CMP Rs.318 Target Rs: 368 Initiating Coverage - Buy. Company Profile. Investment Rationale

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1 z July 2, 201 Mahindra Holidays & Resorts Ltd. More rooms for more memories CMP Rs.318 Target Rs: 368 Initiating Coverage - Buy Key Share Data Face Value (Rs.) 10 Equity Capital (Rs.in cr.) 88 M. Cap (Rs. in cr.) 2, wk High / Low (Rs.) /206 Avg.Volume (qtrly) BSE code NSE code MHRIL Bloomberg code MHRL:IN Shareholding Pattern (as on Mar 31,201) 2% 12% 11% 75% Source: Company data, BSE Financials (Rs In crores) Promoters FII DII Others Particulars FY13 FY1 FY15E FY16E Net Sales growth (%) 11% 5% 15% EBIDTA Adjusted PAT growth (%) % 5% 1% EPS (Rs.) BVPS (Rs.) Key Ratios FY13 FY1 FY15E FY16E P/E (x) P/BVPS (x) M.Cap/Sales (x) EV/EBIDTA (x) ROCE (%) 15% 9% 12% 12% ROE(%) 15% 11% 12% 12% EBIDTA Mar. (%) 18% 15% 17% 17% PAT Mar. (%) 13% 11% 11% 11% Price Performance MHRILv/s CNX500 50% MHRIL CNX500 2 Apr 12 2 Apr 13 2 Apr 1 50% Analyst: Rupali Singh Company Profile MHRIL was incorporated in It is India s leading player in the leisure and hospitality industry where the company offers quality family holidays primarily through the vacation ownership model. While the company has developed flagship brand Club Mahindra Holidays. There are other brands offered such as Club Mahindra Fundays and Club Mahindra Travel. MHRIL has vacation members and operates 1 resorts across India and abroad with total room inventory of 207 units. Investment Rationale MHRIL has pioneered a position in Vacation ownership market in India. This business model will help MHRIL to create valuable assets: Vacation ownership, the unique business model where members have the rights to enjoy holiday every year a week for 25 years. Along with a one time payment, the member would also have to pay annual subscription fees (ASF) for the period of ownership. For e.g. over the past 7 years, ASF has increased from an average of Rs to Rs for a particular tier. The payment received from membership are utilized for acquisition of land, developing resorts and for marketing. It s a unique model, wherein we believe that although the membership ceases after 25 years, but the properties acquired with these subscription (proportionately) remain with the company, adding to the underlying asset value. Focus on customer satisfaction along with increasing room inventory: In the FY1, MHRIL has witnessed a drop in member addition trajectory by 50%, mainly due to implementation of TRAI regulations which curbed cold calling. However, the company has adopted another sales strategy and channel to acquire new members. With this it has successfully added 513 members during the QFY1 and members over the FY1. MHRIL is planning to add rooms over next month rooms through acquiring and developing process or through leasing which will entail capex of Rs cr. that will come through internals accruals and securitization of receivables. Going ahead, we expect that the company will enhance its focus on customer satisfaction by adopting new strategy to acquire along larger room inventory. Topline to grow at CAGR of 16.8% between FY13 16E: Over the last five years, the company has reported CAGR 1% growth in the revenue. Going ahead, we expect that adopting new strategy to acquire members, focusing on customer satisfaction and adding new inventory will improve the availability ratio (members to room ratio). Outlook & Recommendation: We recommend Buy rating on the stock with the 18 month target price of Rs. 368 per share, implying an upside of ~18% from current levels. We have arrived at the Tel No.: ; Mob: rupali.goregaonkar@skpmoneywise.com target by assigning to PE multiple of 31x on FY16E. SKP Securities Ltd Page 1 of 9

