FINOLOGY.

IN® Fair Telegram @MDiscord

Expensive

RESEARCH

Date 13/05/2019
Mahindra Holidays & Resorts India Limited.

COMPANY OVERVIEW FINANCIALS

Mahindra Holidays and Resorts India Ltd. operates in the CAGR Revenue Growth (10 year) - 11.79%
leisure hospitality industry. lt currently owns 59 resorts
across popular tourist locations all around the country and CAGR Profit Growth (10 year) - 5.28%
also abroad (Dubai, Kuala Lumpur, Singapore, Bangkok,
ROE (Mar 18) - 18.68%
etc). lt has also recently acquired Holiday Club Resorts
(HCR), Finland. Presently, Mahindra Holidays has a strong ROCE (Mar 18) - 30.49%
member baseof over 250000 families.
EPS (Mar 18) - Rs 7.55
Mahindra Holidays basically offers family holidays
designedto meet the diverse holiday needsand interests of P/E ratio (Mar 18) - 41.50
the family. They generate revenue by providing a vacation
Debt equity ratio - 1.14
ownership (VO) membership to their customers. Once a
person becomes a member, they can choose to stay and NPM (Mar 2018) - 12.63
holiday at the wide ranee of resorts owned by Mahindra
Holidays for a particular number of days (7 days a year in
their flagship offering) in a year for a period of 25 years.The
company also charges an annual subscription fees for the What is Good ?
maintenance and upkeep of their resorts. Another source
of revenue for the business is through the food and • Guaranteed income
beverage, Spa and other recreational services provided at • Strong Moat
their resorts. • Float (due to getting paid upfront)

Their main target customers are the urban families. • Cash rich
However, they intend to grow and thus have diversified • Multiple revenue sources
their portfolio by introducing new vacation ownership Good growth rates
offerings, Zest and Club Mahindra Fundays, and travel and
holiday related servicesthrough clubmahindra.travel. Quality members

Zest targets older urban families (people above the age of

What is Bad?
50) for short break holidays. Zest membership currently
• Limited market
entitles members the choice of holidaying at resorts, for six
dayseachyear, in a seasonof their choice for 10years. Club • Competition from tourism companies
Mahindra Fundays, launched in October 2006 and targets • Customers may not be willing to plan
corporate houses. The membership currently entitles for long in the future
corporates for a period of 10 years to offer family holidays • Increase in debt due to acquisition
to their employees.

Source:- Investor Presentation

 Fl NO LOGY.IN® Telegram
Date @MDiscord
13/05/2019

What's the moat?

Cost Advantage: -The major cost for businesses operating in the leisure hospitality industry is the
cost of the land and the building. Most hotel chains try to get prime locations in cities to get more
occupancy thus paying exorbitant prices. However. this is not the case with Mahindra Holidays. They
have the advantage of availing land at extremely cheap prices as they build their resorts far away
from the cities. This helps them save costs to a very large extent.

Float: - Also, their business model ensures that they are paid well in advance. Customers pay today
for what they will receive over a period of 25 years. This gives the company a huge float. Apart from
this the company has 2 other sources of regular income viz; Annual Subscription Fee (ASF) and food
and beverage income.

Another huge advantage Mahindra holiday's is their high occupancy rates. Since customers have
already paid for the services, it is very unlikely that they don't come and stay at the resorts. Mahindra
Holidays can churn out revenue through its other F&B,spa and wellness services. Mahindra Holiday's
occupancy rate is as high as 85%.

BUSINESS

l)Ooes the company have sustainable Moat? (4)

Yes, the company has a strong sustainable moat in terms of its cost advantage. Mahindra Holiday has
its resorts in remote locations away from the hustle and bustle of the city as they aim to provide a
peaceful holiday retreat to its members. This allows them to avail land and extremely cheap prices in
comparison to their peers who look for land in prime spots in cities to increase occupancy.
Also. once customers become members. they cannot switch. They continue to generate revenue for
Mahindra Holidays in the form of ASF and services received at the resort during their vacation.

2)Does the company have strong Pricing Power? (3)

Yes, Mahindra Holidays caters to the urban population of India. Their market more or less consists of
well to do, consistent income earning customers who are not very price conscious. These are
generally consumers who are looking forward to quality service.
Also, once membership is taken, the company can earn heavily through its food and beverage
services. The locations are generally in remote, picturesque locations away from cities leaving the
members no other choice than to have their meals in the resorts.

