Inox Leisure -Accumulate- Angel Securities

Inox Leisure announced the buying of the 43.3% promoter stake of Fame India in a block deal, representing 1.5 crore equity shares, for an all cash consideration of Rs66 crore (based on the closing price of Rs44 on 2 February, 2010).

The transaction is entirely funded by Inox’s promoter company, Gujarat Fluorochemicals, as a shareholder loan. This acquisition shall be followed by an open offer to acquire a further 20% stake in Fame, for cash, as per Security and Exchange Board of India (Sebi) regulations.

While the complete details on the price of the purchase through the open offer are not available, we believe that at ~Rs150cr acquisition cost (market capitalisation of Fame India on 2 February), Inox Leisure has paid less than approximately Rs2 crore per screen (95 screens), which is below its own replacement cost per screen.

Going forward, we believe that Inox will derive synergies from a higher number of screens, resulting in costrationalisation for the company. Moreover, the acquisition makes Inox India’s second largest multiplex network, with a combined strength of 55 multiplexes, 204 screens, a seating capacity of 57,891 seats and a firm presence in Western India (already a strong presence in Eastern India).

After the acquisition of Fame India, we have valued Inox Leisure on an SOTP basis. At the current market price of Rs86, Inox is trading at 14.8x its FY2012E Earnings of Rs5.8. Owing to this deal, we upgrade our Target price to Rs92, based on: 1) 14x its FY2012E Earnings of Rs5.8, which results in Rs81 per share value for Inox Leisure, and 2) Rs11 per share for Fame India, valued at 1x its acquisition cost of Rs66 crore. Hence, we maintain an ACCUMULATE on the stock, with a revised Target Price of approx Rs92 (Rs81).

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Tags: Acquisition, Angel Broking, Inox Leisure

Category: Broker tips