2 Mahindra Holidays & Resort Ltd. The company: Snapshot Mahindra Holidays & Resorts India Ltd., (MHRIL) is a part of the Leisure and Hospitality sector of the Mahindra Group. The Mahindra Group consists of USD 16.7 billion multinational group based in Mumbai, India with employees more than people across 100 countries. MHRIL was incorporated in It is India s leading player in the leisure and hospitality industry where the company offers quality family holidays primarily through vacation ownership membership. While the company has developed flagship brand Club Mahindra Holidays. There are other brands offered such as Club Mahindra Fundays and Club Mahindra Travel. MHRIL has vacation members and operates 0 resorts across India and abroad with total room inventory of 207 units. Resort & room inventory details: Owned property Rooms Leased property Rooms South Ashtamudi, Kerala 6 Poovar, Kerala 20 Munnar, Kerala 120 Yercaud, Tamil Nadu 72 Coorg, Karnataka 220 Masinagudi, Tamil Nadu 20 Puducherry, Puducherry 125 Kumarakom, Kerala 28 Ooty, Tamil Nadu 89 Ooty, Tamil Nadu 15 Thekaddy, Kerala 9 Kodai, Tamil Nadu 11 Virajpet, Near Coorg Karnataka 90 Kodaikanal, Tamil Nadu 16 Bhaasuram, Kerala 71 North Binsar, Uttarakhand 36 Corbett, Uttarakhand 50 Binsar, Uttarakhand 22 Naukuchiatal, Nainital, Uttarakhand 31 Manali, Himachal Pradesh 3 Dharamshala, Himachal Pradesh 23 Kandaghat, Himachal Pradesh 80 Shimla, Himachal Pradesh 67 Kanatal, Uttarakhand 38 Mussoorie, Uttarakhand 72 West Varca, Goa 209 Mahabaleshwar, Maharashtra 73 Kumbalgarh, Rajasthan 68 Udaipur, Rajasthan 3 Gir, Gujarat 3 Navalgarh, Rajasthan 26 Varca, Goa 106 Jaisalmer, Rajasthan 7 Tungi, Near Lonavala Maharashtra 8 East Gangtok, Sikkhim 32 Balguney, Sikkim 21 Abroad Kuala Lumpur, Malaysia 1 Pattaya, Thailand 6 Innsbruck, Austria 5 Dubai 75 Bangkok, Thailand Revenue Breakup: Income from operations FY10 FY11 FY12 FY13 FY1 Income from sale of vacation operations Income from Resorts Annual Subscription fee Income from travel services & home stays Total Income from operations % Contributions Income from sale of vacation operations 73.7% 67.1% 68.7% 6.2% 66.1% Income from Resorts 1.9% 17.9% 1.% 18.6% 1.8% Annual Subscription fee 10.9% 1.% 16.1% 16.% 18.2% Income from travel services & home stays 0.6% 0.7% 0.8% 0.8% 0.9% SKP Securities Ltd. Page 2 of 9

3 Investment Rationale: MHRIL has pioneered a position in Vacation ownership market in India. This business model will help MHRIL to create valuable assets: Way back in 1997, MHRIL has entered into the Vacation ownership market in India. With more than 15 years experience and expertise, the company has developed 1 resorts in different regions across India as well as internationally. Vacation ownership, the unique business model where members have the rights to enjoy holiday every year a week for 25 years. Along with a one time payment, the member would also have to pay annual subscription fees (ASF) for the period of ownership. For e.g. over the past 7 years, ASF has increased from an average of Rs to Rs for a particular tier. It clearly considers the inflationary effect on vacation ownership model. The payment received from membership are utilized for acquisition of land, developing resorts and for marketing. MHRIL enjoys pioneer position in Vacation ownership market as compared to the other players and it has also created a flagship brand club Mahindra. With its expertise and experiences in acquiring and developing myriad destination with a small investment, the company will be able to build valuable assets in the future. It s a unique model, wherein we believe that although the membership ceases after 25 years, but the properties acquired with these subscription (proportionately) remain with the company, adding to the underlying asset value. Land Bank details: Land Bank Acres Kadapakkam, Near Chennai, Tamil Nadu 25 Nawabpet, Andhra Pradesh 19 Kas, Maharashtra 96 Varwade, Ratnagiri, Maharashtra 20 Theop, Himachal Pradesh 9 Yellagiri, Tamil Nadu 18 Virajpet, Near Coorg, Karnataka 36 Total 223 The timeshare industry reported 18% growth over the last 5 years. It is further expected to grow by 16% in FY15: Vacation Ownership is also known as Timesharing. It gives a rights to the member to own a specific period of time (a week) every year (for years) at a particular of their choice among multi location resorts. This model is considered as a highly discretionary expenditure. The member who enrolled for Vacation Ownership has an annual household income of more than Rs 1.5 million. It is common knowledge that a family owned first car before it looks at spending on Vacation ownership. There are 11.5 million households who own a car, of which 3% car owners have a Vacation ownership membership. This means that the current market penetration is very low and further it has the headroom for future growth of this market in India. Globally, there are around 6500 resorts across the globe, out of which the US has larges share at 29%. According to RCI, the global Vacation Ownership market was estimated at US$13.1 billion in 2012, of which USA & Europe accounted for ~85%. According to RCI, India has more than 100 resorts with room inventory between units along with the members. The Timeshare market is SKP Securities Ltd Page 3 of 9

