Mahindra Holidays & Resorts India (MHRIL)

Industry CMP Recommendation Add on dips to Target Time Horizon
BUY at CMP and add on
Hotels (Leisure) Rs. 440 Rs. 440 – 395 Rs. 545 – 670 4-6 Quarters

HDFC Scrip Code MAHHOL Investment Rationale
BSE Code 533088
Mahindra Holidays & Resorts India Limited (MHRIL) is a leading player in the leisure hospitality
NSE Code MHRIL industry. Founded in 1996, it has established vacation ownership in India, and is the market
Bloomberg MHRL leader in the business. It offers holidays to its customers that are designed for the discerning
and differentiated needs of families. Apart from providing quality rooms in the form of furnished
CMP as on 10 Feb’17 440 apartments and cottages at resorts in unique and popular destinations, Mahindra Holidays offers
Equity Capital (Rs Cr) 88.21 its members family-friendly amenities including dining, holiday activities, Spa and wellness
facilities for a complete holiday experience. As on March 31, 2016, there were 3,784 people on
Face Value (Rs) 10 the rolls of the Company. The company has almost 2,11,000 members spread across different
membership schemes. Club Mahindra is the flagship brand of the company along with Club
Equity O/S (Cr) 8.8
Mahindra Fundays and Club Mahindra Travel. Holiday Club offers conventional vacation
Market Cap (Rs cr) 3907 ownership program and also engages in resort management contracts earning fee from
managing resorts.
Book Value (Rs) 76
Avg. 52 Week MHRIL offers a compelling play on the large growth opportunity in the vacation ownership
Volumes industry wherein the potential is estimated to grow multi fold from the current industry size. We
52 Week High 513 believe company would add members at 9-11% cagr over the next 5-7 years in India, which
would take total members above 3 lakhs (c. 2.11 lakhs) in the next four years, on the back of
52 Week Low 322 ongoing initiatives in internal processes and engagement outreach. Apart from that MHRIL had
raised its stake from ~20% to c.91% in Holiday Club Resorts (HCR), Finland. HCR had > 50,000
members in EU. ‘Club Mahindra’ members will also have the option of visiting HCR’s resorts in
Shareholding Pattern (%) Europe. The acquisition has made Mahindra Holidays the largest timeshare operator outside the
US and would remain growth driver in the long run. Synergies to aid margins too in the next two
Promoters 75.0
Institutions 14.6
With 2.1 lakhs membership base, MHRIL operates 46 resorts across variety of locations in India.
Non Institutions 10.4 MHRIL has planned upon capex of Rs 600cr over the next two-three years. We expect ~10%
CAGR in user base while the annuity and resort income is likely to exhibit faster growth. The
PCG Risk Rating* Yellow acquisition of Finland‐based Holiday Club Resorts (HCR) would extend MHRIL footprints on EU
including Finland, Spain and Sweden, bringing in 50,000 members to the fold. We value the
* Refer to Rating explanation stock at 26x FY19E EPS and initiate coverage with BUY recommendation with sequential targets
of Rs 545 and Rs 670 over the next 4-6 quarters. Key risks would include lower than estimated
Kushal Rughani growth in membership addition that can have cascading impact on annuity & resort income as well as margins.

