Wait For Your Turn - Mahindra Holidays & Resorts India

In the recently concluded first quarter of fiscal 2011, Mahindra Holidays & Resorts India (MHRIL) added 3,945 members in Q1FY11 as against around 5,400 in the same period last year. The main reasons for this sharp decline are: increase in down payment to 15 per cent from its earlier 10 per cent, reduction in the maximum financing period to 48 months from its earlier 60 months, streamlining of workforce and payment of commission to agents over 12 months against six months. The main aim of the entire exercise was to improve the overall quality of membership addition.

To increase the customer satisfaction levels, the company has also stopped or reduced the availability of rooms to non-members. According to PS Doraiswamy, Chief Financial Officer (CFO), MHRIL, “these steps have been taken by the company for its long-term benefits.” The changes mentioned above have taken place in the third or fourth week of April and therefore the sales team has taken some time to adjust to the new strategy. According to him, “the impact will not be a longer one and improvement in volume has been witnessed on a month-on-month basis and will get better going forward.” The company presently has five products.

Club Mahindra Holidays (CMH), launched in 1997, is the flagship brand of the company and contributes 92 per cent of the revenues. CMH offers family holidays of seven days every year for 25 years and it targets the age group of 30 – 55 years. CMH has been classified into three seasons which are red (peak season), white (good climate season) and blue (off-peak season). The next in the basket is Zest, launched in 2006, which targets a group of those in their late 20s or early 30s. It offers a holiday of six days every year for ten years across five resorts viz. Kodaikanal, Masinagudi, Ooty, Puducherry and Yercaud. Club Mahindra Fundays (CMF) is a product launched in 2006 which is uniquely designed for the corporate members and offers points-based platform to aid flexibility to customers. Till date MHRIL has sold around 2.12 million points. Here a corporate can buy points from MHRIL in bulk and their employees can redeem that points by availing an holiday at any MHRIL resort across all destinations. Club Mahindra Travel (CMT), launched in 2008, is a travel portal which offers unique family travel ideas and travel services. This portal is accessible by anybody, including non-members. The last product in the basket is Mahindra Homestays, launched in 2008, which provides accommodation in private homes and currently has 250 homes or 750 rooms across 15 states in India. This product has also been launched in the United Kingdom. [PAGE BREAK]

This is a unique concept introduced by the company under which they register private homes that provides the tourists to get a good feel of the areas they are visiting. According to the company, this product has very high potential and the maximum bookings are done by foreign tourists visiting India. At present the company has a room inventory of 1,489 rooms across 33 resorts with a pan-India presence. Out of the total room inventory, MHRIL owns 1,058 rooms/apartments and the others are either on long or short lease.

The company plans to add 500 rooms in the current fiscal and has a capex outlay of `200 – 250 crore for FY2011. MHRIL has launched 22 floating vessels in the Asthamudi Lake in Kerala and the resort in Coorg in Karnataka has 186 rooms fully usable while 34 rooms are planned to be added soon. The Greenfield Resort at Tungi near Lonavala in Maharashtra has faced some delays and is expected to be operational by the end of Q2FY2011. The company also has land banks for the future in several areas like Kas and Varwade in Maharashtra, Kadapakkam in Tamil Nadu and in Andhra Pradesh near Hyderabad. Going by international standards, the cost of acquisition of a client is as high as 50-60 per cent but the company has been able to contain the cost to a minimal of 32 per cent in the recently concluded fiscal 2010, which is down from 37 per cent. The company also plans to launch new schemes and restart selling the purple membership which allows its members to avail holidays in all the other categories.

The company has also revised the annual membership fee which may act as a deterrent going forward. It has also stopped booking from non-members. The current occupancy rate stands at around 85 per cent. The company is over-booked with respect to the number of members and room availability. Even if they took no walk-ins they will leave about 30 per cent of their members unsatisfied – and that percentage has not changed much in the last year.

Due to the new policy taken on acquiring membership, the company has suffered on the financial front in the [PAGE BREAK]

recently concluded first quarter of fiscal 2011. The topline has declined by 25 per cent on a YoY basis and the bottomline witnessed de-growth of 61 per cent. The reason behind the decline is the adoption of new strategies and tepid growth in membership addition. According to Doraiswamy, “this is a phase of consolidation and will take two to three quarters more for the business to stabilise.” MHRIL added 13 rooms during the quarter, taking the total to 1,489 rooms in Q1FY11 as against 1,476 in FY10. During the quarter, the company added Ranthambore (25 rooms) and dropped Auli (10 rooms) and Mahabaleshwar (5 rooms). Tungi (Maharashtra), which was to become operational by Q1FY11, has now been postponed to Q2FY11 due to some clearance issues.

The company expects to open 84 rooms in Q2, followed by the remaining 66 in October 2010. The company maintains its stand of estimated 500 room addition in FY11. On a TTM EPS of `11.69 the company trades at a P/E of 40x. The EV/EBITDA stands at 23.88x. The debt to equity ratio stands at 0.1 which is on the lower side. The company has announced a dividend of 40 per cent for the fiscal 2010. The valuation for the company looks a bit on the higher side but due to lack of peers the company enjoys premium valuation. Looking at the higher valuation, the upside potential for the company looks to be capped for the time being. When we compare it with conventional resorts we find that that it trades at a higher P/E. Going forward the growth of the company depends largely on membership addition. Therefore, don’t expect any quick returns from the company.