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June 23, 2009

Mahindra Holidays

Hospitality

Concerns

Economic Slowdown: The current downturn in global economies has led to increased level of consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure and dampened consumer sentiment has adversely affected the company’s business and thereby affecting results of operations. Specifically, in the third quarter of FY2009, the company experienced a reduction in the pace of new member acquisition, as customers postponed purchase decisions. The risks associated with new member acquisitions are more acute during periods of economic slowdown or recession as such periods are accompanied by lower discretionary consumer and corporate spending.

Long-term commitment to customers: On enrollment of a member to Club Mahindra Holidays, the company has the obligation to service its members for a period of 25 years. This in-turn requires the company to maintain its resorts at certain specified standards throughout the contractual period entailing huge financial commitments. The company will have to incur these costs even when it is unable to have robust additions to its customer base.

Customer Defaults: Up to 12 EMIs are interest-free with those of longer duration attracting interest charges. Presently, over 90% of its customers choose the financing option. This makes the company potentially vulnerable to customer defaults, which is one of the business risks.

Insufficient Capacity: Currently, the company has 1,261 apartments, which can serve up to 63,050 members (1,261 x 50 weeks) if all the apartments are occupied. However, As of May 31, 2009, the company had close to 93,000 members. Although according to management, there are only close to 63,000 members by virtue of the EMI clause, which defers the right of holiday, it can be said that the company is currently running short of capacity. Further, any shortage of capacity in the future will lead to member dissatisfaction and could affect new member addition. With the company’s business being member driven, this could have a negative effect on its overall prospects.

Overall growth, to a great extent, hinges on ability to expand membership base: While the company has been able to grow its member base exponentially in the past, it may be noted that it was on a lower base and during the economic boom phase. Hence, sustaining similar growth rates over the next couple of years may not be as easy. While we do believe signs of revival in the economic activity do lend comfort, MHRIL relies heavily on discretionary spending by consumers, which may be the most vulnerable to economic cycles. This is because broader economic slowdown last year led to a dip in the pace of new member acquisitions, especially in the third quarter. This slowdown saw people having salary cuts and job losses, if it persists, may moderate discretionary spending, impeding growth for the company.

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