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June 23, 2009

Mahindra Holidays

Hospitality

Outlook and Valuation

MHRIL’s dominant position in the business of Vacation Ownership, its early-mover advantage in a business with little competition and its strong growth record suggests good growth potential. MHRIL clocked strong CAGR of 40.2% and 70.8% in Sales and Net Profit over FY2005-09 respectively, on the back of robust growth in membership enrolments, which registered a CAGR of 33% over the mentioned period. As of May 31, 2009, it had about 92,825 vacation owners. MHRIL’s Return Ratios are also pretty healthy. We believe that MHRIL can continue with such a performance as it has also been expanding its room inventory over the years along with strong customer acquisition. Going ahead, we expect the company’s FY2011E Revenue to increase to Rs748cr on the back of strong growth in the income from sale of vacation ownership. However, we expect the company to slightly improve its Margins going ahead.

Valuations based on our Analysis and Assumptions regarding Profit per member

MHRIL has designed its membership schemes in such a way that it approximately matches revenues with expenditures over the membership period.

Lump sum membership fees towards S&D and Capex: The lump sum membership fees that it collects from new members is broadly matched to the direct selling and distribution expenses (S&D) that it incurs to sell the membership as well as the capex it incurs to set up the resorts. MHRIL incurs a direct selling and distribution cost of about 33% of the total membership fees earned per annum, which amounts to about Rs75,000 per membership, based on our calculations that put average membership fee collected in FY2009 at Rs2,25,000.

Apportioning of capex depends on extent of over/under-booking: The company has about 1,300 rooms at present, on which the company has incurred capex of about Rs342cr (Excluding freehold land). Since members are entitled to 1 week of stay each year over the membership period, the amount that the company needs to recover from each member becomes a function of the total number of weeks per annum that it can sell in respect of each room.

Our analysis shows that in order to generate Net profits of Rs34,756 per member (Refer exhibit 8), the company needs to sell about 77 weeks per annum (1 lakh customer-weeks, 1,300 rooms) i.e. an over-booking of 50% per annum even assuming evenly spread out demand across the 52 weeks, irrespective of peak-season, off-season demand. In other words, in order to service all its members satisfactorily, the underlying assumption is that each member would use his membership only twice in three years. (Incidentally, based on the White plan that is most common with members, this translates into an average per day room cost of about Rs4,500 for non peak-season stay, excluding any additional charges for food, etc.). Based on this analysis, the average capex cost per member to the company comes to Rs34,200 (Gross block Rs342cr, 1 lakh customers).

Annual maintenance fees and direct charges to take care of fixed and variable operating expenses: The company also charges a fixed annual maintenance fees, irrespective of whether members utilise their stay or not. This is broadly intended to recover non-capex expenditure, including fixed operating expenses such as salary, etc. The company has a right to revise the annual membership fee based on official inflation numbers, so it is not exposed to inflation risk. As regards the direct expenses incurred by the company to service a member during his stay such as food and beverages, etc., such services are charged for separately by the company.

Shortfall in respect of recovery of operating expenses: However, our working shows that excluding selling and distribution and depreciation expenses, in FY2009 the company incurred a shortfall of Rs25cr on this front (fixed and variable operating expenses were approximately Rs125cr, while the company collected Rs100cr towards annual maintenance fees and direct charges). Apportioning this shortfall over 1 lakh customers and extrapolating the same over a 25 year membership period (without considering time value of money), we have made an adjustment of Rs63,925 per member (Refer exhibit 8).

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