Debt Free Smallcap Stock to Watch Out for in 2025

When you think about tough businesses in India, surely airlines and e-commerce would come at the top of the list.

The airline industry is notorious for its razor-thin margins and high operational costs. In India, it's even tougher due to price sensitivity and infra constraints.

Coming to e-commerce, while the opportunity does seem lucrative, scaling profitably in India is a monumental challenge.

One more business that constantly keeps facing challenges is amusement parks.

On account of huge capital investments and seamless management of parks, companies operating in this industry are often unable to keep up. That is why, international chains likes Disney are not targeting Indian markets.

Nevertheless, due to its huge population and favourable demographics, India still remains an underpenetrated market.

To understand how companies in this sector are navigating the landscape, let's visualize one of the key players in the industry, which has more than two decades of experience in running the parks profitably.

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Wonderla Holidays: Set for a 'Roller Coaster' Ride

Wonderla Holidays is a leading player in the Indian amusement park industry with presence in Bangalore, Kochi and Hyderabad.

The company earns majority of its revenue from the ticket fares that comes from rides, while it also earns income from food, beverages, and merchandise sales.

Apart from rides, the company also organizes events in the parks to attract more visitors.

Wonderla has an in-house research & development team and ride manufacturing capabilities.

Typically, the company's business is the strongest in the first quarter (April- June), followed by third quarter and fourth quarter. The second quarter is the weakest due to monsoons.

The business model of the company is top notch, which includes strong cash flows, negative working capital, in-house manufacturing facility to construct amusement rides and a case of operating leverage due to the higher proportion of fixed cost structure.

Wonderla is also debt-free due to its strong cash flow generation.

Besides, there are significant barriers to entry into the business of amusement parks in India due to capital intensity. This limits competition for Wonderla.

In the years leading up to 2019, the company faced several challenges including issues related to GST transition (the GST rate for amusement park was 28%, now it has come down), floods in Kerala, the Sabarimala issue and outbreak of the Nipah virus.

The company has overcome all these setbacks and is currently looking more stronger than ever.

Wonderla recently announced massive expansion plans with potentially 3 to 5 parks planned pan India in the next 5 years. It is raising funds via a qualified institutional placement (QIP) for the same.

Recent QIP

Earlier this year, Wonderla's board had approved raising funds to the tune of Rs 8 billion (bn) through various methods.

The company last week launched a QIP at a floor price of Rs 829.74 per share.

The QIP saw huge demand from investors. The company ended up allotting 6.8 million equity shares at an issue price of Rs 790 per equity share, a discount of around 5% to the initially set floor price of Rs 829.74.

The QIP issue opened on 3 December 2024 and closed on 6 December 2024.

The funds garnered from these QIP would be used for the expansion plan, which includes establishing five parks in the next 7-8 years.

One of these parks is already under construction in Chennai and is likely to come up by December 2025. The management is in talks with state governments for potential new parks in Indore, Mohali, Noida, and Ahmedabad.

Earlier this year in September 2024, the company inaugurated a park in Bhubaneswar, Odisha, marking its entry into the state.

A Strong Smallcap Contendor for the Long Term

Building an amusement park is like planting a sapling - it takes a lot of time and plenty of resources before it grows into a tree.

Also, the first few years after launching a park can be pretty challenging. The construction, staffing, and marketing costs pile up. And the visitors don't always flood in overnight.

During this initial phase, the park feels more like a liability than an asset, dragging down profitability as it works to find its footing.

Over time, as the park matures, it starts to pay off. Visitors increase, operational efficiencies improve, and it begins to generate steady and sustainable cash flows.

So in the long run, the company which takes all these efforts enjoys a strong early mover advantage.

Among the listed peers - Nicco Parks and Imagicaaworld Entertainment - none of them come close to the expansion that Wonderla is undertaking.

Both of them are also yet to catch up with the consistency in earnings.

Wonderla also has good amount of undeveloped land in the existing parks that gives it an added advantage.

A Close Look at Wonderla's Financials

As mentioned above, Wonderla has stable financials - a track record of profitability and positive cash flows from operations, barring the exceptional Covid-year.

In the past 5 years, the company's net sales and net profit have grown at a CAGR of 11.4% and 23.3%, respectively.

In FY24, the company posted upbeat performance owing to an increase in average revenue per user (ARPU).

Financial Snapshot

Rs m, standalone	FY20	FY21	FY22	FY23	FY24
Net Sales	2,709	384	1,286	4,292	4,830
Growth (%)	-4%	-86%	235%	234%	13%
Operating Profit	1,173	-221	263	2,359	2,520
OPM (%)	43%	-58%	20%	55%	52%
Net Profit	648	-499	-95	1,489	1,580
Net Margin (%)	24%	-130%	-7%	35%	33%
ROE (%)	7.7	-6.0	-1.2	17.0	15.5
ROCE (%)	11.3	-7.9	-1.5	22.9	20.9
Dividend (Rs)	1.8	0.0	0.0	2.5	2.5
Debt to Equity (x)	0.0	0.0	0.0	0.0	0.0

Source: Equitymaster

In the first two quarters of FY25, the company's performance was impacted amid election season and heatwaves that dampened amusement park visits.

Going forward, the company's management anticipates fluctuations in the revenue mix depending on seasonal demand and park performance.

In its latest earnings call, the company highlighted weather-related challenges such as heavy rainfall and landslides, which impacted visitor turnout.

Another key point mentioned by the management was margin pressures due to increased corporate staffing and marketing expenses.

The long-term outlook, however, looks bright with Wonderla aiming to capture a larger share of the growing industry, projected to expand from Rs 110 bn to Rs 250 bn in the next 4-5 years.

With the urbanization theme picking up, rising consumerism and favourable demographics in India, amusement parks business has enough penetration potential. Wonderla, with its increased focus on digital and social media platforms, is well positioned to ride this trend with presence and planned expansions.

Nevertheless, investors should examine and keep track of the company's execution and how it's progressing. For instance, any delays could materially impact the business performance... the company faced a similar challenge in 2018 when its Chennai plant construction got delayed on account of delayed approval for tax exemption by Tamil Nadu government and due to pandemic.

Investors should also consider corporate governance as one of the criteria for due diligence before considering an investment.

For more on Wonderla, check out Richa's video on Equitymaster's YouTube channel.

How Wonderla Holidays Share Price has Performed Recently

In the past 5 days, Wonderla Holidays share price is up 9%.

In a month, the stock price has gained 6%.

Wonderla Holidays hit a 52-week high of Rs 1,107 on 8 April 2024 and it touched a 52-week low of Rs 772 on 14 August 2024.

In the past one year, the stock price has remained largely rangebound.

Here's a table comparing Wonderla with its peers -

Comparative Analysis

Company	Wonderla	Hanman Fit	Imagicaaworld	Nicco Parks
ROE (%)	15.5	30.8	105.2	31.3
ROCE (%)	20.9	6.4	52.2	43.1
Latest EPS (Rs)	24.4	0.6	1.3	3.7
TTM PE (x)	36.6	5.7	57.8	35.6
TTM Price to book (x)	4.3	1.5	3.7	7.9
Dividend yield (%)	0.3	0.0	0.0	1.1
Industry PE	42.9
Industry PB	4.2

Source: Equitymaster

For a detailed analysis, check out Wonderla Holidays' financial factsheet.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here.