MAHINDRA HOLIDAYS:Weak quarter; low volume growth :: Edelweiss

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MAHINDRA HOLIDAYS & RESORTS INDIA
Weak quarter; low volume growth


􀂄 Slow new membership growth; provision continues for inactive members
Mahindra Holidays & Resorts India (MHRIL) added net 4,164 members in Q2FY11
against 3,945 in Q1FY11 and ~7,000 in Q4FY10. It cancelled 688 memberships
during the quarter and created provision for another 1,109 inactive members for
the coming quarters. Owing to addition of just 8,100 members in 1HFY11, we
reduce our estimates for growth in membership addition to 16% for FY11-12.
􀂄 Muted sequential sales growth; EBIDTA margins strained
Sales declined 5.4% Y-o-Y, but increased 11.5% Q-o-Q as membership addition
improved on a sequential basis. During the quarter, company provided INR 278
mn for the cancelled members. EBIDTA margins declined to 25.2% in Q2FY11
compared with 37.2% in Q2FY10, as other expenses like higher rent and supplies
hit the expenses. On sequential basis, EBIDTA margins improved 260bps as the
company was able to control certain other expenses.
􀂄 Negative rooms growth; Tungi project postponed to Q3FY11
MHRIL dropped two resorts during the quarter, taking 43 rooms out of the
inventory. During the quarter, the company added 27 rooms in Saraska, taking
the total numbers of rooms at the end of Q2FY11 to 1,473 against 1,489 in
Q1FY11. The Tungi (Maharasthra) project, where MHRIL was supposed to soft
launch 80 rooms in Q2FY11, has been postponed to Q3FY11 as the company still
awaits the occupancy certificate. Few more resorts on both ownership and lease
basis are expected to be added in H2FY11. The company maintains its stand of
estimated 500 room addition in FY11.
􀂄 Outlook and valuations: Member addition dwindles; maintain ‘REDUCE’
We believe MHRIL is facing headwinds in membership additions sooner than
expected. We also believe that new schemes to be launched are far in future to
have a meaningful impact on the near-term financials. As we are reducing our
membership growth estimates to 16% for both FY11 and FY12, we are cutting
EPS estimates by 10% and 14.9% for FY11 and FY12, respectively, and the target
price to INR 346 from INR 370. We continue to value the stock through DCF
methodology. At CMP of INR 441, the stock is trading at P/E of 32.6x and 26.4x
FY11E and FY12E earnings, respectively. We maintain our ‘REDUCE’
recommendation on the stock.