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Company Name 22 JAN 2016 Company Report BUY Target Price:Rs 520 CMP : Rs 356 Potential Upside : 46% MARKET DATA No. of Shares : 89 mn Market Cap : Rs 32 bn Free Float : 25% Avg. daily vol (6mth) : 132,319 shares Mahindra Holidays & Resorts India 52-w High / Low : Rs 475 / Rs 232 Bloomberg : MHRL IB Equity MISCELLANEOUS Promoter holding : 75% FII / DII : 8% /5% Cash Machine Price performance 250 Sensex Mahindra Holidays & Resorts 200 150 100 50 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Financial summary (consolidated) Key drivers Y/E Sales PAT (Rs Con. EPS* Change RoCE EV/E FY 15 FY 16 FY 17 FY 18 Mar (Rs mn) mn) (Rs) EPS (Rs) YOY (%) P/E (x) RoE (%) (%) (x) DPS (Rs) Mem. addn. FY15 8,119 803 - 9.2 (6.7) 38.6 10.9 14.7 17.5 4.0 8% 9% 8% 8% growth FY16E 9,839 1,200 13.0 13.8 49.5 25.8 15.9 20.8 12.3 4.8 FY17E 11,514 1,600 15.4 18.4 33.3 19.4 19.0 25.6 10.0 7.4 Mem./Room 65 65 65 65 FY18E 13,423 1,972 17.6 22.7 23.3 15.7 20.9 29.1 8.3 10.2 RoCE 15% 21% 26% 29% Source: *Consensus broker estimates, Company, Axis Capital 22 JAN 2016 Company Report Mahindra Holidays & Resorts India Reminiscences of a member… MISCELLANEOUS I realized the perils of a time-crunched sell-side job when my wife threatened Holiday activities at resorts to go on holidays with the kids without me! And so I signed up for Club Mahindra (CM) after great reviews from common friends who were having enjoyable family holidays, from the smallest of extended weekends to the sacrosanct annual family vacation without fail at new exotic locations each year My first vacation at Varca beach Goa was an eye-opener. To me, the most enjoyable part was that I didn’t have to chaperone my kids around, and I too could have a proper holiday. Each member of my family found many others of common interest to occupy themselves with. And thus my investing mind did what it does best – hovered over the premises. I discovered one by Tea leaf picking at Munnar one, the exceptional moats that surround the CM business model: Each day of my ‚do nothing‛ vacation involved a bunch of activities for people of different ages and backgrounds, it has something for everyone! – From treks to dancing classes for the hyperactive, and of course board games and the massage spa for the mentally hyperactive like some people I know I experienced first hand the exceptional ‚service‛ ethos where the staff was geared to adjusting and dealing with a motley crowd with an omni-smile Locations were usually in the bosoms of nature, saving costs and yet, allowing for massive expanses of manicured landscapes and facilities. They were beautifully maintained, partly because CM has inflation-linked annual payment. The absence of this was the main reason competitors’ locales were maintained badly Source: Company, Axis capital 2 22 JAN 2016 Company Report Mahindra Holidays & Resorts India …and the covering analyst MISCELLANEOUS If it weren’t for the Mahindra brand name, I doubt I would pre-pay for 25 years of vacation! So when I put pen to paper, realization drew upon me that ‚I‛ funded the capex and opex of the resorts (through initial membership fee and Annual charges), but the best (or the worst) part is that I didn’t own them. So, who owns the asset base? The shareholders!! This set me thinking on the business model: Operational RoCE in this business seemed uncapped, as there isn’t any perpetual equity/ debt requirement, and customers fund both the expansion and its running costs My dinner conversations with fellow members revealed that most memberships were less than 10 years old. Hence, over the next 10-15 years, there would be a steady stream of members completing their vacation entitlements. This implies CM can again sell these memberships (post the 25 years) on its existing infrastructure at the inflation-adjusted prices creating superior ‘terminal value’ No business analysis is complete without a properly thought out DCF. Given the convoluted (well justified though!!) accounting, run-of-the-mill valuation matrices do not hold stead (also there is no real comparable domestically or internationally). Hence we rely on the righteous DCF to guide us through the valuation arguments. We use a two-stage DCF with key variables being membership addition (bringing in the CFO) and increase in room inventory (spawning the capex). We believe a 8% CAGR for member addition and room inventory is not unreasonable given the historical 17% CAGR and 20% CAGR for member and room addition respectively and the underpenetrated market for vacation ownership in India. Our DCF generates a fair value of Rs 520 (FY17) indicating a potential upside of 46% from CMP. -- Kashyap Pujara The promise of delivering quality holidays for 25 years is assured by brand Mahindra 3 22 JAN 2016 Company Report Mahindra Holidays & Resorts India What is changing? MISCELLANEOUS Getting the member/room economics working; significant FCF generation going forward FCF (Rs mn) No of Rooms Member/ Room Ratio (RHS) (Nos) Declining member/room ratio led to 100 4,000 