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Adlabs Films: Feeling the heat

Nov 7, 2001

Adlabs, film processing major reported a sharp drop in performance for 2QFY02. While sales dropped by 24% sequentially, operating margins dipped to a 21.5% compared to 35.8% in 1QFY02. Finally, PBT recorded a drop of around 52%.

(Rs m) 1QFY02 2QFY02 % Change FY01
Sales 145 111 -23.7% 464
Other Income 16 17 2.1% 28
Expenditure 93 87 -6.7% 312
Operating Profit (EBDIT) 52 24 -54.3% 152
Operating Profit Margin (%) 35.8% 21.5%   32.7%
Interest 1 2 93.3% 2
Depreciation 7 9 28.4% 12
Profit before Tax 60 29 -51.9% 165
Other Adjustments        
Tax 16 10 -37.5% 50
Profit after Tax/(Loss) 44 19 -57.2% 115
Net profit margin (%) 30.2% 17.0%   24.9%
No. of Shares (eoy) (m) 21.5 21.5   21.5
Diluted Earnings per share* 8.2 3.5   5.4
P/E (at current price) 14.3   9.3
(*- annualised)        

The sharp drop in peformance has been on two counts. While film processing business dipped due to absence of any mega movies during the quarter, the capacity utilisation in its IMAX venture is taking a toll. The drop in operating margins thus could be justified by the fact that the business model of the company is tilted towards high fixed cost. For example, while staff costs recorded a jump of more than 37% due to commencing of IMAX theatre. However, revenues from IMAX failed to match up with increase in fixed costs.

Adlabs Revenue Mix
Rs.m 1QFY02 2QFY02
Film Processing 95.4 48.8
Traded Goods 49.9 49.7
IMAX 0 12.3
TOTAL 145 111

At the current market price of Rs 50, the stock is quoting at 14x its 2QFY02 annualised earnings. The multiplex theatres which have become operational are expecte to contribute considerable revenues in the currrent quarter. Under the new government policy on multiplex theatres the company enjoys exemption from entertainment tax. Though the company seems to be cautious in its ad-spends and other marketing expenses, fixed costs are expected to be higher this quarter. Though the film processing business has recorded a sharp drop, it remains a cash cow for the company. However, the fortunes of the company are intrinsicly linked to the utilisation rates of the Imax and multiplex theaters. The company has a huge fixed cost bill for running these ventures and in case utilisation rates don't pick up, there could be considerable further drop in operating margins. Further, considering that these projects will take atleast 3 years to breakeven, RoCE would continue to remain under strain.

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