3)1s the business simple to understand? (4)

Yes, Mahindra Holidays is a time share business and offers vacation ownership. lt basically means. it
generates revenue by selling memberships and it also charges annual subscription fee (ASF)for the
maintenance of its resorts. Its members can take avail their services for 7 days every year for 25 years
after taking membership.

4)Does the business operate in a fast-changing industry? (3)

No. the business doesn't operate in a fast-changing industry. The company however currently caters
to a niche market, but with the introduction of new offerings like zest and funday, the company is trying
 Telegram
Date @MDiscord
13/05/2019
Fl NO LOGY.IN®
to cater to a broader customer base but also ensuring it acquires only quality consumers.
There is a threat of some tourist locations becoming unfavourable, but it is highly unlikely and cannot
be considered as fast-changing. Mahindra holidays is also trying to increase the number of locations
to negate such threats and offer more variety to its members

5)1s the company under the threat of being substituted or outdated? (2)
Tourism is a growing business in India today. People who like to travel may not be necessarily be ready
to commit themselves to an upfront payment and may prefer travel packages as and when they decide
to go for a holiday. Today'sgeneration doesn't really seem to be the "plan for the future" types and this
may prove to be a set-back for Mahindra Holidays.

On the other hand, the members pay for their services upfront. This means once you are a member.
you have made a sort of a commitment. Since, the customers have paid, they try to make it a point to go
for their holiday.
Also, this spans a long 25 years, so it is highly unlikely that the business will suddenly get outdated.
Also. every year the members pay a subscription fee. and when they go on a vacation, they pay heavily
for food and beverages.

6)1s the company's business immune from easy replication by new players? (4)
Yes, Mahindra Holidays has a total of around 58 resorts at popular tourist locations across the country.
This essentially means that it can offer as many choices to its members every year. Any new player
entering this business model will have to be able to provide better services in order to attract
customers to his business which seems quite unlikely. Also, it involves several licenses, regulations,
permissions, etc which makes it more difficult for new entrants.

7)Does the industry have long term visibility? (3)

Yes, the business of time share itself is all about the long term. Mahindra Holidays is now all set to
generate revenue every year from its members in the consumption in India has been on the rise. The
urban population today is gifted with more disposable income in their hands, and this is good news for
Mahindra Holidays.

8)To what degree is the business cyclical, countercyclical, or recession-resistant? Is the earnings
growth constant or cyclical? (3)
The business offers services over a period of 25 years. The customer doesn't buy the service for a
short period. Therefore. the business is not cyclical or seasonal. However, a recession in the economy
could dampen the sales to an extent.

9)1s the industry in which the business operates highly regulated? Can regulatory or geopolitical
changes affect the working of the business? (2)
Yes, a business like Mahindra Holidays does require regulatory approvals, sanctions, licenses,
registrations and permissions for their operations. Also, many these expire in due course from time to
time and it is required for the business to apply for renewals. There is a sort of uncertainty in obtaining
regulatory approvals, licenses, sanctions. etc and if the company is not able to obtain such
requirements, the business could be adversely affected.
ln a country like India, the government exercises significant influence over many aspects of the
economy, but we don't necessarily think this will affect hospitality business significantly.
 Telegram
Date @MDiscord
13/05/2019
Fl NO LOGY.IN®

MANAGEMENT

l)ls management's salaries too high? On what basis warrants and ESOPs are issued to the
management? (3)
No, the management salaries are not too high, they are reasonable. The managers earn a salary of
around 4.2% of the net profits.

2)1s the company free of promoter pledging of shares? (4)

Yes, the company is free of promoter pledging of shares. Also, one good point to note is that the
promoters a massive 67 .36% of the total shares of the company.

3)1s the management trustworthy? Do they have a history of compliance and legal troubles? (2)
The Mahindra Group is known for its ethics and corporate governance, however, there is a history of
compliance and legal issues for Mahindra Holidays. There was a complaint filed against the
management. the then MD Mr. Ramesh Ramanathan and a few others by one of their members.
There have been no issues in the recent past.
The Mahindra group has quite a trustworthy history and we can bank upon 1t to handle any
management or compliance related issues.

4)Has there been any substantial equity Dilution in the last 2 years? (3)
No, there has been no equity dilutron in the previous two years. There has been an increase in the
equity share capital due to the issue of bonus shares in the proportion of 1 2, i.e one bonus share for
every 2 shares held in the year ended 2018.

5)What has management done with the free cash in the past years? (3)
Mahindra Holidays, even though looking for expansion. has always paid high amounts of dividends. ln
FY2018, it paid dividends as much as 40% of the total net profits. lt has also indulged in several
investments in its subsidiaries.

