Mahindra Holidays & Resorts Comes Up With OFS

The promoter of Mahindra Holidays & Resorts India (MHRI), Mahindra & Mahindra, is offering 34 lakh equity shares of a face value of Rs 10, representing 4.02% of paid up equity capital. MHRI has submitted a Notice of Offer for sale (OFS) on March 5, 2013. Its promoters hold a stake of 82.69% in the company as per the company's shareholding pattern submitted on December 31, 2013.

Earlier in the month, the company had announced an institutional placement programme (IPP) for disinvestment. However, the OFS announcement has surprised the market due to the issue of equity shares through OFS before IPP. Now there is scope for only 3.67% of equity capital for IPP if this OFS goes smoothly. The OFS will be issued exclusively through a separate window provided by the stock exchanges. The offer will commence on March 7 at 9.15 AM and close on the same day at 3.30 PM. The OFS by the promoters is to meet the SEBI norm on public shareholding in listed companies of a minimum of 25%, which the listed companies should meet by June 2013.

MHRI is engaged in providing family holidays through vacation ownership membership. Members can choose to stay and holiday at resorts in a range of holiday destinations for a per-determined number of days in a year for a fixed number of years. It has integrated business model and its services are spread across the entire value chain. It includes the acquisition of members, servicing of members, building of resort and operating it. The revenue model for the company entails earning revenue from sale of vacation ownership and other related services and helping members to finance their membership. Over and above that, the company collects recurring income from annual subscription fee and the other spending at its resorts by these members.

At the end of December 31, 2012, the company has a total of 2200 rooms and is spread over 40 resorts across India and other countries. The company is adding to its number of rooms with 20.3% CAGR since FY09. The company has 1,55,221 members for its holiday resorts as on December 31, 2012. Further, the company's CAGR growth for its membership is seen at 15.6% since FY09. MHRI has reported 81% occupancy for 9MFY13. Its occupancy was at 78% in FY12 compared to 75% in FY09.

MHRI earns mainly from vacation ownership income. For FY12, the company earned 61% of total income from vacation ownership, 14% from annual subscription fee, 13% from resort income and the rest from other sources. However, the company's EBITDA margin has dropped over the last couple of years due to its cancellation policy, reduction in non-member occupancy and pre-operating losses in new resorts.

On the valuation front, the floor price for the OFS is Rs 270 which is trading at 22.33x and 20.17x of Rs 12.09 FY12 EPS and Rs 13.38 TTM EPS. Yesterday, the stock price closed at Rs 276.35. The offer price is only little more than 2% discount to the market price. Moreover, the company's revenue model largely depends on the vacation ownership income which is expected to grow at a moderate rate. This is not seen since the last couple of years' membership addition. Considering a low recurring income and pressure on EBITDA margins, we recommend our readers to stay away from this OFS and the stock.