Tuesday, June 30, 2009


Long-term play

Unique business model
Mahindra Holidays and Resorts India (MHRL) is one of the leading leisure hospitality providers in India, offering family holidays with a range of services designed to meet the diverse holiday needs of a family. In addition to providing Vacation Ownership (VO) memberships, it also manages the operations at its resorts, which helps it control the quality of its offering thereby enhancing customer experience.

Apart from its flagship service offering of VO, as part of its growth strategy it diversified its portfolio by introducing new vacation ownership offerings, Zest and Club Mahindra Fundays, Mahindra Homestays and travel and holiday related services through clubmahindra.travel.

As of May 31, 2009, MHRL had 96,067 Club Mahindra Holiday vacation ownership members.

Likely increase in income levels to augur well for MHRL
Over the next two decades, the Indian market is likely to undergo a major transformation. Income levels will almost triple and India is poised to become the fifth largest consumer market by 2025. As Indian incomes rise, the shape of the country’s income pyramid will also change dramatically. Over 291 mn people will move from desperate poverty to a more sustainable life, and India’s middle class will swell by over ten times from its current size of 50 mn to 583 mn people.

Revenues extremely sensitive to incremental member additions
The fact that 60% of upfront onetime membership fess is booked upfront (currently accounting for 75% of revenues), topline for MHRL is extremely sensitive to incremental membership additions. Hence, unless the incremental number of new member addition is higher than the previous year, the topline for the company may not grow.

Strong parentage
MHRL is a part of the Mahindra Group of companies that is amongst the top 10 industrial houses in India. Forbes has ranked the Mahindra Group in its Top 200 list of the World’s Most Reputable Companies and in the Top 10 list of Most Reputable Indian companies. The Mahindra Group’s activities have spread over various areas such as automotive, farm equipments, engineering, forging, steel, infrastructure development, leisure hospitality, information technology, systems and technology, consultancy and software services, general retailing, and trade and financial services.

Outlook and valuations
Although the IPO is stiffly priced, we recommend ‘SUBSCRIBE’ from a long-term perspective at the lower end of the price band, betting on the strong parentage, management track record, early-mover advantage and the company’s dominant position in the vacation ownership business suggesting growth potential over the long term. At the upper band of INR 325, MHRL is valued at 34.2x its FY09 earnings and at the lower price band of INR 275, it is valued at 29x its FY09 earnings (on a fully diluted basis).