Private Client Group - PCG RESEARCH Page |1

PCG RESEARCH A play on growing market for Vacation Ownership Mahindra Holidays’ flagship brand ‘Club Mahindra’ is a play on the growing market for vacations and holidays. Holiday Club Resort (HCR). 2 in Sweden and 6 in Spain. Mahindra Holidays accounts for 60% of the onetime vacation ownership fee upfront in P&L and balance 40% is amortized over the 25‐year period of membership. Finland is Europe’s leading Vacation Ownership and HCR has 22 resorts in Finland.159 hotel rooms and 2.PCG RESEARCH Page |2 . 2 in Sweden and 6 in Spain. priced between Rs. It also creates a larger pool of resorts for existing Club Mahindra customer base.2016).1 lakhs customer base of the company. A look at the installed car base and annual car sales of 30 lakhs suggest large untapped potential when compared to the 2. Holiday Club acquisition to create global footprint Mahindra Holidays had acquired ~19% stake in Finland based Holiday Club (HCR) in July 2014 which has since been hiked to ~91%. Management remains confident on membership growth with focus on driving stickier memberships. We expect strong turn around in HCR over the next two- three years and that would add to MHRIL’s profitability.000 members. Mahindra Holidays is looking at options including reorganization of related assets and debt reduction to drive the turnaround of HCR.18. The membership.700 units and 50. HCR had reported revenues of Rs 1310cr and loss of ~Rs 30cr. MHRIL had acquired additional 6. It has 31 resorts with a majority (23) in Finland. The acquisition helps create footprint in Europe and directs own inventory in places where domestic population is likely to travel. is available at affordable EMIs with a 6 to 48 month period. HCR portfolio includes about 2.4 mn Euros (Rs 32 cr) and values the company at Rs 500cr.4% CAGR in membership base over FY12‐16 and we expect the same to accelerate further with lower double digit growth over the next 3-5 years. of which 23 are located in Finland. MHRIL mainly targets the audience as a typical in the age of 30s with a family and car ownership. HCR is a leading vacation ownership company in Europe with around 50. In addition to that MHRIL would invest up to 10 mn Euros in the form of loan to finance the growth of the company over the medium term.000 members and 31 resorts in Finland. Sweden and Spain.3 lakhs for a Purple Two Bedroom (effective from June . company commented that such consumers also tend to be stickier which reduces churn and promotional expenses for product consumed over 25 years. Management has judiciously added room inventory just ahead of membership growth which implies commendable capital allocation strategy. Besides.3% stake in HCR. Finland for 4. For FY16. ‘Club Mahindra’ members will now also have the option of visiting HCR’s resorts in Europe. 47 under construction as on 2015. HCR had total of 2685 units incl.173 holiday homes (Time share units and villa units). It had clocked 7. two in Sweden and 6 in Spain. Private Client Group .6 lakhs for a Blue Studio to Rs. HCR operates 1. HCR has 31 resorts. Digital and referral programs accounted for 50-55% of the sales lead and though the costs are relatively higher.2.

Though room additions were not impressive in FY16 (63 units added).9%. MHRIL uses digital channels to target potential customers with specific ads. PCG RESEARCH Sales and marketing would remain key to member additions Club Mahindra marketing is based on a direct sales methodology and does involve discounts though these are linked to higher down payments. focused effort on which can fetch economies of scale over a long period.720. brand marketing is one of the key margin levers.185 and the membership base reached to 1. MHRIL has indicated that overall selling costs including branding cost have triggered improved outcomes in membership addition. Moreover. Member additions were healthy for FY16 Mahindra Holidays & Resorts India (MHRIL) had reported consolidated revenues of Rs 1599cr in FY16.PCG RESEARCH Page |3 . for the full year it increased 26% YoY to 16. the management sounded confident of adding ~600 rooms in the next two years driven by greenfield and brownfield expansions as well as inorganic acquisitions. Private Client Group . Though new member addition in Q4 FY16 were flat YoY. EBITDA margin came in at 17.99.

436 despite demonetization headwinds is incredible. Shimla: 115 [to be completed by Q4 FY17] and Kandaghat. During first nine months of FY17 company added 12.6% to Rs 144cr. as it continues to ready itself for consolidation under Mahindra’s umbrella. Resort occupancy was up 400bps YoY to 85% in Q3.  Brand campaign has gained traction on Twitter and Youtube. Management plans to continue its focus on digital marketing and referrals to increase membership additions.4% YoY to 4. Food & beverages posted 12% YoY growth and drove resort income. Kerala: 100 units.380 members. Naldehra. Increased sales was driven by i) higher growth in annual subscription fee (ASF) of 21. Membership additions in Q3 at +14. Management says it plans to add ~600 owned rooms by FY19 (Goa: 240. Expanding inventory to aid in future growth Company did not add new rooms during the quarter. and iii) the rise in other operating income by~13. it increased its ad spends. Hence.PCG RESEARCH Page |4 . the company had the option of not advertising. cumulative memberships have reached to 2. Private Client Group .1 Lakhs. Instead. management is confident of adding ~600 rooms over the next two years on account of greenfield expansion. PCG RESEARCH Q3 FY17 Update Vacation ownership and fees drive sales growth Mahindra Holidays & Resorts India (MHRIL) posted 12. Asthamudi. ii) higher growth in income from the sale of VO of 10.5% YoY growth in standalone sales in Q3FY17. Management has guided capex of Rs 600cr over the next two years.9% YoY to Rs 52cr. but added 63 units in first 2 quarters of the year. Himachal Pradesh: 140 through Brownfield as well as Greenfield expansion in the next two years).3% to Rs 23cr on higher interest income and others. Other Highlights Sales & marketing activities  Contribution of referrals and digital at 50% was 14% higher than previous quarter.  In these challenging times. However. Web reservations have reached at 73% in FY17. construction has commenced. Management commented that the international business segment also turned in a good quarter.