6)1s the management guilty of di-worsification? (4)

No. the management is not guilty of any di-worsification. All its acquisitions are related to the
hospitality industry.

?)Are there too many related party transactions? (2)

Yes. there are quite substantial amounts of related party transactions. Given the nature of their
business it is more or less acceptable. There are significant investments in its subsidiaries Gables
Promoters Pvt. Ltd. and Infinity hospitality Group Company Ltd from the past two years.

8)1s the tax payout less than 25 % (4)

No, the company has paid substantial taxes in the previous two years. ln the year ended 2018 the tax
pay-out was 34.28%of the net profits.
 Telegram @MDiscord
Fl NO LOGY.IN® Date 13/05/2019

FINANCIALS

l)Does the business have a consistent sales and profit growth history and is there room for future
growth? (3)
Yes, the business has been growing consistently both in terms of revenue and profits from the last 10
years. The company has been focussed on expanding its resorts to cover almost all the popular areas
in India and its acquisition of Finland's Holiday Club Resorts (HCR) is evidence that it is looking to
expand into locations abroad as well.

2)Does the company enjoy significant degree of operating leverage? (3)

Yes, Mahindra Holidays enjoys quite a high degree of operating leverage. The percentage of profit from
the revenue earned from every new member is huge.

3)Are the profit of the company actually turning into cash flow? (4)
Yes, Mahindra Holidays is able to convert its profits into cash flows. ln fact the company has a huge
advantage due to its business model, which creates a huge float. Therefore, it does have a high amount
of operating cash flows.

4)Has it generated healthy return ratios? (4)

Yes, Mahindra Holidays has a very healthy ROE of 19.65% and ROCE of 20.51%. These ratios are
significantly higher compared to its peers.

5)Does the business generate strong free cash flow? (3)

Yes, the business model of Mahindra Hotels is such that is has to generate strong cash flows as long
as it increases its members. Quite evidently, people taking Club Mahindra memberships have been
growing consistently over the years. The business does generate strong cash flows. However, the
business is still looking to expand into newer locations.

6)1s the company conservatively financed? Is the debt to equity ratio of the company= 1 (1)
Mahindra Holidays has a debt equity ratio of around 1:1. ln other terms, 50% of its capital is financed by
debt. On a standalone basis however, the company is virtually debt free. The debt values projected on
the balance sheet are all from its subsidiary companies.

7)Canthe company run its business without relying on external funding in the upcoming years? (3)
Yes, the company has significant amount of reserves and generates healthy cash flows every year to
help it sustain without relying on external funding in the upcoming years. ln fact. it is also on the road to
clearing its debt in the coming years. The company has a strong cash position of over 500 erares.
 FINOLOGY.IN® Telegram
Date @MDiscord
13/05/2019

BEHAVIORAL

1)Whatis the general sentiment around the stock? (3)

The Mahindra Group is a highly reputed organisation. Mahindra holidays is also a leader in the vacation
ownership business in India. lt is also known to be the biggest vacation ownership business in the
world outside the USA.

The business model seems to be a good revenue generator for the company. The stock is currently
trading at Rs 238. The stock has however experienced quite a few fluctuations across the previous 2
years. This may be due to the acquisitions made by the company and its expansion plans.

VALUATION

Current Market cap 3191 erares

Current market price Rs 238.95
Current P/E 36.26 Score= 74/100
EV/EBITDA (2018) 5.39

Valuation Fy14 Fy15 Fy16 Fy17 Fy18

EPS 7.14 5.93 8.57 9.81 7.55

P/E 22.59 29.98 31.38 30.03 41.50

PEG Ratio -3.37 -4.05 5.50 0.37 -1.26

Enterprise Value/EBITOA ratio 2.85 3.13 3.85 3.61 5.39

Mahindra Holidays and Resorts India Limited has seen a constant and rather consistent growth since
it started its operations in 1996. Its strategy of focussing on the right quality members ensures they
get good amount of cash flows upfront. ln the year ended 2018, they have added approximately 18000
new members. The total number of members currently is over 2,50,000.
The company has also acquired Finland's Holiday Club Resorts (HCR) which has crossed its break
even and is running in profits from the previous year. This new acquisition is also set to boost its
earnings in the coming years. HCR owns 25 resorts in Finland to date.

The earnings of Mahindra Holidays has been around 12.3% in the previous three years. lt has been
successfully increasing its membership numbers using aggressive marketing techniques
(percentage of sales expenses of total expenses in graph).