higher room addition per incremental customer leading to 90 3,000 lower/ inconsistent FCF generation 80 2,000 70 1,000 60 0 50 (1,000) 40 FY07 FY08 FY11 FY12 FY14 FY15 FY18 FY19 FY09 FY10 FY13 FY16 FY17 FY20 Source: Company, Axis Capital FCF generation despite the continual room addition indicating no reliance on external funding while delivering on the promise of vacations The member room economics entailed walking on the thin line which had valley of overcapacity on one hand and the ocean of dissatisfied customers on the other The company at 65 members to a room seems to have cleared out the kinks in its model Improving member room economics leading to stable FCF generation 4 22 JAN 2016 Company Report Mahindra Holidays & Resorts India Mahindra Holidays: It Came...It Saw... It Conquered MISCELLANEOUS Club Mahindra (CM) business model Room revenue Mahindra Holidays & Resorts Non- Spending India Limited (MHRIL), popularly Provides 1 week/year unique holiday at resort members experience for 25 years known as ‚Club Mahindra‛ (part of Mahindra Group), is the Unused inventory for undisputed leader in the Indian Resort non-members Spending at resort Vacation ownership (aka - time- share) industry with >70% Build resort financed market share by member payment Purchase vacation ownership Customers are willing to pay Interest on EMI Member upfront for vacations to be Annual subscription fee delivered over 25 years due to their belief in the promise made by brand ‘Mahindra‛ Recurring Income Fixed payment Service offered Source: Company, Axis Capital Club Mahindra (CM) offers customized holiday solutions to its member families drawing on its comprehensive bouquet of holiday destinations ranging from hill stations, beaches, back-waters, wildlife, deserts. CM has a base of ~190,000 members (up 7x in last 10 years) and 45 resorts (2,867 rooms). This implies the company has ~65 members to a room The company offers a four tier membership structure {purple (highest), red, white and blue (lowest)} with initial membership costs ranging from Rs 0.2 mn to Rs 1.7 mn. It also offers membership according to the size of the unit (Studio, 1BR, 2 BR) with the studio ownership being the most popular with the customers Property title vests with CM. Recurring income (resort income + ASF) stream adds to income stability 5 22 JAN 2016 Company Report Mahindra Holidays & Resorts India Contents MISCELLANEOUS Page Extra-ordinary business model 07 Why CM trumps hotels !! 12 Prudent capital allocation 15 Valuations and Risks 19 Value proposition for customers 24 Investors’ key concerns 29 Industry still at nascent stage 34 Appendix Club Mahindra 39-44 Global peers 46-51 Company financials 52 6 Extra-ordinary business model Profitability both at HO and resort level with no need for external capital Sustained competitive advantages in the drivers seat 22 JAN 2016 Company Report Mahindra Holidays & Resorts India Robust business model – no reliance on external capital for growth MISCELLANEOUS Upfront per room membership fee (one-time) Annuity Income at resorts (per room) Memb er/ Particulars Amount Total Room Particulars Amount Units Total Initial membership fee 400,000 65 26,000,000 Annual subscription fee 13,000 65 845,000 Customer acquisition cost 150,000 65 (9,750,000) Resort income (Weeks) 9,082 50 454,124 Capex per room 7,500,000 1 (7,500,000) Revenue from non member rooms (Weeks) 31,108 4 124,432 Surplus at HO 8,750,000 Resort income 1,4 23,556 Source: Company, Axis Capital Source: Company, Axis Capital Used to fund Corporate OHs Used to fund Brand promotion activities Resort Expenses (~Rs 1.1 mn Building land banks per room per annum) Net surplus per room Net surplus per room ~Rs 2 mn ~Rs 0.4 mn pa Upfront payment for membership – initial cash flow used for building more resorts. As a result, the company does not have to rely on external capital for funding room inventory Spends at resort and Annual Subscription Fee (ASF) = recurring income for Mahindra Holidays Other sources: Interest on EMI + sale of excess room inventory to non-members Ownership of property stays with the company. If regularly maintained, capex requirement when the renewals start kicking in (post 25 years) would not be significant Property title vests with CM; recurring income stream adds to income stability 8 22 JAN 2016 Company Report Mahindra Holidays & Resorts India Net cash company/ equity dilution only for regulatory purposes MISCELLANEOUS Gross block funded predominantly through internal accruals FY10 FY15 FY20 Share Share Capital + Share Capital + Securities Capital + Securities Premium Securities Premium Premium 84% 55% 76% Built Built through Built through internal through internal accruals internal accruals accruals Source: Company, Axis Capital IPO: In 2010 – the promoters reduced holding to 83% from 93% Promoters further issued equity in 2013 only to reduce ownership to below the regulatory minimum of 75% In FY15, the company raised debt of ~1.3 bn for acquisition of the Finnish subsidiary.
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