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

🎢 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 one 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 continue attracting more footfalls, it is generally accepted that companies like Imagicaaworld & Wonderla should see their EBITDA as a % of sales 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 will not exceed 2-2.5 times of EBITDA. This comes 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, Imagicaaworld 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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🎩 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

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I sincerely hope you liked this issue and I look forward to hearing your perspectives on the stories we’ve discussed here in the comments box below

As always — do your own research & be highly convinced before dipping your investing toes

Wishing you a pleasant week ahead,

Shankar