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Issue Details
Issue Price : Rs 275 – Rs 325
No of Shares (FV Rs.10) : 92,65,275 Shares
Issue Size : Rs 2,548 million – Rs 3,011 million
Issue opens-closes : 23rd – 26th June 2009
Listing : BSE and NSE |
Post Listing Details
Pre-Issue Promoter Holding : 93.64 per cent
Post Issue Promoter Holding : 83.09 per cent
Post Issue Equity Capital : Rs 842.30 million
Post Issue Equity Shares (nos) : 84.23 million shares
Market Cap : Rs 23,163 million - Rs 27,375 million
FY09 EPS (Actual Diluted) : Rs. 9.50
P/E Ratio (FY09) : 29 – 34.30 times |
The Mahindra group’s Resorts arm — Mahindra Holidays & Resorts India (MHRIL), popularly known as Club Mahindra, is one of the leading leisure hospitality providers in India. Club Mahindra Holidays is the flagship service offering and as a part of growth strategy, the company has also diversified its portfolio by introducing new vacation ownership offerings, Zest and Club Mahindra Fundays. It has also launched new travel and holiday related services, like Mahindra Homestays and clubmahindra.travel.
Below is the table detailing the break-up of existing resorts of the company
Owned : 11 resorts (937 Apartments)
Long Lease : 12 resorts* (252 Apartments)
Short Lease : 5 resorts* ( 72 Apartments)
Total : 27 resorts (1,261 Apartments) |
94 per cent of the total resorts are either owned or have a long lease
As of May 31, 2009, the company had 91,997 Club Mahindra Holiday vacation ownership members and 4,070 Zest vacation ownership members taking the total number of members to 96,067. As of May 31, 2009, the company had 19 branches and 61 retail outlets across India of which 45 were owned and 16, franchised. It also has 149 direct to home operations franchised by the company. In addition it also has a service office in Dubai and a franchisee in Kuwait.
The company proposes to offer 92,65,275 equity shares representing 11 per cent of the expanded capital base. Of the above, 58,96,084 comprises of fresh issue and the balance 33,69,191 is an offer for sale. In the past, MHRIL had raised nearly Rs 1200 million by selling 2 per cent and 1 per cent stake to SBI and Jacob Ballas respectively in February last year at Rs 479 per share. The company proposes to utilize the IPO proceeds for financing the expansion of some of its resorts and setting up new projects. The estimated amount to be funded by the IPO has been earmarked at Rs 2,109.50 million. The company also has additional land banks in states like Tamil Nadu, Kerala, AP and Karnataka which can be exploited in the future. The company has not entered into any definitive agreements to utilise a substantial portion of its Net Proceeds. Nevertheless, as per its current business plan, the company intends to expand inventory of apartments and enhance facilities at its Coorg (Phase IV in Karnataka), Ashtamudi (Phase II in Kerala), renovate its newly-acquired resort at Ooty (Tamil Nadu). Further, the company intends to construct new resorts at Tungi and Theog.
Financial Scan
Other Income of the company formed over 11 per cent of the total income in FY 2009 on the back of steady rise in the interest income from the members opting an EMI route for membership.
Interest income from instalment sales amounted to Rs 371.50 million or 76 per cent of the other income for FY 2009. The ratio was as high as 81 per cent and 82 per cent for the preceding two years.
The management claims to have leveraged its financial position to fund its members instead of routing them to banks (for loans) . By doing this, the company has opened up one more source of income for itself and the same may grow in line with the number of new memberships added in future.
Other Expenses formed 52 per cent of the total income for the year ended March 2009. Promotional expenses formed 32 per cent of the other expenses and almost 19 per cent of Income from sale of Vacation Ownership, the same has increased by 471 basis points over the previous financial year. Higher promotional expenses to acquire clients could reduce margins going forward.
The company does not have any significant provisioning for depreciation on account of the nature of its business. Thus, there is higher cash outflow in terms of tax payments.
Further the company follows an accounting policy of amortizing 40 per cent membership fee of the time share over the period of the membership and not charging the entire 100 per cent as revenues in the year of sale.
On the other hand, a prudent accounting policy of writing off 100 per cent of selling costs is followed. There is a dual benefit here for the company. Firstly, its tax liability stands substantially reduced and resultantly, its cash-flows are positively impacted.
Expectedly, this has been challenged by the Income tax department in the past. The amount of Rs 779.50 million stands as issues relating to revenue recognition as on FY 2009
This revenue recognition policy has thus led the debtors figure to balloon and it now accounts for more than the Total Income of the company.
MHRIL is almost a debt free company and its as debt/equity ratio stood at 0.12 times at the end of FY 2009
The PBIDTA margins of the company declined 378 basis points to 34 per cent whereas the PAT margins declined by 423 basis points to 18 per cent for FY 2009.
IPO Positives
Unique Business Model - The company’s financial performance is directly impacted by the number of vacation ownership memberships it can sell. An increase in the membership base and additional fees received from new and existing members direct impact the bottomline. The membership enrolments have increased at a CAGR of 32 per cent over the last three fiscal years. Over the same period, the average sales price for a Club Mahindra membership also increased at a CAGR of 13.18 per cent. As per the company, approximately 35.18 per cent of its sales in FY 2009 were through member referrals which augurs well with increasing membership base.
