Sunday, February 28, 2010

Technical Analysis - Mahindra Holidays & Resorts


The company is a dominant player in the vacation ownership business.

Srividhya Sivakumar

Shareholders with a long-term perspective can retain their holdings in Mahindra Holidays & Resorts, the leading vacation ownership provider in the country. With a business model highly dependent on the domestic consumption story, the slow uptick in the economy suggests improving prospects for the company. A strong brand equity, multiple sales channel and unique revenue model further fortify its investment appeal.

However, at the current market price of Rs 434, the stock appears fully priced, trading at about 30 times its likely FY-11 per share earnings. While not having any strict comparables and being the market leader do lend room for premium valuations, it appears fairly valued at the current price. Near-term upsides, therefore, may be limited.

Unique model

In the business of vacation ownership, Mahindra Holidays' revenue model entails an upfront payment of the ownership fee with a recurring annual maintenance fee component thereafter.

This provides for higher visibility and a more stable stream of revenues compared to that of pure hospitality players. And unlike the asset-heavy hotel industry, the company does not operate on a capital-intensive business model. It adds to its assets only against the payment received on member additions. As a result, it enjoys strong cash flows and has near-zero debt on its books.

Mahindra Holidays, however, sells a significant majority of its memberships through financing schemes (monthly instalment options) and even securitises a portion of its receivables. While financing the vacation ownerships helps add to its member count, it also complements the revenue stream by way of interest income.

The risk of default is low here considering the overall profile of its member base — consisting of mostly employed professionals who are reasonably sound financially. And since MHRIL continues to hold the assets, the impact of defaults, if any, would only be negligible.

Besides, that it has so far managed to operate with near negligible rates of default lends confidence. That said, it still remains to be seen how the company would manage member additions in an increasing interest rate regime.

High interest rates tend to curb discretionary spending by consumers and so can pose a threat to member additions. This is especially relevant in the case of MHRIL since its business operates on the difference between the interests its pays to banks and the interest rate in-built into the EMI schedule of its members.

Growing membership enrolments — which is the key driver for future growth — at historical growth rates may, therefore, not be as easy (34 per cent compounded rate over the last four years).

Financials


Even though the company has a diverse source of income, its key contribution still comes from member additions only. Of the total membership fee charged, the company books nearly 60 per cent of that in the same year, while the rest is spread over the life of the membership (typically 25 years for the flagship Club Mahindra product) as entitlement fees (annuity income). It also charges an annual subscription fees over the life of the membership.

Over the last four years, Mahindra Holidays has grown its revenues and profits at a compounded annual growth rate of about 40 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.

For the nine-months ended December 2009, the company managed to grow its revenues by about 18 per cent. Profits surpassed last fiscal's full year earnings helped by a slew of cost-control measures, which helped expand the operating margins by about 4 percentage points to 38 per cent.

The company, however, is required to spend considerably towards sales and marketing exercises (its largest cost component), as member additions hold the key to its growth.

While bringing down the sales and marketing expenses last quarter helped it better its operational performance, it may pose a threat to member additions if the cost component is brought down drastically. This cost component therefore may have to be monitored vis-à-vis member additions in the coming quarters.

But to its credit, MHRIL enjoys a fairly strong brand loyalty; over 35 per cent of the vacation ownerships sold in 2009 came through member referrals.

Health check since IPO

The company had raised roughly Rs 177 crore through its public issue in June last year for funding the proposed addition to its room inventory (capex to extend up to FY11).

As against 1,105 rooms in FY-09, the company had, as of December 2009, created an inventory of 1,403 rooms.

Member additions in the nine months from FY-09, however, have been lower than its yearly average, growing by about 17 per cent; it now has 109110 members as against 92,825 vacation owners in FY-09.

The member per room ratio too has improved, decreasing from 84 in FY-09 to 78 members per room now. And with average occupancies hovering around 75 per cent, the proposed addition to room inventory will further help the spread. It plans to expand its property in Coorg, Ooty and Ashtamudi and set up of new ones in Tungi and Theog.

Source BL


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