We initiate coverage on Mahindra Holidays & Resorts India Ltd (MHRIL) as a BUY with a Price Objective of `451 representing a potential upside of ~37.0% over a period of 15 months. At the CMP of `329, the stock is trading at 23.7x and 19.0x its estimated earnings for FY13 and FY14 respectively. MHRIL is the market leader in the Vacation Ownership (VO) industry and faces limited competition (other sizable player being Sterling Resorts). MHRIL is expected to witness healthy growth of 17.7% CAGR in its top-line to `867.2 crore by FY14 on the back of acceleration in net member additions (13.4% CAGR). We believe that this acceleration is achievable owing to huge untapped opportunity for VO industry in India, adherence to its “Member First” policy and focus towards increasing room inventory (FY13 - ~600 rooms; FY14 - ~425 rooms). While in the recent past, MHRIL was plagued by significant member cancellations, its refurbished business model coupled with increasing room inventory should help in stemming the attrition; boosting net member additions and consequently revenues.
Robust model with front ended cash flows and steady annuity income streams
Owing to MHRIL’s stable stream of cash flows and self funding nature of the business model, the company has been able to maintain its debt at negligible levels as compared to the hotel industry which has high gearing. MHRIL’s strategy is to fund capex (building room inventory) and customer acquisition costs from membership fees (via both upfront and securitization of receivables). Also, majority of the resort and company level expenses are funded through Resort income and Annual subscription fees (ASF). With an estimated growth of membership base at a 13.4% CAGR, the fund flows, going forward, will ensure that the company maintains debt at negligible levels. Also, the annuity stream in form of ASF will become stronger. Further, we believe that the low gearing status is an added advantage especially during the period of hardships (viz slowdown in membership base, delay in payment of membership fees) as it will be in a good position to raise liquidity from external sources.
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