Integrated and Mixed - Use Business Model - Additionally, MHRIL utilizes a mixed-use model of being a vacation ownership company and also providing non-members access to its unutilized apartments on a per-night-tariff basis. This enables it to enhance revenues through optimum occupancy and sales. The company also plans to attract budget and adventure tourists using a different business model wherein it would set up tents near its properties. This would not only enable the company to target members from lower age group but will also benefit from the synergies it already enjoys at its properties near such formations (tents). These clients could also become future potential members of the company giving it easy access for its long term membership model. The company has thus developed multiple product offerings for each Target Segment with a customer centric design model.
Strong Management Team with Prestigious Parentage and Strong Brand Recognition – MHRIL’s management team has experience across diverse industries such as the retail, consumer products, real estate and telecommunication. Being a part of the Mahindra group of companies, the association lends enables the company to leverage its parentage to attract and retain fresh talent and more importantly, member acquisitions. Moreover, unlike in some other cases (across industries) the company does not have to pay any royalty to its parent group for leveraging its synergies and brand name.
Wide Distribution network with strategy to leverage parent/group companies network : The company already has a wide distribution network and plans to increase its reach further into tier 2- 3 cities. MHRIL is known to have already tapped and is likely to get more aggressive with using Mahindra’s auto dealers network.
The Franchisee Model : As part of its strategy to increase its penetration, the company worked out a simple franchise model. Sales through this model constituted 26.73 per cent the total sale for FY 2009. This model not only helps the company to expand its reach but also does so without exerting any significant cost pressure unlike in the case of opening a retail, branch or service office.
Leveraging its Brand Equity : Its established brand name also accords the opportunity to successfully launch new service offerings. The company has thus leveraged its brand name to offer services such as Club Mahindra Fundays, clubmahindra.travel and Mahindra Homestays. This has also helped the company to diversify into new offerings and different segments as well as new businesses related to its main business enabling synergies across businesses.
Sizeable Market Share : It is estimated that the company, enjoys a domestic resorts market share of close to 75 per cent. The company accounted for 72 per cent of the total active members across the vacation ownership industry in India with RCI (Resort Condominiums International) up to May 31, 2009.
Going International : The company intends to expand its operations into new international markets. It already has an affiliation with RCI which is the world’s largest holiday exchange network enabling its members to access 5,087 resorts across the world.
Stable Financial Performance : The Company has been growing at a CAGR of 43 per cent over the past four years. During the same period, its net profit grew 76 per cent. Total revenues for FY 2009 stood at Rs 4,421 million whereas the net profits stood at Rs 798 million. The margins, (profit after tax) of the company is also satisfactory at over 18 per cent. Thus the company financials performance appear satisfactory.
Beneficiary of Government’s Travel Thrust : The Central and State Governments of India have introduced various schemes to boost tourism. Revenues of the company are highly dependent on the travel industry and thus any promotional schemes initiated by the Government would have a beneficial impact on the company.
IPO Concerns
Client Servicing Quality : Inability to maintain and operate its resorts and also maintain leases for the leased properties may have an adverse effect on its reputation, revenues and results of the company. This also requires regular and quality client servicing from the point of booking to the point when a holiday is taken. The company’s booking service merits closer attention as it can be a point where otherwise satisfied customers can turn disgruntled.
Dependence on Economic Conditions : Being a discretionary spend, the number of new members joining the company is directly dependent on the prevailing economic conditions and consumer spending especially at the time of a slowdown. The company is also exposed to credit risk in case members default on their payment of subscription fees.
Pending Income Tax proceedings : The figure stands at Rs.779 million and could impact the company’s cash flows, though its provisioning in the books of accounts could cushion the impact on bottomline.
Pending Consumer Complaints : A total of 104 consumer cases are currently pending against the company in various consumer courts wherein an aggregate sum of approximately Rs. 24 million has been claimed. While this may not have a material effect on the company’s bottomline, the damage it can do to the image and reputation of the company can be manifold.
Reputational Risk : The company launched Mahindra Homestays in July 2008 and though HomeStays as a concept is catching on in India, there is significant reputational risk as users would hold the company responsible for any shortcomings during the stay.
Possiblity of Lease Termination : Some of the resorts are leased on a short term basis and are terminable by the lessor without assigning any reason. However the company has 72 apartments and cottages on short term lease which constitute merely 5.71 per cent of the total 1,261 apartments and cottages. Hence, termination may not have significant material impact on the company's operations.
Securitization Related Risks : As of March 31, 2009, 25.11 per cent of its receivables are securitized with banks and the parent holding company. Default in payment by the members underlying such receivables, could affect the company’s results.
Pricing Review & Verdict
The issue is priced at a historical P/E multiple of over 34 times on its FY 2009 earnings and a forward P/E of 25 times its expected earnings for FY10, It also has a market cap to sales ratio of over 6 times at the upper end of the price band.
This by no means modestly priced considering the prevalent uncertain market conditions as a post-budget stock market correction could render these valuations unsustainable. In that case, the stock could be available around or below the issue price. Of course, the reverse could also be true in the event that the Market takes off post-Budget, though the valuations then could become even more unwieldy.
Hence, this clearly is an IPO for investors with high risk-appetite who will have to place their bets on the qualitative superiority of this company leading to a continued premium valuation.
If only the Book-Running Lead Managers had priced this IPO a little more prudently, MHRIL could have been the ideal IPO for kick-starting the primary market revival especially given its robust business model.
theIPOguru’s Verdict:
INVESTOR TYPE
Risk Appetite | | Recommendation | HIGH | | INVEST | LOW | | WAIT & WATCH |
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