Product crack: UFO Moviez India’s IPO

UFO Moviez India Ltd, a digital cinema distribution network and in-cinema advertising provider, is accessing the primary market through an initial public offering (IPO) of 600 crore.

WHAT’S GOOD…

The company distributes digital cinema across many screens in different languages. In the previous financial year (FY), it distributed 1,500 movies in 22 languages in 4,703 screens. Since its inception in 2005, it has delivered a total of 8,800 digitized movies. It distributes films in other countries as well with a network of 6,626 screens worldwide.

India’s film and entertainment industry is growing, driven by digitization. The company derives its earnings from leasing equipment to cinema exhibitors, digitizing content and in-cinema advertising. The last of these is currently the most lucrative. According to Crisil research quoted in the prospectus, digital advertising revenue has seen the highest growth over the past five years as compared with advertising through other mediums such as print and television. UFO provides in-cinema advertising for 3,770 screens of the 4,911 that it digitizes. Its advertising revenue has grown at a compounded annual growth rate of 64% between FY12 and FY14. The management expects contribution from advertising revenue to increase from the current level of 24%. According to the management, advertising revenue business has operating margins of around 60% as compared to the overall operating margin of 33%. It has partnered with 1,669 advertisers.

UFO’s revenues are not linked to the box office collection per movie, which means its earnings are stable. Debt levels are reasonable with debt-to-equity ratio of 0.4 times. Capital expenditure in this line of business is high, which acts as an entry barrier for competition.

...WHAT’S NOT

The company derives revenues primarily from the film industry; if growth in this industry slows or the focus shifts to other lines of entertainment such as television, then the overall revenues for UFO will also suffer. Also, the company is focused on increasing the contribution of advertising revenue to its total revenue pool. If economic growth slows further, advertising budgets can get smaller.

UFO doesn’t earn advertising-linked revenue from some of the larger outlets like PVR Ltd and Inox Leisure Ltd. And as these chains grow across cities in India, this can be an opportunity loss for UFO which connects the digital content for them.

MINT MONEY TAKE

The business is in a growing industry with stable earnings expectation. UFO has a first-mover advantage and competition is limited. Healthy financials help qualify this as a good long-term investment. At a price-to-earnings multiple of 32-34 times FY15 expected earnings, the IPO isn’t cheap even though the company has displayed strong growth—investing for listing gains might not work. Pessimistic secondary markets can also impact its listing price. If you subscribe to the IPO, be sure to remain invested for at least 3-5 years. And remember, IPO investments are for those who can stomach high risk.