4 a nascent industry and according to industry estimate, this market has grown by 18% in the last five years. Further, Cushman & Wakefield estimates this market to grow by 16%in FY15. Hotels companies have been expanding their room inventory to meet demand in the industry. However, dwindling foreign tourist arrivals has resulted in their revenue dwindling in the last five years. The supply of rooms in the industry has grown at 23%, while demand has been steady at 21% at an occupancy rate at 57%. Whereas, the vacation ownership, occupancy rate is higher than the hotel industry. Hence, at the times of economic slowdown when people usually tighten their wallets strings, the timeshare model allows the members to reap the benefit of their lumpsum payment and enjoy vacations at resorts. Global Vacation ownership player & MHRIL Global VOS players & MHRIL No. of Resorts Members Units Wyndham Vacations Marritto Vacations Hilton Vacations Starwood Vacations Disney Vacations Mahindra holidays Source: Wyndham presentation & SKP Research Focus on customer satisfaction along with increasing room inventory: The company introduced online booking solutions and web platform along with the on going voice platform for booking. This not only resulted in increased online bookings from 13% in FY12 to 50% in FY1 but also reduced interference, increased transparency and increased the efficiency of booking process which provided a better web interface for information to its members. In the FY1, MHRIL has witnessed a drop in member addition trajectory by 50%, mainly due to implementation of TRAI regulations which curbed cold calling. However, the company has adopted another sales strategy and channel to acquire new members. With this it has successfully added 513 members during the QFY1 and members over the FY1. New net member addition remains a challenge for the company. Net member addition, cumulative member & growth in members Members Growth % cumlative members Net member addition % 1.5% 12.2% % 20% 15% 10% 5% 0% FY10 FY11 FY12 FY13 FY1 During the FY1, the company has rationalized its room inventory where it closed 72 rooms from oversea (23 rooms) and local destinations, thus taking the room available for 207 rooms in QFY1. SKP Securities Ltd Page of 9

5 MHRIL is planning to add rooms over next month through acquiring and developing process or through leasing which will entail capex of Rs cr. that will come through internals accruals and securitization of receivables. Going ahead, we expect that the company will enhance its focus on customer satisfaction by adopting new strategy to acquire along with increasing room inventory. Room inventory & occupancy %: member room ratio: room inventory (no. of units) Occupancy rate % cumlative members room inventory member room ratio % % 77% 81% % % 80% 75% 70% FY10 FY11 FY12 FY13 FY1 Financial Outlook: Topline to grow at CAGR of 10% between FY1 16E & maintain the margins: Over the last five years, the company has reported CAGR 1% growth in the revenue. Going ahead, we expect that adopting new strategy to acquire members, focusing on customer satisfaction and adding new inventory will improve the availability ratio (members to room ratio). Revenue & Revenue Growth (%) Revenue (Rs. in cr.) growth (%) 1, % 1.8% 10.7% % FY12 FY13 FY1 FY15E FY 16E 25% 20% 15% 10% 5% 0% The company has witnessed the drop in EBITDA margins & PAT margins was on account if higher food prices, employee cost and other operating expenses. We expect that the company adopting a rationalized expenses policy will improve EBITDA margins to 17% over the FY1 16E and maintain the PAT margins around 11% during the FY1 16E. SKP Securities Ltd Page 5 of 9

6 EBITDA & EBITDA Margins (%) Adjusted PAT & PAT Margins(%) EBITDA (Rs. in cr.) Ebitda margins % PAT (Rs. in cr.) PAT margins % % 17.7% 1.6% 16.8% 16.9% 20.0% 15.0% % 13.1% 11.3% 11.3% 11.3% 20.0% 15.0% % 5.0% % 5.0% FY12 FY13 FY1 FY15E FY 16E 0.0% FY12 FY13 FY1 FY15E FY 16E 0.0% MHRIL stands on a strong balance sheet : The company has a policy to fund all its capex through internal accruals and membership subscriptions. This business model consists mix of upfront and annuity based cash flow model. MHRIL has been developing its Fixed assets through membership subscription also. Fixed assets (at cost) for the company have grown by CAGR 25% during the last seven years. Consistent Dividend policy: Over the past few years, the company has been consistently paying dividend Rs. per share. Going ahead, we expect the company to maintain dividend policy during FY1 16E. Dividend payout ratio (%) Dividend Dividend payout % 0.5% 33.1% 36.8% 38.5% 33.7% FY12 FY13 FY1 FY15E FY 16E 50.0% 0.0% 30.0% 20.0% 10.0% 0.0% SKP Securities Ltd Page 6 of 9

