UFO Moviez Multibagger Ashish Kacholia Recommendation

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Pee Vee
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UFO Moviez Multibagger Ashish Kacholia Recommendation

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We recently spoke with the management of UFO Moviez to discuss roll out of the Nova Cinemas. The key takeaways are as follows:-

- Nova Cinemas would be rolled out over the next couple of years across twenty properties, which establishes the proof of concept of this business model. However this will have no major bearing on the earnings of the company over the next couple of years, but will build the next lever of growth for the company.

- Management has indicated a commitment of Rs. 15 crore as its equity contribution towards these initial screens. Currently, the management is in talks with 14 prospective partners with talks being at various levels of negotiation. The equity contribution is restricted to these 20 screens only.

- The screens would be housed in PEB (pre-engineering buildings), the design for which is under consideration. This would help in fast tracking state regulatory approvals. Currently close to 70 approvals are required from the various authorities. Management is working towards building a proposal that would help in achieve a single window clearance and the PEB is a step in that direction.

We are positive on the stock and expect the advertising revenue growth to be the main growth driver notwithstanding the sunset impact of the D-Cinema business. UFO Framez is expected to spear head the short term initiative, while Nova Cinema’s proof of concept is expected to de deterministic by mid FY19 and would be the next trigger for the long term growth. Until then we expect a steady growth of 15% CAGR through FY19 in earnings. Our high conviction investment story is trading at 11.3x FY19 earnings. We recommend a BUY with a TP of Rs. 667 which indicates a return potential of 68% from the CMP of Rs. 397.

Ventura Securities research report on UFO Moviez

UFO Moviez India Ltd.
Geared for uptick in ‘in-cinema’ advertisement growth in FY18

We believe that the impact of demonetisation on UFO Moviez’s ‘in-cinema’ advertisement
revenue would ease in Q4FY17. Given the strong movie slate, we expect up-tick in the growth in
FY18 lead by growth in both Government and corporate segment driving a 29.2% YoY growth in
‘in-cinema’ advertisement. We forecast growth to sustain in FY19 (+31.2% YoY).

- We now forecast Caravan business to achieve EBITDA breakeven in FY19E. We await
management’s outlook on this business.

- We factor relatively slower advertisement growth and cut our FY17E/18E revenue by
3.6%/6.4%. As a result, we cut our FY17/18E EBITDA and EPS by 8.3%/11.6% and 16.3%/16%
respectively. We believe that our forecast has upside triggers from faster ramp-up in
advertisement growth.

- We maintain that UFO Moviez has significant re-rating opportunity on the back of - 1) healthy
earnings growth (we still forecast FY16-19E CAGR of 14%), 2) improving RoE (18% from FY18E
onwards up from 13% in FY16), 3) FCF yield of 7.3%/9.6% in FY17/18E and 4) net cash B/S. We
maintain BUY on UFO Moviez with new TP of Rs690 based on EV/EBITDA of 9x FY18F.
Key Highlights and Investment Rationale

- What do we forecast for Q3FY17?

We forecast advertisement revenue to see a modest growth of 1.9% YoY impacted by
demonetisation. We forecast in-cinema advertisement revenue to grow by 3.7% YoY lead by, a
7% YoY growth in the government segment. We expect Caravan business to be impacted more.
Further, due to decline in VPF revenue and hardware sales, we forecast over-call revenue to
decline by 3.3% YoY to Rs1,397mn. We forecast EBITDA to remain unchanged at Rs440mn
(EBITDA margin of 31.5%, +90bps QoQ). Due to the increase in depreciation YoY, we forecast
EPS to decline by 16.4% to Rs5.2.

- Expect In-cinema advertisement revenue to see an uptick in FY18

We expect strong movie slate (bollywood and regional), pick-up in corporate segment and full
year benefit of local advertisement to drive growth. We now forecast advertisement revenue to
grow at a CAGR of 27.8% over FY16-19E vs. 35% earlier. This includes -430bps impact from the
Caravan business (we now forecast FY19 revenue of Rs163mn vs. Rs506mn earlier).

- Forecast FY16-19E EPS CAGR of 14%; upside triggers from faster pick-up in ad revenue
We factor lower advertisement revenue and cut our FY17E/18E/19E revenue by
3.6%/6.4%/7.9%. We also cut our EBITDA forecast by 8.3%/11.6%/14.9% and EPS forecast by
16.3%/16%/19.3%. Despite this sharp cut, we forecast EPS to grow at a CAGR of 14% over FY16-
19E. We believe that our forecast is conservative and has upside triggers from faster ramp-up
in advertisement revenue.

- Would watch out for commentary on the Caravan business

As mentioned above, the cut in our forecast for the Caravan business forms a major part of our
change on forecast for UFO Moviez. The company had guided for cash-breakeven in H2FY17 for
this segment. We would watch out for any change in the guidance.

- CMP offers deep value and ignores the quality of earnings growth

Even after the cut in our forecast, we expect UFO Moviez to generate FCF of Rs3.1bn over FY17-
19E. At CMP, even the FY17E FCF yield is at 7.3% and FY18E FCF yield is 9.6% which we believe
is extremely attractive. Further, we still forecast RoE to improve to 17.7% in FY18E vs. 13.3% in
FY16. Thus we believe, that the stock has significant re-rating potential and maintain our target
EV/EBITDA of 9x FY18E. We maintain BUY with new TP of Rs690.

IDBI Capital research report
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