Mahindra Holidays & Resorts — IPO: Invest

Investors with a long-term perspective can subscribe to the initial public offer of Mahindra Holidays & Resorts. The company’s position as the dominant player in the business of vacation ownership, its early-mover advantage in a business with little competition and its strong growth record suggest good potential.

The company’s revenue model, which involves upfront payment of the ownership fee and recurring annual maintenance fee thereafter, also provides for higher visibility and a more stable stream of revenues than for pure hospitality players. Stiff pricing of the offer, however, may curtail scope for near-term gains on the stock, post listing.

Mahindra Holidays’ overall growth, to a great extent, hinges on its ability to expand its member base.

While it has been able to grow its member base exponentially in the past, this was on a lower base and during an economic boom. Sustaining similar growth rates over the next couple of years may not be as easy.

While signs of revival in economic activity do lend comfort, Mahindra Holidays relies heavily on discretionary spending by consumers, which may be the most vulnerable to economic cycles. It is in this context that the offer price of Rs 275-325 appears a tad stiff. The offer price discounts the company’s likely FY10 per share earnings by about 23-27 times on post offer equity base.

The fact that the company has no strict comparables and is the market leader in its segment does offer room for premium valuations. The offer, nevertheless, would leave more room for upside over the next year, if priced at the lower end of the price band.
vacation ownership

Mahindra Holidays & Resorts has, over the years, grown to become a popular name in the business of providing leisure hospitality services through vacation ownerships in India.

A relatively nascent concept in India, Mahindra Holidays’ service offering is based on the model of time shares in which multiple owners (its vacation ownership members) hold the rights to use its various properties and are allotted specific time slots (depending on member choice) in which they may use the property.

The company has a total of 27 resorts across India and Thailand with a capacity of 1,261 apartments and cottages. Club Mahindra Holidays, its flagship service offering, currently entitles its members the choice of holidaying at any of its 23 resorts, for seven days each year, in a season and apartment type of their choice, for 25 years. Members can also choose to access a range of resorts globally through its RCI affiliation.

That apart, it also features other vacation ownership packages aimed at specific user segment such as Zest (young urban families), Club Mahindra Fundays (corporate houses) and Mahindra Homestays (overseas and Indian travellers). In order to further widen its network, it also launched clubmahindra.travel in April 2007.
Member growth

Despite the odds of venturing into new territory, the company has done well in growing its membership enrolments at a compounded annual growth rate of 33 per cent over the last three years. As of May 31, 2009, it had about 92,825 vacation owners.

Broader economic travails had, however, led to a dip in the pace of new member acquisitions last year, especially in the third quarter, with a 26 per cent addition to its member base last year.

While the company says that it managed to get back to its historical levels of member acquisitions in the fourth quarter by increasing focus on Tier II cities, replicating similar growth levels over the next couple of years will hinge mainly on a revival in the economy.

While there’s no doubt that the its existing member base will continue to vacation at its properties, contributing to annual resort revenues (its room nights booked have only increased year on year), member additions from hereon at historical growth rates may not come by as easily.

The recent phase of salary cuts and job losses, especially in the services sector, if it persists, may moderate discretionary spending, impeding growth for this company.
Marketing presence

It is in this context that Mahindra Holiday’s increasing marketing presence and brand recognition may help.

The company has a total of 19 branches and 61 retail outlets across India, of which 45 are owned and 16 franchised. In addition, it also has direct to home operations and on-site operations at a few of its resorts.

While it plans to further add to its market presence over the years, the significantly high share of member referral sales lends confidence on its ability to add members, macro challenges remaining the same. For the last fiscal year, over 35 per cent of its sales were through member referrals. The high share of referrals does away with the company’s member acquisition expenses.

Despite worries about new member additions, the recurring revenue stream that the company enjoys by way of annual subscription fees and resort revenues lend immense strength to its revenue model.

Mahindra recognises a portion (60 per cent) of the total fee as admission fee in a given fiscal, the balance entitlement fee is booked over the period of membership. That ensures a committed stream of annuities from existing members, even if new member contributions taper down.

While the default on annual subscription fee is also a risk, the company hasn’t seen significantly high numbers on that front so far.
Results and IPO proceeds

Over the last four years, Mahindra Holidays has grown its revenues and profits at a compounded annual growth rate of about 43 per cent and 76 per cent, respectively. In the same period, both its operating and profit margins have expanded significantly to about 34 per cent and 18 per cent, respectively.

Through this issue, which also involves an offer for sale by the promoter company M&M, Mahindra Holidays intends to finance the expansion of its resorts in Coorg, Ooty and Ashtamudi and setting up of new ones in Tungi and Theog.
Offer details

The initial public offer is open between June 23-26. The company seeks to raise Rs 162-192 crore through the fresh issue of shares. Kotak Investment Banking and HSBC Securities and Capital Markets are the book-running lead managers. Karvy Computershare is the registrar to the issue.

via BL