7 Valuations: We expect MHRIL to report moderate revenue growth on the account by focusing on customer satisfaction and optimum capacity utilization. MHRIL trades at a PE of 29.3x, 32.2x, 30.6x and 26.8x in FY13, FY1E, FY15E and FY16E earning of Rs.10.8, Rs.9.9, Rs.10. and Rs.11.9 respectively. One year forward PE Band Close Price 20.0 X 2.0 X 27.0 X 30.0 X 32.0 X 16 Jul Jul Jul Jul Jul 13 We recommend Buy rating on the stock with the 18 month target price of Rs. 368 per share, implying an upside of ~18% from current levels. We have arrived at the target by assigning to PE multiple of 31x on FY16E. SKP Securities Ltd Page 7 of 9

8 Financial Performance: (consolidated) Income Statement (March ending) Figures: Rs in crore Cash Flow Statement Figures: Rs in crore Particulars FY13 FY1 FY15E FY16E Particulars FY13 FY1 FY15E FY16E Net Sales Net profit Before Tax (NPBT) growth % 10.7% 5.3% 1.8% Depreciation Expenditure Interest Expenses 2 1 personnel expenses Other (inc)/ dec (50) (62) (3) (5) Admin expenses Exceptional items 0 0 Operating expenses Operating PB change in w. cap EBITDA Change in working capital (105) (260) 73 (137) Depreciation Taxes paid (52) (7) (5) (52) EBIT Net CF from operating activites (3) (19) 16 (32) Operating & other income (Inc)/ dec Fixed Assets (256) (88) (75) (29) Interest Expenses 2 1 (Inc)/ dec Investment 116 (2) 0 Profit Before Tax Other income Tax Net CF from Investing activites (90) (28) (32) (20) Profit After Tax Repayment/proceeds from Loans (78) 301 growth %.5% 5.% 1.3% Interest & dividend paid (2) (3) (2) (2) Minority Interest and Exceptional items 0 0 Other adjustment 16 5 Adjusted NPAT Net CF from Financing activites (115) 259 No. of shares Net change in cash or cash equ (1) EPS Opening cash balance DPS Balance Sheet (March ending) Figures: Rs in crore Ratio Analysis Particulars FY13 FY1 FY15E FY16E Particulars FY13 FY1 FY15E FY16E Equity Capital Earning Ratio (%) Reserves & Surplus EBITDA Margin 17.7% 1.6% 16.8% 16.9% Shareholder's Fund Net profit Margin 13.1% 11.3% 11.3% 11.3% Non current liabilities 1,328 1,79 1,0 1,705 ROCE 15.1% 9.5% 11.6% 11.7% Long term borrowings 5 0 RONW 1.8% 11.% 11.3% 12.0% Long term provision Dividend payout % 36.8% 0.5% 38.5% 33.7% Deffered Income 1,313 1,68 1,00 1,700 Valuation Ratio Sources of funds 1,95 2,21 2,215 2,578 P/E (x) P/BV (x) Net Fixed Assets ,199 EV/EBIDTA (x) Goodwill EV/ Sales (x) Total Fixed Assets 1,021 1,069 1,102 1,32 Market cap/ sales (x) Investments Long term loans & Advances Other non current Assets Balancesheet Ratio Total Current Assets Debt/ Equity ratio Inventory Debtors Cash & Bank Balances Dupont Analysis (ROE) 15% 11% 12% 12% Loans & Advances NPAT/ EBT (tax burden) Other current assets EBT/ EBIT (int. burden) Total Current Liabilities EBIT Margin Net Current Assets Asset TO ratio Deffered Tax Assets (1) (59) (59) (59) Asset / Equity Ratio Uses of Funds 1,95 2,21 2,215 2,578 Cash & cash equivalent at the end of the year SKP Securities Ltd Page 8 of 9 51

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