The company is highly rich in cash, with over Rs 520 erares of cash in hand. lt is on the road to clearing
its debt and its rich cash position will only make that process hasste free. lt also uses a self­
sustainable model for its growth and expansion.
Taking the above factors into consideration, we can take an estimate of a 14% CAGR in earnings over
the next 3 years. The PE of the stock can be estimated at an industry average of 27x.
 Telegram @MDiscord
FINOLOGY.IN® Date 13/05/2019

(Est) CAGR in EPS over next 3 yrs 14%

(Est) EPS after 3 years 14.80

Current PE 36.00

(Est) PE in 3rd year 27.00

(Est) Stock price 399.62

Current Market Price 238.95

(Est) CAGR return in 3 yrs 18.70%

Stock - Fair Value (@15% Rate of return) 262.75

Margin of Safety 20%

Fair Value of the Stock after MoS (20%) 210.20

After doing the above calculations, we arrive at a fair value of around Rs. 262.75for the stock. Keeping
a margin of safety of 20% for any errors or deviations in estimations. we arrive at a fair value of Rs
210.20.Therefore, the currently the stock is slightly overvalued.

Fair/Intrinsic Price - Rs 210

Depreciation Vs. Other Expenses

2018

2017

2016

2015

2014
•
2013
•
2012
•
2011
•
•-
2010

2009

450.00 900.00 1,350.00 1,800.00

• Expenses Depreciation • lnîerest •Tax

 Telegram @MDiscord
FINOLOGY.IN® Date 13/05/2019

Fig. 1 : This Chart shows the amount of depreciation, Interest and Tax of the total expenses. (Figures in
Creres)
Since the business is asset heavy and also has quite a significant amount of debt on its balance sheet,
one may easily assume that a major portion of the expenses would be toward interest payments.
However, on a standalone basis, the company is virtually debt free. Interest expense constitutes a very
little part of the total expenses

Marketing and Distribution Expenses

• Selling and admin Expenses
1750.
1400.
1050.
700.
350.
O.
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Fig: 2 Here. we can see the amount of sales expenses in the total expenses. The sales expenses
constitutes a major part of the expenses as the company is using aggressive sales techniques to get
new members on board. The basic reason is, once someone becomes a member, he is a revenue
generator to the company for the next 25 years. (Figures in Creres)

Sales • Operating •Net Profit

Fig: 3 This chart shows how the company has rapidly increased its membership figures from
the past 3 years. (Figures in Crores)
 Telegram @MDiscord
FINOLOGY.IN® Date 13/05/2019

Disclosure:
Finology Ventures Private Limited, a SEBI Registered Investment Advisor (INA000012218)
has no disciplinary history as on the date of publication of this report. We certify that the
views and opinions expressed in this report accurately reflect the views of Miss Urvi Kotak,
MBA, our research analyst and the author of this report about the subject company.

lt is hereby certified that no part of her compensation is, was or will ever be related to the
contents of this report. Further, it is certified that neither the Company nor the research
analyst or any of her relatives have any financial interest in the subject company or conflict
of interest with the same whatsoever.

Disclaimer:
This special report is meant as a source of information only so as to enable the readers to
further their own research and must not be used as the sole basis of any investment
decision. The readers are advised to further research on the subject company and consult
an investment advisor before taking any decisions. Nothing contained in this document
shall be construed as investment or financial recommendation or advice. The author may
change their views as and when tíme warrants without any notice.

Neither Finology ventures Pvt ltd. nor any of its employees (the "Company") have received
any compensation from the subject company or have had any relations with it.

This report is not meant or directed for use or reference of any person residing, situated or
located in any place or jurisdiction where any such use or reference would be contrary to
the local law(s). Any such user who receives this report is hereby advised to ignore it.

This document is published on the basis of information publicly available, internal data and
other reliable data sources believed to be true but the Company does not guarantee any
accuracy or completeness of the same. The Company shall not be responsible for loss or
damage faced by the reader(s) arising out of any error in the information contained in this
report or any decision taken based on the same.
The information and content of this report may not be reproduced, circulated or conveyed
by the readers in any form through any means without prior written permission of the
Company.

Disclosure as per SEBI Guidelines:

1. Neither the Company nor any of its employees have served as an employee, officer or
director of the subject company.
2. The Company does not have any financial interest in the subject company.
3. The Company does not have actual or beneficial ownership of more than 1% in the
subject company at the end of the month immediately preceding the date of publication
of this report.
4. The Company has recommended the subject company to its Clients and the Research
Analyst (Urvi Kotak) has personally not invested in the stock