Take a break

The company has diversified its product portfolio by introducing new offerings such as Zest and Club Mahindra Fundays,Mahindra Homestays,and travel and holiday related services through clubmahindra.travel.

Strengths

The company has a unique revenue model. For accounting purposes,its income is divided into two components. Nearly 60 per cent of the membership fee is treated as admission fee and is recorded in the profit and loss account for that year. The rest 40 per cent is treated as entitlement fee,which is recognised equally over 25 years. Moreover,members pay annual subscription fees. Nearly 94 per cent members pay their fee in instalments on which they pay interest.

In addition,the resorts earn revenue from spending on food and other activities. To improve its revenue and maximise occupancy,the company provides non-members access to its unutilised apartments on a per-night-tariff basis.

Membership has grown at a compounded annual growth rate CAGR of 32 per cent over the last three fiscal years.

Expansion plans

The company plans to set up resorts at new centres like Coorg,Binsar and Ashtamudi. It is currently developing a new resort on 41.64 acres at Tungi near Lonavala Maharashtra,and another on 9.27 acres at Theog near Shimla Himachal Pradesh. Moreover,it plans to expand its presence into tier-II and tier III cities as these are the cities that have been hit least by the downturn.

The company is also planning new products targeted at different income and age segments. The maximum occupancy at their resorts goes up to 75 per cent. MHRIL plans to use the utilised occupancy by offering a scheme to senior citizens that will have a membership of three years or so. Products such as large luxury villas for the high-income category and budget holidays are also on the anvil. The company also intends to expand its operations into international markets: it plans to sell family holiday vacation ownership and thus increase its membership base,and it also plans to acquire or develop resort properties abroad. It is currently evaluating markets such as South Africa and China.

Growth prospects

Domestic tourism has grown at a steady pace in India over the last few years. The percentage of holiday-takers has increased from 2.5 per cent in 2000 to 4.5 per cent of the total population in 2006. By and large,MHRIL caters to domestic tourists. The rising disposable income of the expanding middle class in India is expected to have a positive impact on domestic tourism,leading to more people being able to afford vacations in the next few years.

Concerns

A risk applicable to the leisure and hospitality industry is that preferences of members could change in future. Default on payment of subscription fee is another point of concern. However,according to Ramesh Ramanathan,managing director,MHRIL,Normally members who haven taken the holiday package hardly ever cancel the subscription. But other cancellations do occur from time to time. The rate is around 4 per cent.

Moreover,the economy is still not out of the woods. According to Bhavesh Gandhi,analyst at Indiainfoline,The next 12-18 months will continue to be quite a challenging time for the

hospitality industry.

Valuations and financials

MHRIL has virtually no long-term debt. It has current liabilities amounting to Rs 82.06 crore for FY09. Income and net profit have grown at a four-year CAGR of 42.9 per cent and 76.1 per cent respectively during the year.

Almost no other listed entity in India is into the business of vacation ownership. But Country Clubs India business has some similarities. We have hence used it for comparison. MHRIL fares well against this peer in terms of return on net worth RONW and margins see table. MHRILs RONW stood at 40.8 per cent in FY09. The issue received a Fitch rating of 4/5,which indicates that the fundamentals of the issue are above average compared to that of other listed securities.

Based on the number of shares outstanding after the issue,earnings per share EPS comes to Rs 9.5. And based on the price band of Rs 275-325,the price to earnings ratio P/E falls in the range of 29-34.3. This is a fairly high valuation.

Bottomline

With the Sensex trading at a trailing P/E of around 19.2,MHRILs valuation of 29-34.3 looks high. The companys high CAGR for income and net profit is the result of low base effect. The question is whether such high growth rates will sustain. One should wait and watch till the company proves its mettle,

says Veer Sardesai,a Pune-based financial planner.

On a similar note,Kishor Ostwal,chairman and managing director of CNI Research says: The high valuation of the company may compel investors to look at other stocks in a similar line of business that are available at cheaper valuations. However,if an investor wants to invest in this stock,he should hold it for the long term.

While MHRIL appears to have a good revenue model and a strong management,its valuation appears to be on the higher side. We would advise investors to exercise caution. Wait and watch the companys performance for a couple of years after listing to see how its growth rate sustains and only then invest.

niti.kiranexpressindia.com