Mahindra Holidays & Resorts India Ltd Bloomberg Code: MHRL IN

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1 Consumer Discretionary - Gaming, Lodging & Restaurants May 26, 216 Bloomberg Code: MHRL IN India Research - Stock Broking Strong Inventory to Drive Growth through Club Mahindra Strong inventory to drive growth: The new inventory of 45-5 rooms across 4 projects to be added to the current inventory of 2879 rooms. Addition of room is more important strategy for the growth of the vacation membership business. The current inventory and new inventory in pipeline augment well for the growth of the company in the coming years. Good membership base: Total ownership members are at 1,99,185 on standalone basis. With this strong membership base, MHRIL is looking to increase its membership base through referral programmes and by building its brand Club Mahindra. To the one time membership fees, which is currently at an average of Rs..3 Mn per member, there is annual subscription fees which is linked to the inflation numbers. Attractive new acquisition to expand into Europe: With around Euro 12 Mn of revenue and 1% EBITDA, Holiday Club Resorts (HCR) in which MHRIL increased its stake by 62.3% for consideration of around Euro 27 Mn, is a leading vacation ownership company in Europe and has well established presence in Finland with thirty-two resorts. With this acquisition, the company is looking to grow in Europe and Middle East. It has membership base of 5,. MHRIL is also looking for more inorganic growth. Strong promoter: Over the years, many players have come into vacation ownership business. With promoter group like Mahindra, this would give the company an advantage for easy penetration and thrust among the new members. Valuation and Outlook With well established resorts, strong network and credible promoter, MHRIL placed well in the Leisure vacation ownership business. The new inventory in pipeline, the acquisition along with growth from the consistent resort and annual subscription business, RoEs and RoCEs in the coming years are expected to improve further. On the back of these growth initiatives, we initiate coverage on MHRIL and assign P/Ex multiple of 27.5x to FY18E EPS and give BUY rating with a target price of Rs.472, with an upside potential of 19%. Key Risks ydip in vacation ownership business. yweak growth in Finland Exhibit 1: Valuation Summary YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Net Sales EBITDA EBITDA Margin (%) Adj. Net Profit EPS (Rs.) RoE (%) PE (x) , *Represents multiples for FY14, FY15 & FY16 are based on historic market price For private circulation only. For important information about Karvy s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters Recommendation (Rs.) BUY CMP 397 Target Price 472 Upside (%) 19 Stock Information Mkt Cap (Rs.mn/US$ mn) / wk High/Low (Rs.) 475 / 232 3M Avg. daily volume Beta (x).9 Sensex/Nifty 2523 / 7731 O/S Shares(mn) 88.8 Face Value (Rs.) 1. Shareholding Pattern (%) Promoters 75. FIIs 1. DIIs 5. Others 1. Stock Performance (%) 1M 3M 6M 12M Absolute (2) 8 (4) 61 Relative to Sensex 1 (2) 79 Source: Bloomberg Relative Performance* May-15 Jun-15 Jul-15 Aug-15 Source: Bloomberg; *Index 1 Analyst Contact Ashok Ramineni Sep-15 Oct-15 Mahindra Holidays Nov-15 ashok.ramineni@karvy.com Dec-15 Jan-16 Feb-16 Mar-16 Sensex Apr-16 1