Others  Company has taken several cost reduction measures. Payment plans are for 2. Fee is charged as a one-time membership payment and also members have to pay an annual subscription fee. Vacation Ownership – “Time Share” Concept Time share is a form of vacation ownership. The main attraction that draws many people to time shares is the prospect of taking regular vacations for the next 25 years at today’s costs.20. The company is also investing in sales employees of Tier 2 cities.  Employee expenses also include incentives. First. A vacation ownership allows a member and the family guaranteed 7 days of holiday every year for 25 years across all the resorts’ the company owns. for a certain number of years. staff salaries and utility charges by paying an annual maintenance fee. weighted average increase was ~4%.  There are challenges in Europe. by the end of this fiscal. one will have to pay one-time membership charge. Aside of a large upfront payment. ’Purple’ and ‘Red’. Finland is a profitable bet. Club Mahindra charges Rs 15.  A total of 600 units to be added by FY19.  Construction work has commenced at Ashtamudi. your vacations are hedged against inflation. Private Client Group . Shimla is expected to come up in next 3-4 months  Goa is 240 rooms property. where one purchases the right to use a resort for a specified number of days each year.  Management commented that investments in Finland are for the long term. This upfront payment can vary depending on the type of accommodation and time of the year. Kerala.PCG RESEARCH Page |5 . The 7 days can be split into 2-3 day holidays across the year.  Prices were increased in Q1 FY17. which will come towards end of FY19. The business allows a family to holiday in a high end resort at a much cheaper cost and largely protected from inflation risks over 25 years. PCG RESEARCH Room addition/capex  Naldehra. member will also have to foot the bill for the upkeep of the property. Hence. However. Vacation ownership concept assures good quality rooms and is a cheaper way to holiday.000 per year and the same is likely to be revised every year. This isn’t inflation-protected. company will add 115 rooms. Club Mahindra’s annual fee is benchmarked against WPI/CPI and revised every year. The price hike was slightly higher in ‘White’ and ‘Blue’ category compared to. to become a member. 3 or 4 years.  Down payments vary but minimum of 10% has to be paid. while resort and hotel room rates increase every year.  Sweden has underwent some renovation.000 .

Assanora (Goa). with the increase of the Company’s stake in Holiday Club Resorts Oy. Mahindra Holidays added 87 room units to its inventory. Apart from this. If one compares the Indian vacation ownership industry with the US in terms of its share of the total hospitality sector. Some of its existing resorts also have additional land that can be utilised for further expansion. beaches. During the year FY16. It is also present in international destinations such as Bangkok. ‘Holidays’ is in the top of discretionary spend list for 3 out of 5 Indians. Innsbruck (Austria). it is also considering acquisition opportunities in different parts of the country. The Company is currently undertaking four projects: Naldehra (Shimla). it clearly means that there is significant headroom for growth of the business in India. the scope for growth in India is around 8 times of its current size. The chart provides information on growth in inventory over the last 10 years. which are in different stages of planning and development. Efforts are on to expand this further. Kuala Lumpur and Dubai. wildlife sanctuaries. Ashtamudi (Kerala) and expansion at Kandaghat (Shimla). Private Client Group . Thus.PCG RESEARCH Page |6 . members have a choice to visit HCR’s 31 resorts in Europe. This included 12 units in Kanha. Similarly. At a fundamental level. Expansion Plans over the next two years Mahindra Holidays currently has pan India presence through its extensive network of resorts across destinations including hill stations. The value proposition hence for an end customer is compelling as long as one can plan holidays in advance. PCG RESEARCH The business allows flexibility in terms of membership exchanges / sales. 51 in Munnar and 24 in Kashmir. Besides. In addition. Holidaying demographics in India Holidaying is increasingly becoming an important lifestyle trend in middle to higher income families across India.879 units across its 45 resorts by the end of 2015-16. there has been considerable growth in the size of this market in the last 10 years — both in terms of people with the ability to spend and change in lifestyle and aspirations that have increased the willingness to take vacations for leisure. the Company also has land bank at nine destinations across six states. Long weekend holidays and extended family holidays are key emerging trends that reinforce this belief. It is expected that these initiatives would eventually add around 600 units to company’s inventory over the next few years. forts and heritage. the net addition during the year was 63 units — taking the total inventory to 2. This will provide the flexibility to build such destinations and add room inventory on an ongoing basis. After accounting for inventory retired. Finland (HCR). backwaters. The addressable market for MHRIL is urban families with an ability to incur discretionary expenditure. if one were to look at the > 13 million households who own a car as proxy for the addressable market. Today.

