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Ever since its listing on 16th July 2009, Mahindra Holidays’ stock has outperformed Sensex only for a brief period of five months in 2010 (March-August). In all other times except the said period the stock has been an underperformer. This has happened significantly and consistently since September 2010-end till date.
The economic slowdown, which started in 2008, impacted the company’s business with a lag effect (as usually is the case since consumption is the last hit in an economic downturn). The company’s expansion plan (read room additions) also impacted profitability. While room additions will continue even going ahead, the extent or magnitude is expected to be relatively less since the company has now reached a scale.
Analysts are turning sanguine about the company’s future prospects thanks to change in business strategy resulting in continued improving financial performance. However this only means that the stock’s past underperformance will get corrected. Any outperformance will depend on the company’s ability to positively surprise every quarter in terms of financial performance.
Improved financial performance in FY13
Even though the company’s topline of Rs 578 crore grew 15.5% in FY12, profitability took a hit as the operating profit declined 24% and net profit growth was also marginal at 2% thanks to downturn in business on one hand and expansion on the other. However the company’s financial performance rebounded sharply in FY13 led by robust business activity in June and December quarter, which form around 70% of sales and 60% of profits.
The company stopped giving white goods as gifts to members from September 2012 quarter (Q2) and saved on sales and marketing expenses (26% of sales in nine months ended December 2012 compared to 32% in FY12). Online booking (10% of sales) has been a success and that has also helped the company to cut costs. Then in December 2012 quarter (Q3), the company discontinued membership under less profitable offering ‘Zest’ though it formed a substantial 10-15% of total membership addition.
Zest was low duration membership plan or shorter version of flagship product ‘Club Mahindra Membership and required separate resorts all together. It offered three breaks of two nights each, every year, for 10 years. As a result, while profitability started improving from September 2012 quarter, the same got a further boost in the December 2012 quarter as scrapping of Zest helped improve realisation (up 31% year on year in Q3 . In short both the strategies have worked for the company and benefits will continue even going ahead. Says Sumant Kumar, analyst, Elara Capital, “The company is likely to show better margins as well as healthy earnings growth going forward.”
Occupancy rate in each quarter has improved over the years. For example, the same in busiest quarters of June 2012 (89%) and December 2012 (83%) was highest in two years (comparable with same quarters of previous years).
Improved visibility for the stock
The company is well on track as regards its expansion plans and has added eight new resorts or 227 rooms in last 12 months. Negligible debt offers room for expansion as the same is funded by internal accruals and membership fees. Following the recent offer for sale (OFS) of 4.02% stake, the company is expected to come out with institutional placement programme (IPP) for another 3.7% (or issue of more than 4.1 million shares) to meet SEBI guidelines for minimum 25% public shareholding (promoter stake of 82.7% as on December 2012).
While money collected through OFS went to the promoter (Mahindra and Mahindra), IPP money will be used for buying new resorts as a part of ongoing expansion strategy. Since OFS (floor price of Rs 270 per share) received a good response with oversubscription of 1.3 times, IPP should also do well.
“Given the self funded nature of its business for future growth, low penetration in the vacation ownership industry gives an investor good long-term visibility for this business. However, the key near term challenge for the company includes customer satisfaction apart from the economic slowdown, which MHRIL is trying to address through inventory additions,” ICICI Direct said in its report before OFS.
The company is a leader in an untapped category called ‘timeshare’ industry with 72% market share. Besides India, the company has obtained a licence to operate in the UAE and it is looking for acquisitions in Dubai and Sri Lanka. At Rs 266, the stock trades at 15.6 times FY14 estimated earnings and is very cheap compared to the consumption driven stocks in other categories. Sundaram Mutual Fund bought 5 lakh shares in the company on March 11.
