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).
Prakash Kapadia
+91-22-6620 3119
prakash.kapadia@edelcap.com
Reuters : NA
Bloomberg : NA
52-week range (INR) : NA
Post IPO share in issue (mn) : 84.2
M cap (INR bn/USD mn) : NA
Avg. Daily Vol. BSE/NSE (‘000) : NA
Promoters : 83.1
Non-Promoters : 16.9
India Equity Research | Travel and Tourism IPO Note
MAHINDRA HOLIDAYS AND RESORTS INR 275-325
Long-term play SUBSCRIBE June 22, 2009
Market Data
Share Holding Pattern (%)
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities
Limited
1
Mahindra Holiday Resorts
Edelweiss Securities Limited
2
Investment theme
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.
Club Mahindra Holiday membership currently entitles members the choice of holidaying at
any of its 27 resorts, for seven days each year, in a season and apartment type of their
choice, for 25 years. In addition, members can choose to access a range of resorts globally
through our RCI affiliation.
As of May 31, 2009, MHRL had 96,067 Club Mahindra Holiday vacation ownership members.
Right to use not ownership
MHRL memberships provide members the right to use its resorts over the period of their
membership. This type of a membership, gives members the flexibility to choose a different
resort and the time to holiday every year.
The holiday seasons are generally divided into three or four seasons, based on the demand
for a particular resort in a particular season. Each of the resorts has a unique week
classification for the different seasons offered by them.
Venture into other segments will help strengthen presence
Apart from VO, MHRL launched Zest in November 2006, which targets young urban families
for short break holidays. Zest membership currently entitles members the choice of
holidaying at any of its five Zest resorts, for six days each year, in a season of their choice,
for 10 years. Club Mahindra Fundays was launched in October 2006 and targets corporate
houses. The membership currently entitles corporates for a period of 10 years to offer family
holidays to their employees. It also launched clubmahindra.travel in April 2007 to provide a
one-stop shop for travel and holiday related services. Mahindra Homestays was launched in
July 2008, which markets homestays to overseas and Indian travelers wishing to experience
the real India by lodging with a host family in India.
Additionally, a mixed-use model of being a vacation ownership company and also providing
non-members access to its unutilized apartments on a per-night-tariff basis enables MHRL to
enhance revenues through optimum occupancy and sales from its restaurants and other
services.
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.
Mahindra Holiday Resorts
Edelweiss Securities Limited
3
Travel and tourism in India is expected to give a very dynamic performance over the forecast
period, driven by strong economic growth, an expected increase in its share of GDP to over
8% and increased traveler confidence. (Source: Travel and Tourism – India: Euromonitor
International: Country Market Insight, November 2008) India has seen an increase in
expenditure on leisure and recreation to INR 370 bn in 2005 from INR 270 bn in 2003.
Good track record; membership addition key to success
Of the total revenues of MHRL, income from sale of vacation ownership accounts for 75% of
the total operating income. The balance 25% comes from a combination of annual
subscription fee, and income from resorts.
Over the past four years, the company’s operating income has posted a CAGR of 40% on
account of increase in the cumulative member base from 28, 491 in FY05 to 92,825 in FY09,
which have shown a 34% CAGR increase over the same period. Of the income from sale of
vacation ownership, MHRL accounts 60% of its revenues upfront in the year of the
membership addition; the balance 40% is accounted over the period of the membership,
which ensures an annuity stream from its existing members.
The strong growth of membership addition, we believe, is on account of changing
demographics, increasing aspirations of the middle class, emergence of low-cost airlines and
an integrated business model that entails presence across the value chain right from member
acquisition (marketing and sales of lifestyle offerings), servicing of and contact with members,
identifying land and developing resorts, acquiring resort properties, to resort operations
(delivering family holiday experiences) and providing value-added services.
Apart from the income from sale of vacation ownership, the annual subscription fee
contributes to more than 11% of the income from operations, which are ~ INR 6100 per
member on the membership base last year.
While MHRL has been able to grow its member base at a healthy growth rate in the past,
sustaining similar growth rates over the next couple of years may not be as easy given the
recent economic slowdown as it relies on heavily on discretionary spending by consumers.
