Mahindra Holidays & Resorts India Ltd (MHRIL) -BUY :: Ventura

We initiate coverage on Mahindra Holidays & Resorts India Ltd (MHRIL) as a BUY with a Price Objective of `451 representing a potential upside of ~37.0% over a period of 15 months. At the CMP of `329, the stock is trading at 23.7x and 19.0x its estimated earnings for FY13 and FY14 respectively. MHRIL is the market leader in the Vacation Ownership (VO) industry and faces limited competition (other sizable player being Sterling Resorts). MHRIL is expected to witness healthy growth of 17.7% CAGR in its top-line to `867.2 crore by FY14 on the back of acceleration in net member additions (13.4% CAGR). We believe that this acceleration is achievable owing to huge untapped opportunity for VO industry in India, adherence to its “Member First” policy and focus towards increasing room inventory (FY13 - ~600 rooms; FY14 - ~425 rooms). While in the recent past, MHRIL was plagued by significant member cancellations, its refurbished business model coupled with increasing room inventory should help in stemming the attrition; boosting net member additions and consequently revenues.
 Robust model with front ended cash flows and steady annuity income streams
Owing to MHRIL’s stable stream of cash flows and self funding nature of the business model, the company has been able to maintain its debt at negligible levels as compared to the hotel industry which has high gearing. MHRIL’s strategy is to fund capex (building room inventory) and customer acquisition costs from membership fees (via both upfront and securitization of receivables). Also, majority of the resort and company level expenses are funded through Resort income and Annual subscription fees (ASF). With an estimated growth of membership base at a 13.4% CAGR, the fund flows, going forward, will ensure that the company maintains debt at negligible levels. Also, the annuity stream in form of ASF will become stronger. Further, we believe that the low gearing status is an added advantage especially during the period of hardships (viz slowdown in membership base, delay in payment of membership fees) as it will be in a good position to raise liquidity from external sources.

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 Customer-centric initiatives to propel growth
Although member additions have grown at a brisk pace of 25.9% CAGR from FY05 to FY12, rumblings amongst the client base due to non-availability of rooms and lack of transparency in room bookings caused bad publicity leading to growth in cancellations and slowdown in net member additions. Aligned to resolve these issues and bring MHRIL back on the high growth trajectory, a newly formed management team was inducted. This new team has adopted a number of customer-centric initiatives viz improving inventory additions, “Member First” philosophy, online booking and increased awareness of lesser known locales. We believe that these initiatives are well received and the goodwill of the company has been reinstated. This should lead to MHRIL getting back to its high growth trajectory.
 MHRIL is well positioned to capitalize on industry growth
On the back of buoyant economics, increasing consumer affluence and rapid urbanization, Indian VO industry is expected to grow at 16% p.a. (as per a research by Group RCI and Cushman & Wakefield). With strong presence at exotic locations across India, new property development and tie up with RCI (access to ~6,500 resorts across the globe), MHRIL with a market share of ~72%, stands out as a clear market leader in the Indian VO industry. We believe MHRIL is well placed to benefit from the burgeoning VO industry and is likely to increase its membership base to 1,84,168 by FY14 (CAGR of 13.4%). Accordingly it is expected to witness healthy growth of 17.7% CAGR in its top-line to `867.2 crore by FY14 from `625.8 crore in FY12. The management envisions being among the top 5 global players in the VO space and we believe the new found aggression is a step in the right direction.
 Valuation
We initiate coverage on MHRIL as a BUY with a Price Objective of `451 representing a potential upside of ~37.0% over a period of 15 months. At the CMP of `329, the stock is trading at 23.7x and 19.0x its estimated earnings for FY13 and FY14 respectively. MHRIL is the market leader in the VO industry and faces limited competition (other only organized player being Sterling Resorts). We believe that MHRIL should be able to witness robust uptick in member additions on the back of its revamped growth strategy. The VO industry which is the fastest growing component of the tourism segment in India provides enough room for MHRIL to gain its rightful share. While the stock has traded at an average PE of 29.0x its one year forward earnings, currently the company is being quoted at its lowest valuations. With the new management team in place coupled with key customer centric initiatives (“Member First” philosophy, inventory additions, value added services), we expect the company’s valuations to re-align to its historical levels. We have valued the company at a PE of 26.0x, which is at a 10% discount to its historical average of 29.0x.