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Mahindra Holdiays & Resorts (I) Limited
Sunny days ahead
Investment rationale
Diversified product profile
MHRIL has a diversified product basket which is customised to various price
points and customer preferences. Its formidable marketing reach helps monetise
this product basket in the form of an increasing member base.
Bolstering of business practices
In order to homogenise its customer base, MHRIL has inititated several steps
like increasing the initial downpayment from 10% to 15% and withdrawing
the 60 month EMI scheme. These will help weed out potential delinquencies
and shorten the cash flow cycle.
Robust business model
Its business model is designed to generate significant cash flows, especially
in the first 12-24 months, giving it adequate head room to expand inventory,
boost marketing efforts or pay out dividend or deploy its float as a treasury
instrument, thereby generating additional income. Lastly, the low capital and
operational outlay for the asset also facilitates high asset sweating.
Strong parentage
The company is promoted by the Mahindra Group, one of the largest industrial
conglomerates in India today. The group has operations spread across
automobiles, information technology, metals, financial services etc. and is
one of the most reputed brands in the country. The brand inspires customer
confidence, which makes it relatively easier while enrolling customers.
Valuation and outlook
Despite a tepid performance in 1HFY11, MHRIL’s business model remains
intact and centred on optimisation of cash flows. Our confience in the company
stems from its scale of operations, float generation and comfortable valuations.
We reiterate our BUY recommendation with a price target of INR502, which
represents an upside potential of 22% from current levels.
Investment rationale
Operational re-organisation
While the company has been clocking impressive growth in its membership base and
balancing out the same with an increase in inventory, it was experiencing a peculiar
problem of bunched up demand at specific times viz. holidays like Diwali, Christmas.
This was due to a combination of reasons like inventory blocked for newer members,
external sales to non-members and mismatch in subscription classifications. As a result,
existing members were unable to access inventory and thereby unable to utilise their
allocation of holidays. Consequently, the management started noticing a drop in
utilisation rates of older members.
With a view to rectify this situation, MHRIL has adopted the following measures:
�� It has increased the initial down-payment on holiday packages from 10% to 15%
to weed out potential delinquencies. Additionally, it has withdrawn its 60 month
EMI scheme in order to shorten its cash flow.
�� It plans to strengthen its customer mapping in order to develop a homogenous
client base. In the process, it will be developing new product offerings for various
income groups, thereby preserving brand equity.
�� The release of an additional 150keys Tungi in FY11 will give the company the
elbow room to offer more room nights to its existing clientele.
�� Lastly, the company has completely stopped selling inventory to non-members,
freeing up rooms for existing members.
The company has been implementing these measures through 1HFY11 as a result of
which operating metrics have fallen considerably YoY. The slowdown in enrollments
has reflected in MHRIL’s financial performance over the past two quarters, as revenues
have fallen 14% to INR2.2bn while profits have plummeted 45% to INR315m.
Our view
With a member base in excess of 100,000, brand identity and maintenance of service
levels are of prime importance for the future sustainability of MHRIL’s operations, as is
product line segmentation. Any dilution of the brand would jeopardise future cash
flows, by way of low enrollments and utilisations in addition to higher delinquencies.
Hence, we believe that the rejig in operations in conjunction with a deliberate slow
down in enrollments is timely. The freeing up of existing inventory in favour of current
members should go a long way in beefing up service levels and improving brand
equity. Going forward, diversification of product profile in terms of targeting of various
income segments and the corresponding capex will be critical to cash flows.
Additionally, the control it exercises on its fixed costs and the ensuing effect on
profitability will also be pertinent to the float generating ability of the business.
On the macro level, the penetration of the VO concept in India is abysmally low and
a pickup in the same is imminent, given the brand equity MHRIL has earned over the
past decade. Lastly, customised offerings like ‘Fundays’, ‘Zest’ and ‘Terra’ have enabled
the company to satisfy diverse vacationing needs thus increasing the scope of
addressable markets.
Going foward, we remain confident about MHRIL’s business model and believe that its
financials would take a turn for the positive from 1QFY12. Moreover, the low penetration
of the VO concept in India and the tremendous brand equity earned so far with the
company We believe that the high incidence of fixed costs like sales promotion, marketing
and resort maintenance would generate operating leverage for the company in FY12, as
MHRIL monetises its brand and steps the gas on the pace of enrollments.
Valuation and outlook
At the CMP of INR412, MHRIL is trading at a PER and EV/EBIDTA of 28.1x and
12.6x, discounting its FY12e numbers. MHRIL’s operations are similar to but do not
replicate that of a hotel’s. Hence, it is difficult to ascribe a peerset valuation to the
company. We have used the DCF method to arrive at the valuation of the company,
considering the cash generating capabilities of its business model. We have arrived
at a DCF based price of INR502 for the company and reiterate coverage with a BUY
recommendation.
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