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.
Revenues sensitive to incremental member additions; topline could decline despite
membership growth
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. What this also
means is that even if the overall membership base for the company will grow due to new
member additions, the topline will not grow unless the incremental member additions is
higher than the previous year. If the recent phase of economic slowdown and job cuts
persists, it could affect the company’s growth.
Mahindra Holiday Resorts
Edelweiss Securities Limited
4
Growth in members has slowed down in FY09, leading to profit decline
During FY09, MHRL reported 11.5% Y-o-Y growth in revenues and 13.6% fall in EBITDA. This,
we believe, is on account of marginal decrease in the addition of members during the year.
Addition of incremental members stood at 19,292 in FY09 against 20,420 during FY08. The
decrease in the incremental members can be attributed to the IT slowdown in the southern
region, and volatility and fall in stock markets affecting sales in the western region.
EBITDA margins drop substantially in FY09
Of the total operating costs, employees and sales promotion and commission are the two
major costs. The share of employee and sales promotion has been steadily rising from 45.7%
in FY05 to 57.5% in FY09. During FY09, since the membership base saw a marginal decline
and costs saw an increased pressure, EBITDA margins saw a huge fall from 33.9% in FY08 to
26.20% in FY09.
During FY09, 35% of its sales were through member referrals. Despite this, we saw an
increase in sales promotion and commission and discounts offered, clearly indicating
deferment in purchase decisions by consumers leading to increased costs.
Issue details
Issue opens June 23, 2009
Issue closes June 26, 2009
Fresh issue 58,96,084 Equity shares
Offer for sale 33,69,191 Equity shares
Face value INR 10
Price band INR 275-325
Source: Company
Objects of the issue
Objects of the issue are
(a) Financing of expansion of some of the resorts and setting up of new projects
(b) For certain general corporate purposes
The company intends to utilize the net proceeds from the issue in the following manner:
(INR mn)
Particulars
Total fund
requirement
Amount
deployed till
May 31, 2009
Estimated Amount to
be utilized from the
Net Proceeds
Financing of expansion of
their resorts & setting up of
new projects
2 ,368.9 2 59.4 2,109.5
Source: Company
The year-wise break-up of the proposed utilization of the net proceeds is set forth below:
(INR mn)
Particulars
Estimated Amount
to be utilized from
the Net Proceeds
Amount to be
utilized in Fiscal
2010
Amount to be
utilized in Fiscal
2011
Amount to be
utilized in
Fiscal 2012
Financing of expansion of their resorts &
setting up of new projects
2 ,109.5 1,117.7 9 34.2 57.6
Source: Company
Mahindra Holiday Resorts
Edelweiss Securities Limited
5
As per the current business plan of the company, it intends to expand the inventory of
apartments, enhance facilities at its Coorg (Phase IV in Karnataka) and Ashtamudi (Phase II
in Kerala) destinations, and renovate its newly acquired resort at Ooty (Tamil Nadu). Further,
the company also intends to construct new resorts at Tungi and Theog.
