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Sunday, June 21, 2009

Mahindra Holidays IPO - Analysis

Mahindra Holidays & Resorts India is a leading leisure hospitality provider in India. The company provides family holidays primarily through vacation ownership memberships.

Its members can choose to stay and holiday at resorts in a range of holiday destinations for a pre-determined number of days in a year for a fixed number of years.

Currently, Mahindra Holiday & Resorts has 11 owned resorts with 937 cottages/apartments, 12 resorts with 252 cottages/apartments on long-term lease, and five with 72 cottages/apartments on short-term lease (less than two years). Of the long-lease resorts, two resorts are in Thailand. Currently, the occupancy is 75%, of which 6% are non-members.

Club Mahindra is the flagship product. Started in 1997, Club Mahindra Holiday membership entitles members the choice of holidaying at any of its 23 resorts for seven days each year in a season and in an apartment type of their choice for 25 years. The membership is divided into four seasons: Purple, Red, White and Blue. In addition, its members can choose to access a range of resorts globally through the company's affiliation with Resort Condominiums International (RCI). The company has 91,997 Club Mahindra Holiday vacation ownership members end May 2009.

Zest, based on the concept of short breaks, was introduced in November 2006, and is targeted at young urban families. The Zest member is entitled to six days of holidays every year within the allotted season, Verve, Buzz and Pep, at any Zest resort for a membership period of 10 years. Currently, five resorts have been earmarked for Zest. The company had sold 4,070 Zest vacation ownership memberships end May 2009.

Club Mahindra Fundays, introduced in October 2006, is targeted at corporate customers. The scheme is based on point system, where different season and apartment combinations are valued at points per day as specified from time to time. A corporate customer purchases a specific number of points that are credited to its account every year of the 10-year term of the membership. A corporate member may offer family holidays to its employees. The company had sold 20,16,018 Club Mahindra Funday points end May 2009.

In July 2008, Mahindra Homestays was launched to market Indian Homestays to overseas travelers wishing to experience the real India by lodging with a host family in India. In April 2009, Mahindra Homestays began promoting homestays to Indian customers. A homestay provides no more than eight rooms to in a private home, run by the homeowner. The company had approximately 71 homestays affiliated with Mahindra Homestays end May 2009.

The revenue model is as follows: Mahindra Holiday & Resorts takes membership fee of Rs 250000. This is split into non-refundable admission fee of 60%, i.e., Rs 150000, and the balance 40% is recognised equally over 25 years. The member is also charged annual subscription fees for maintenance of properties. Currently this subscription fee is close to Rs 8000 and is adjusted to the Consumer Price Index.

The proceeds of the issue, net of offer for sale and funds for corporate purposes, will be utilised to upgrade existing facilities and construct new resorts, thereby adding 408 new rooms/apartments.

Strengths
** Has a strong parentage of the Mahindra group, which is among the top 10 industrial houses in India. Club Mahindra has the highest brand equity among timeshare companies in India. In terms of market share, accounted for 72% of the total active members across the vacation ownership industry in India with Resort Condominiums International (RCI) up to end May 2009.

** The number of memberships including all brands had a CAGR of about 34% over the last four years from 2,8491 members end of the fiscal ending March 2005 (FY2005) to 92,825 members end FY 2009 and further to 96,067 members end May 2009. The number of members for Club Mahindra had a CAGR of 33% over the last four years from 28,491 members end FY 2005 to 88,998 members end FY 2009 and further to 91,987 members end May 2009.

Weaknesses
** Has 1,261 apartments/cottages, meaning it can serve 63,050 (1261x50 weeks) members if all its cottages are occupied. However, there are 96,067 members. As per the management, of these, about 63,000 members are eligible for vacation. The logic being that members who have chosen EMI payment (94% of the new members) would be eligible for vacation only 12-18 months from the date of membership. Nevertheless, there is not enough capacity to properly service all its members. The holiday traffic would not be throughout the year but during specific periods. This compounds the unavailability problem. This may lead to dis-satisfaction of members. Currently, there are 105 consumer cases pending.

** Though new members are being added, the reputation of the business is not encouraging. The vacation ownership industry in India has suffered from loss of consumer confidence by virtue of inappropriate business practices by certain companies, resulting in a general disgruntlement against the vacation ownership industry.

** Sales grew 11% to Rs 393.19 crore in FY 2009 as against more than 50% growth in earlier years. Net profit dipped 5% to Rs 79.80 crore as against close to 100% growth in the earlier years. The new member addition has also seen a dip in FY 2009 due to economic slowdown.

Valuation
At the price band of Rs 275 – 325, PE works out to 28.9 – 34.2 times on consolidated FY 2009 EPS of Rs 9.5, The market capitalisation to sales ratio comes to about 5.9 – 7 times, whereas that of the hotel Industry on a trailing 12-month (TTM) basis is 2.4 times. Thus, the offer price is very high.

Brokerage Views:
There are a couple of brokerage views although the street is really divided on this front. A couple of brokerages say this is a good price at which they are raising money because in FY09, Mahindra Holidays reported a profit after tax (PAT) of Rs 83 core. So the EPS stands at about Rs 11-12. Thus, considering this, the price at which they have raised funds is good. But there are a couple of other disappointing news as well. Deutsche Bank says that they had a per value share of Rs 117. And now, if we actually do the numbers, it comes to Rs 66. So they feel it’s a little disappointing.

Giving the valuations from all the subsidiaries for Mahindra Holidays, it is Rs 66, Tech Mahindra its Rs 130, for financial services its Rs 50. So, Rs 246 of their entire share price, of M&M share price comes only from their listed subsidiaries. That is the kind of valuation from SOTC perspective.

Thus, as of now, the price band is disappointing—Rs 275-375 per share. So let’s see what it really comes at on June 23.

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