Mahindra Holidays and Resorts -Overvalued

IPO market seems to be brewing up. The companies, sensing an opportunity and with better valuations available are trying to cash in on the situation, either through private placements or through IPO, as in the case of Mahindra Holidays and Resorts. The issue will end a 15-month drought in India as firms had desisted from coming up with a public issue on account of valuations and sentiments being very low.

Mahindra Holidays and Resorts IPO opened on June 23, 2009 and is going to close on June 26, 2009. It seems Mr. Anand Mahindra has made it a habit of hitting the market, when everyone else is away, as even in the case of Tech Mahindra, he came up with an IPO when no one was around.

First a look at business and then at valuations

Business

Mahindra Holidays and Resorts India Ltd. are in the business of leisure hospitality services in India. They offer different kinds of services that target different set of customers. The services that are offered are :

Club Mahindra Holiday Vacations

Under this scheme, the members can choose to holiday in any of the predetermined resorts for a fixed number of days in a year for a fixed number of years.

Zest

Mahindra holidays sensing an increase in the no of young urban families, came with this scheme to lure them to its resorts. Zest members get an option to choose between 5 resorts, for 6 days each year, for a period of 10 years.

Similarly the company has other offerings in the form of Club Mahindra Fundays and Mahindra Homestays.

The business model of Mahindra Holidays and Resorts is entirely different from hotel business. In this case members pay an upfront fee and then an annual subscription fee, whereas in case of a hotel, a person has to pay every time he comes for a stay. The company has been able to report reasonably good results and is not recession hit, as is the case with hotels. The reason behind it could be, that the company does not depend on occupancy level but depends on membership fee, which is paid annually. Now, if a person has paid a one-time upfront fee, which is non-refundable, then he would obviously pay annual membership fee to continue with his membership( Annual membership fee is substantially lower than upfront fee).

Financials

As reported by the company in its prospectus, the total revenues for FY2008-09 stood at Rs 442.12 Cr, which is a tad higher than revenues for FY2007-08 at 377.19 Cr. The net profit for the last three years was Rs. 79.80 Cr, 84.03 Cr and 42.52 Cr, and most importantly, it had a positive cash flow from operating activities. The company has been witnessing an average growth of 33% in the memberships over the years and currently has around 1 lakh members.

Valuations and Outlook

The company's business model is based on vacation ownership and enjoys the advantage of being a first mover. Even the outlook for such an industry is definitely positive, especially with rising income levels, but the valuations are high as explained below.

Mahindra's have set the price band in between Rs. 275 to Rs.325 for its initial public offer (IPO) of 9.27 million shares. The issue comprises a fresh issue of 5.89 million shares and an offer for sale of 3.36 million shares by M&M, and would represent about 11% of the post-issue paid-up capital. A simple calculation reveals, that the total shares of the company will be about 8.36 Cr. Now, if we take into account this year earnings which stands at 79.8 Cr, then the EPS comes out to be about Rs 10.

So, the valuation of IPO is highly priced in as the PE multiple works out to be 23-27 times next year’s earnings and 29-34 times current year’s earnings. When compared with competitors like EIH, Country Club, the valuations are definitely on a very high side. It would have been better had the price band been in between Rs 120 to Rs 140, but at current levels, my suggestion would be to avoid this for the time being (very high valuations). The prices may correct, once the stock hits the secondary market.

Note: The stocks discussed at www.hbjcapital.com thru blog postings are neither a part of “10in3” not “Street Smart” issues which we publish for paid subscribers. These are just stock specific views by HBJ Capital team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com