Details of expansion of resorts are as follows:
(INR mn)
S. No. Location of resort
Total fund
requirement
Amount deployed till
May 31, 2009
Estimated Amount to be utilized
from the Net Proceeds
1 Ashtamudi 368 36.1 331.9
2 Coorg 163.1 0 163.1
3 Ooty 121.7 39 82.7
4 Tungi 969.6 164.4 805.2
5 Theog 746.5 19.9 726.6
Total 2368.9 259.4 2109.5
Source: Company
Shareholding pattern
The table below presents shareholding pattern before and after the proposed issue:
No. of shares (%) No. of shares (%)
(mn) (mn)
Promoter
Mahindra & Mahindra 73.4 93.6 70.0 83.1
Others 0.0
ESOS Trust1 1.3 1.7 1.3 1.6
State Bank of India 1.6 2.1 1.6 2.0
Nylim Jacob Ballas 0.8 1.1 0.8 1.0
Employees and Directors 1.1 1.4 1.1 1.3
Others 0.1 0.2 0.1 0.1
Public 0.0 0.0 9.3 11.0
Total 78.33 100.0 84.23 100.0
Pre-Issue Post-Issue
Source: Company
Key Risks
Economic recession could adversely affect MHRL’s business
Inability to manage the timing of vacation requests of members could lead to member
dissatisfaction and loss of revenue generation opportunities
There are income tax proceedings pending against MHRL which, if finally determined
against the company, can have an adverse effect on its business
Mahindra Holiday Resorts
Edelweiss Securities Limited
6
Financial Statements
Income statement (INR mn)
Year to March FY05 FY06 FY07 FY08 FY09
Income from operations 1,017 1,527 2,323 3,527 3,932
Total operating expenses 789 1,121 1,620 2,332 2,900
Employee cost 143 195 283 474 608
Sales promotion and comission 218 351 530 845 1,057
Other expenditure 4 28 576 807 1,014 1,235
EBITDA 2 28 406 703 1,195 1,032
Depreciation and amortisation 6 5 78 89 113 168
EBIT 1 64 328 614 1,082 864
Interest 4 3 33 36 33 70
Total other income 4 5 40 90 245 489
Profit before tax 153 328 671 1,296 1,284
Provision for tax 7 0 128 246 456 486
Core Profit 8 3 201 425 840 799
Profit after tax 8 3 201 425 840 799
Profit after minority interest 8 3 201 426 840 799
Shares outstanding (mn) 7 8 78 78 78 78
EPS (INR) basic 1 .1 2 .6 5.4 10.7 10.2
Diluted shares (mn) 7 8.3 78.3 78.3 78.3 78.3
EPS (INR) diluted 1 .1 2.6 5.4 10.7 10.2
Summary statement of assets and liabilities as restated (INR mn)
As on 31st March FY05 FY06 FY07 FY08 FY09
Gross block 1,493 1,917 2,257 2,734 4,293
Less: Depreciation 235 307 383 479 641
Net Block 1,257 1,610 1,874 2,255 3,652
Capital work in progress 18 22 127 450 513
Net fixed assets (A) 1,275 1,632 2,001 2,705 4,165
Investments (B) 45 0 59 0 0
Current assets, loans and advances
Inventories 6 9 18 35 53
Sundry debtors 782 1,457 2,187 4,034 4,826
Cash and bank balances 39 77 94 76 328
Loans and advances 188 262 419 621 665
Total current assets (D) 1,016 1,805 2,718 4,766 5,871
Liabilities and provisions
Loan funds
Secured loans 220 268 60 201 247
Unsecured loans 13 - - - -
Advance towards members' facilities 1,640 2,263 3,242 4,825 6,410
Deferred tax liability net - 92 202 236 295
Current liabilities and provisions
Current liabilities 229 380 406 609 821
Provisions 2 3 112 171 306
Total liabilities and provisions (E) 2,104 3,005 4,021 6,041 8,078
Net worth (A+B+C+D-E-F) 233 433 757 1,430 1,958
Represented by
Share capital 284 284 284 764 770
Reserves and surplus 0 149 473 666 1,188
Sub-total 284 433 757 1,430 1,958
Less: Profit and loss account debit balance ( 52) - - - -
Total 233 433 757 1,430 1,958
Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246
Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206
Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411
Coverage group(s) of stocks by primary analyst(s): Miscellaneous:
Opto Circuits, Page Industries and Lakshmi Energy & Foods
Recent Research
Rating Interpretation
Buy appreciate more than 20% over a 12-month period
Accumulate appreciate up to 20% over a 12-month period
Reduce depreciate up to 10% over a 12-month period
Sell depreciate more than 10% over a 12-month period
19-Jun-09 Opro Well-grounded; 162 Buy
Circuts Result Update
16-Jun-09 Page Steady going; 481 Buy
Industries Result Update
04-May-09 Lakshmi Problems of surplus; 73 Accum.
Energy & Result Update
Foods
02-Feb-09 Bombay No surprises disappoint; 103 Accum.
Rayon Fash. Result Update
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 44 50 26 8 128
Market Cap (INR) 70 44 14
> 50bn Between 10bn and 50 bn < 10bn
Date Company Title Price (INR) Recos
Rating Expected to
Buy Accumulate Reduce Sell Total
on www.edelr