7x EV/Sales. company being under Mahindra Group and having strong track record with ~2.PCG RESEARCH Page |7 . We expect company to post 15.700 units.  Accounting policy: Company follows revenue recognition policy with 60% revenue being recognized upfront and services being offered over 25 years. PCG RESEARCH Thematic play on Indian Discretionary space. Moreover. The planned capex would add another 600-700 units to its kitty. 8. MHRIL is poised to post robust growth over the next several years. At CMP of Rs 440. Initiate as BUY with TP of Rs 670 Currently. We expect company to post EPS of Rs 25. stock trades at ~17x of FY19E earnings. This is a story to hold on for the long term. Key Risks  The Company’s business involves significant investments in building resorts for its operations. We recommend BUY on MHRIL as BUY at CMP of Rs440 and add on declines to Rs 390 with sequential price targets of Rs 545 and Rs 670 over the next 4-6 quarters. which exposes it to credit risks.  Low members addition: New member addition member cancellations and consumer dissatisfaction are some of the factors that could provide risk to our estimates. These expose it to risks in terms of timely and adequate availability of funds at competitive rates to finance its growth. We believe company would continue to add members at 9-11% cagr over the next 5-7 years per annum in India. Another financial risk that the Company is exposed to is potential non-payment or delayed payment of membership instalments and/or the annual subscription fee by members resulting in higher outstanding receivables. on the back of ongoing initiatives in internal processes and engagement outreach. we project company to reach milestone of 5 lakh members in the next decade or so. Similarly. which would earn great returns for investors.5 lakhs in EU (HCR). the Company offers its customers schemes to finance the purchase of the vacation ownership and similar products. MHRIL has 2.1 lakhs members in India and > 0.1 lkhs members as on Dec 2017.8 in FY19E. We forecast 21% EBITDA margin in FY19E. This can be considered aggressive Private Client Group . after the expansion MHRIL will have ~3.3x FY19E EV/EBITDA and 1.8% revenue cagr over FY16-19E along with 310bps margin expansion over the same period driven by better operational efficiencies from HCR and its cost reduction from India operations. Company has planned Rs 600 cr capital expenditure over the next 2 years. Healthy growth in revenues and superior operating performance would lead to 32% PAT cagr over FY16-19E. We have valued MHRIL on 26x FY19E earnings and ~13x on FY19E EV/EBITDA to arrive TP of Rs 670. Besides. which would take total members > 3 lakhs in the next four years.

 Asset ownership: Ownership rights of resort property partly financed with upfront payment from members Financial Summary (Rs cr) (Rs Cr) FY15 FY16* FY17E FY18E FY19E Sales 812 1599 1897 2180 2482 EBITDA 199 291 373 447 545 Net Profit 81 99 138 171 227 EPS (Rs) 9.PCG RESEARCH Page |8 .1 EV/EBITDA (x) 23.0 22.1 12. Vacation ownership industry is at the cusp of multi-year growth as India’s per capita disposable income experience speedy growth.1 10. Finland Acquisition Private Client Group . HDFC sec Research.2 11. PCG RESEARCH Key Positives  Domestic Tourism boom: MHRIL with its unique business model is in a sweet spot to gain from growth in the Indian domestic tourism and rising spending on discretionary items.2 28.2 15.0 8.  We believe.9 15.  Rising Resort level Income: Rising food & beverage and holiday activity revenue from members will increase profitability at resort level.4 25.3 Source: Company.7 17.7 19.8 P/E (x) 47.8 39. * HCR.

