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Mahindra Holidays (MHRL IN)
UW(V): Strong Q3 earnings as margins expand
Q3 earnings were 29% above our estimates as better
realization improved margins (which we expected to occur in
Q4 FY11)
Weak volume growth is a concern; we do not expect
valuation to expand on lower volume growth outlook
Retain UW(V) and TP of INR344. Slower-than-expected
inventory addition and volumes are key downside catalysts
Q3 earnings boosted by margin expansion despite volumes falling sharply. MHRL
reported 31% earnings growth in Q3 FY11, which was 29% above our estimates and 14%
above consensus. The earnings surprise was driven primarily by a 254bps margin expansion
(+19% realization growth) and a stabilizing cancellation rate (lower impact on write-offs),
which offset the sharp volume drop of 23%. We expected the volume mix change to appear in
Q4 FY11 and hence the margin expansion was a quarter earlier than forecast.
However, higher margins unlikely to compensate weak volume growth. WhileMHRL has
successfully improved its realization through a better customer mix, volumes have not kept
pace. Although this strategy will likely improve MHRL’s ability to manage inventory, we
believe the company’s growth outlook will take a hit. Additionally we believe that MHRL can
improve volume mix only to a limited extent over FY12-13, as fresh inventory creation will
need company to again diversify its customer base. This is reflected in our revised estimates,
where we have increased realizations by only 7-9% over FY11-13, though cut new
memberships by 10-14% over the same period. Hence despite our near-term earnings growth
revision of +10% in FY11 (to factor a strong Q3), we have lowered our FY12 estimates by
c4% and FY13 estimates by c8%.
Retain UW(V) and TP of INR344. We continue to value MHRL at INR344 (DCF based
price target), which implies an exit PE of 23x FY12e earnings. A lower than anticipated
growth outlook (Revised FY11-13 earnings CAGR of 36% against 51% earlier) will
restrict valuation expansion in our view. We are 4-9% below consensus on FY12-13
earnings. Potential downside catalysts include consensus earnings estimate cuts and weak
volume data over H2 FY11.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra Holidays (MHRL IN)
UW(V): Strong Q3 earnings as margins expand
Q3 earnings were 29% above our estimates as better
realization improved margins (which we expected to occur in
Q4 FY11)
Weak volume growth is a concern; we do not expect
valuation to expand on lower volume growth outlook
Retain UW(V) and TP of INR344. Slower-than-expected
inventory addition and volumes are key downside catalysts
Q3 earnings boosted by margin expansion despite volumes falling sharply. MHRL
reported 31% earnings growth in Q3 FY11, which was 29% above our estimates and 14%
above consensus. The earnings surprise was driven primarily by a 254bps margin expansion
(+19% realization growth) and a stabilizing cancellation rate (lower impact on write-offs),
which offset the sharp volume drop of 23%. We expected the volume mix change to appear in
Q4 FY11 and hence the margin expansion was a quarter earlier than forecast.
However, higher margins unlikely to compensate weak volume growth. WhileMHRL has
successfully improved its realization through a better customer mix, volumes have not kept
pace. Although this strategy will likely improve MHRL’s ability to manage inventory, we
believe the company’s growth outlook will take a hit. Additionally we believe that MHRL can
improve volume mix only to a limited extent over FY12-13, as fresh inventory creation will
need company to again diversify its customer base. This is reflected in our revised estimates,
where we have increased realizations by only 7-9% over FY11-13, though cut new
memberships by 10-14% over the same period. Hence despite our near-term earnings growth
revision of +10% in FY11 (to factor a strong Q3), we have lowered our FY12 estimates by
c4% and FY13 estimates by c8%.
Retain UW(V) and TP of INR344. We continue to value MHRL at INR344 (DCF based
price target), which implies an exit PE of 23x FY12e earnings. A lower than anticipated
growth outlook (Revised FY11-13 earnings CAGR of 36% against 51% earlier) will
restrict valuation expansion in our view. We are 4-9% below consensus on FY12-13
earnings. Potential downside catalysts include consensus earnings estimate cuts and weak
volume data over H2 FY11.
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