, we borrow a term introduced by Warren Buffet, in the year 1986 in his letter to shareholders,called owners earnings. He defines it as follows (original)
In other words owners earnings is the cash an owner can take home after paying all his expenditures(both recurring and capital in nature) and taxes.
The Reported earnings (PAT) of Wonderla vs Owners earnings (factoring the working capital changes) are asfollows:
03/09/2016 Wonderla’s Indominous Rex
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Now in case of Wonderla why is the owners earnings lesser than reported earnings? Is that normal?The difference you see in owners earnings and reported earnings is due to difference between the depreciation(reduction of value in asset, rides in this case, due to wear and tear) charged and the actual capital expenditure(money spent on acquiring new assets) incurred.
On a side note, there is a book tiled “ Value investing from Graham to Buffet and Beyond” by Bruce greenwald,can be helpful to understand concepts of how to calculate maintenance capital expenditure and factor that inthe income statement instead of depreciation.
Let’s try and paint the picture in words..
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Imagine the first time you visit wonderla, you are excited about the whole experience. But would you come backagain second, third or fourth time? Well, may be second time (may be not). Given that you have otherentertainment options , You will definitely need “something more” i,e. new rides/attractions to draw you in.Imagine, a few lakhs of you feeling the same way – need for more rides. A company like Wonderla will add newrides/attractions to keep the customers coming in. That’s a Capital expenditure. As Buffet says”doesmanangement think that tooth fairys pay for Capital Expenditure ?”, The management has to either borrow oruse its operating cash flows to expend on the rides. In the last four years from 2012 to 2015 , they have added18 rides in Cochin and Banglore. They are planning to make an additonal 150 crore expansion in Bangaloreamusement park.
Normally, an increase in new rides would result in increase in foot falls, Have the foot falls increased?
Wonderla, ©wonderla.com
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Interestingly from the above graph, one can infer that from 2012 to 2015, sales have gone up by 15 percent,Ticket prices have gone up by 13 percent, but the footfalls have gone by a meager 1 percent.
As sales is a product of Ticket prices and Footfalls, to calculate how much of the sales has grown because ofincrease in footfalls, lets assume ticket prices at previous year rates and then determine sales growth.
2011 2012 2013(IPO) 2014 2015
Sales Growth (Assuming last year ticket rates)
26%
11%
4%
2%
2%
Sales Growth (Actual) 30% 28% 19% 8% 18%
You can clearly see from the table above, that in recent years the sales increase is majorly contributed byticket price increases and not due to footfalls. Question here is, how long can you keep increasing theprice?This brings us to the most important question of the discussion.
Would Wonderla be a value buy?This is a catch 22 situation that draws a parallel to a common evolutionary effect called red queen effect, whichis beautifully explained by Prof. Sanjay Bakshi in his blog . In his words, it is like going up on a down escalator.You need to go up at least twice as fast as the speed of the escalator to move up.
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Wonderla has to keep investing on new rides (going up the escalator) to keep up with reducingfootfalls (go down the escalator). The increase in footfall is the driving factor for increase in owners earningsand ROCE** of Wonderla.
On a valuation point of view, at FY 15 Owners earnings of RS 230 million and Market Capital of Rs 22000Million, an investor is expecting a 20 percent growth (CAGR) in owners earnings for the next 10 years till 2025and then assuming a terminal growth rate of approx 3.5 percent. To achive this kind of growth, it needs to run atdouble the speed [double the footfalls] and without substantially increasing rides.
May be , it is prematured to conclude for now if Wonderla is impacted by the red queen effect or not, as thedata is from past 34 years only. Given the management capability and demographic advantages, it would bewise to closely watch on how the owners earnings and ROCE** shape in the future before taking aninvestment call.
03/09/2016 Wonderla’s Indominous Rex
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Acknowledgements: I gratefully acknowledge the help provided by Aparna in writing this. You can follow herhereDisclaimer: As of this writing, I do not own shares of Wonderla. This is not a recommendation to buy, sell,or hold. I am not a SEBI registered analyst.Author: Mallikarjun GaddamTwitter: @arjun848*Moat: The term moat, coined and popularized by Warren Buffett, refers to a business’ ability to maintaincompetitive advantages over its competitors in order to protect its longterm profits and market share fromcompeting firms.
**ROCE: Return on capital employed in this context is Owners earnings divided by Invested tangible assets
Photo Credits: http://www.kompozitservis.com