PCG RESEARCH Revenues trend over FY16-19E EBITDA Margin to witness improvements 3000 100 600 25 2500 80 500 20 2000 400 60 15 1500 300 40 1000 10 200 500 20 100 5 0 0 0 0 FY15 FY16* FY17E FY18E FY19E FY15 FY16* FY17E FY18E FY19E Revenue Growth (%) EBITDA EBITDA Margin (%) Source: Company. HDFC sec Research Private Client Group . HDFC sec Research. HDFC sec Research PAT to post 32% cagr over FY16-19E Healthy Return Ratios (%) 250 50 25 % 23 20 200 20 19 25 150 14 15 0 11 100 9 10 8 7 6 5 50 -25 5 FY15 FY16* FY17E FY18E FY19E PAT Growth (%) 0 FY15 FY16* FY17E FY18E FY19E Source: Company. HDFC sec Research RoE RoCE Source: Company. Finland Acquisition Source: Company.PCG RESEARCH Page |9 . * HCR.

0 1.4 1.0 in Lakhs 4.3 1.0 2.6 28.5 0.5 3.5 4.5 4.8 1.0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY19E FY21E FY25E Source: Company.0 0.4 Annual Subscription Fees (ASF) Interest & Others Source: Company.1 3.1 1. PCG RESEARCH India: Members Addition Trend 5.6 2.2 2. HDFC sec Research Private Client Group .9 80 60 Rentals 40 Foods & Beverages 20 (F&B) 0 Others FY12 FY13 FY14 FY15 FY16 9M FY17 Vacation Ownership (VO) Income Resorts Income 44.6 1.7 1.0 3.5 2. HDFC sec Research Revenue Split (%) Resorts Income breakup (%) 120 100 26.0 2.PCG RESEARCH P a g e | 10 . HDFC sec Research Source: Company.5 1.

Share 1 -21 -22 -27 -34 Long Term Loans & Advances 874 746 816 789 761 PAT 82 99 138 171 227 Total Non Current Assets 1992 2168 2329 2453 2514 Growth (%) -5.0 Current Investments 10 58 58 90 115 EPS 9.5 96.2 20.1 88.1 88.7 19.2 Deferred Income 167 192 217 251 297 EBITDA Margin (%) 22.6 14.1 88.2 11.5 40.6 20.PCG RESEARCH P a g e | 11 .9 18.0 88. CWIP 1000 1365 1448 1600 1689 PBT 108 179 233 294 380 Goodwill On Consolidation 118 47 47 47 47 Tax 27 59 70 92 120 Deferred Tax Assets (net) 0 10 18 18 18 MI/Ass. HDFC sec Research.8 Inventories 6 458 400 418 476 Source: Company.1 58.4 33.0 25.0 23.3 17.9 Long Term Debt 117 632 683 621 553 Operating Expenses 631 1313 1538 1747 1962 Net Deferred Taxes 61 70 60 60 60 EBITDA 199 291 373 447 545 Deferred Entitlement Fees (Non-Current) 1509 1689 1858 2047 2239 Growth (%) 13.4 25.5 20.9 18.0 Long Term Provisions & Others 11 48 73 95 118 Depreciation 66 98 117 128 141 Minority Interest 0 74 74 74 74 EBIT 133 194 256 319 404 Total Source of Funds 2702 3419 3615 3809 4061 Interest 3 15 23 25 23 APPLICATION OF FUNDS Extraordinary Items -22 0 0 0 0 Net Block incl. PCG RESEARCH Income Statement (Consolidated) Balance Sheet (Consolidated) As at March FY15 FY16* FY17E FY18E FY19E (Rs Cr) FY15 FY16* FY17E FY18E FY19E SOURCE OF FUNDS Net Revenue 812 1599 1897 2180 2482 Share Capital 88. HDFC sec Research Private Client Group .9 13.1 Other Income 18 5 14 14 25 Reserves 637 582 685 810 984 Total Income 830 1604 1911 2194 2507 Shareholders' Funds 725 670 773 898 1072 Growth (%) -0.9 19.9 21. * HCR.2 15. Finland Acquisition Trade Receivables 871 1093 1289 1451 1625 Short term Loans & Advances 39 78 100 102 103 Cash & Equivalents 22 113 234 177 188 Total Current Assets 949 1801 2082 2240 2510 Short-Term Borrowings 6 11 20 29 34 Trade Payables 111 257 442 488 548 Other Current Liab & Provisions 78 228 269 293 317 Short-Term Provisions 43 54 65 74 83 Total Current Liabilities 238 550 797 885 982 Net Current Assets 710 1251 1286 1356 1528 Total Application of Funds 2702 3419 3615 3809 4061 Source: Company.

0 22.7 0.7 19.011 200 -32 55 PER SHARE DATA Investments -182 118 -79 28 28 EPS 9.1 88.9 41.1 Source: Company.5 7.1 11.9 15.5 0.7 102.2 Tax Paid -27 -59 -70 -92 -120 Solvency Ratio Net Debt/EBITDA (x) 0.0 8.9 0.0 15.1 20.1 0.9 19. Finland Acquisition P/BV 5.9 8.3 1.2 1.3 2.8 INVESTING CASH FLOW ( b ) -310 -573 -265 -238 -177 BV 82.5 1.4 76.5 8.9 Working Capital Change 37 -425 111 -93 -115 RoCE 4.5 44.PCG RESEARCH P a g e | 12 .1 10.7 1.9 22.3 Free Cash Flow 22 -1.3 17.3 22.8 Non-operating income 18 5 14 14 25 CEPS 16.0 7.0 Non-operating & EO items -18 -122 -14 -14 -25 EBIT Margin 14.9 0.5 Depreciation 66 98 117 128 141 RoE 11.0 33.9 1.6 EV/EBITDA 23.9 Dividend Payout 43. * HCR.1 10.7 Debt Issuance / (Repaid) 119 560 66 -39 -46 Dividend 4.0 9.2 11.3 2.3 Interest Expenses -3 -15 -23 -25 -23 Turnover Ratios (days) FCFE 139 -466 243 -97 -14 Debtor days 392 249 248 243 239 Share Capital Issuance -1 74 0 0 0 Inventory days 4 53 77 70 70 Dividend -42 -52 -57 -73 -86 Creditors days 88 98 105 102 102 FINANCING CASH FLOW ( c ) 74 567 -15 -137 -155 VALUATION NET CASH FLOW (a+b+c) -68 -320 121 -128 -47 P/E 47.8 14. PCG RESEARCH Cash Flow Statement (Consolidated) Key Ratio (Consolidated) (Rs Cr) FY15 FY16* FY17E FY18E FY19E (Rs Cr) FY15 FY16* FY17E FY18E FY19E Reported PBT 108 179 233 294 380 EBITDA Margin 22.4 25.1 12.2 Source: Company.2 15.5 OPERATING CASH FLOW ( a ) 168 -315 400 248 285 D/E 0. HDFC sec Research.9 18.3 Interest Expenses 3 15 23 25 23 APAT Margin 10.0 4.0 5.0 5.0 0.7 5.0 36.7 17.0 8.9 21.2 19. HDFC sec Research.7 2.5 Capex -146 -696 -200 -280 -230 Net D/E 0.2 28.8 39.4 0.3 29.8 5.3 3.1 0.7 0.6 35.1 32.1 1. Private Client Group .3 EV / Revenues 5.6 1.0 14.7 Dividend Yield (%) 0.3 5.8 12.0 1.3 122.4 9.9 6.

Sell: Stock is expected to decline by 10% or more in the next 1 Year.PCG RESEARCH P a g e | 13 . PCG RESEARCH Price Chart 550 500 450 400 350 300 250 200 150 100 Rating Definition: Buy: Stock is expected to gain by 10% or more in the next 1 Year. Private Client Group .


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