2 May 26, 216 Company Financial Snapshot (Y/E Mar) Profit & Loss (Rs. Mn) FY16 FY17E FY18E Net sales Optg. Exp (Adj for OI) EBITDA Depreciation Interest Other Income PBT Tax Adj. PAT Profit & Loss Ratios EBITDA margin (%) Net margin (%) P/E (x) EV/EBITDA (x) Dividend yield (%) Balance sheet (Rs. Mn) FY16 FY17E FY18E Total Assets Net Fixed assets Trade receivables Cash and cash Equivalents Total Liabilities Networth Debt Current Liabilities Other liabilities Balance Sheet Ratios RoE (%) RoCE (%) Debt/Equity (x) Equity/Total Assets P/BV (x) Exhibit 2: Shareholding Pattern (%) Company Background Mahindra Holidays Resorts India Limited (MHRIL), owned by Mahindra and Mahindra group, India s leading player in the leisure hospitality industry, offers quality family holidays primarily through vacation ownership memberships. While Club Mahindra is the flagship brand, the other brands offered by the company are: Club Mahindra Fundays and Club Mahindra Travel. The company currently operates 45 resorts across India and abroad, with inventory of 2879 rooms. In FY14, MHRIL acquired 23.3% of HCR and then increased its stake to 85.6% in FY16 for Euro 27 Mn. Holiday Club Resorts Oy is the leading vacation ownership company in Europe and is a significant operator in the fields of holiday housing and tourism. It has 32 resorts with membership base of 5. It has presence in neighboring European markets. The main revenue drivers for the company are vacation ownership income, subscription fees and resorts income. Cash Flow (Rs. Mn) Exhibit 3: Revenue Segmentation (%) FY16E FY17E FY18E PBT Depreciation Interest (net) Tax (612) (678) (89) Changes in WC (3531) (159) (1981) Deferred income CF from Operations Capex (4549) (196) (26) Other income CF from Investing (4412) (2758) (3449) Change in Debt/Interest 5196 (34) (67) Dividends (416) (515) (515) CF from Financing 4634 (729) (761) Change in Cash 94 (35) (163) Promoters 75.% FIIs 1.% Others 1.% DIIs 5.% Annual Subscription Fee 16.1% Resort Income 14.4% Vacation Ownership 68.7% Income from travel services.8% Source: BSE, Karvy Research 2

3 Good membership base: May 26, 216 Vacation ownership currently contributes around 69% of total revenue and would be the major contributor for the growth of the company in the coming years too. With vacation ownership of members, MHRIL has strong network effect across India. The number of vacation ownership members has grown at CAGR of 9.8% in the last 5 years and in the same period the revenue from vacation ownership business has grown at a CAGR of 9.9%. MHRIL is currently focusing more on this current network for the growth of the business in the medium to long term. In H1FY16, the growth in vacation ownership is at 5%. Its various strategies on brand building and subscriptions for loyalty and strengthening the brand value of Club Mahindra are yielding good results in terms of membership addition and on improving the brand visibility. It is also focusing more on digital media. Exhibit 4: Vacation ownership members Exhibit 5: Total Inventory (No. of Rooms) FY11 FY12 FY13 FY14 FY15 FY16 Vacation ownership members (No.) Sale of vacation ownership (Rs.Mn) (RHS) FY11 FY12 FY13 FY14 FY15 FY16 Total Inventory (No. of Rooms) Sale of vacation ownership (Rs.Mn) (RHS) Strong inventory in pipeline to drive the growth: With occupancy of 81% (82% in FY15) and Average revenue per room of Rs (Rs in FY15) in FY16, MHRIL has total inventory of 2879 rooms spread across 45 resorts in destinations- hill stations, beaches, backwaters, wildlife sanctuaries, forts and heritage places. The number of rooms added increased by 2% in FY16 as compared to FY15. It is also present in international destinations such as Bangkok, Innsbruck (Austria), Kuala Lumpur and Dubai. Majority of the total inventory is owned by it. Part of the inventory is operated under lease arrangements. Addition of inventory is more important strategy for the growth of the vacation membership business and MHRIL is strictly adhering to this strategy in line with the growth of the membership business. The company is looking to add 45-5 rooms in the next two years. The current inventory and new inventory in pipeline augment well for the company s growth in the long term. Exhibit 6: Total Inventory (No. of Rooms) Exhibit 7: Occupancy Rates % % % % % 83% 82% 81% Cumulative Inventory (No. of Rooms) FY14 FY15 FY16 No. of Rooms Occupancy (%) 8% Attractive new acquisition to expand into Europe: With Euro 12 Mn of revenue and 1% of EBITDA in , HCR has well established presence in Finland. It is a leading vacation ownership company in Europe with membership base of ~5, families and properties of thirty-two resorts, twenty four of which are located in Finland, two in Sweden and six in Spain. In FY16, MHRIL increased its stake in HCR to 85.6% from 23.3% for consideration of Euro 27 Mn which is very attractive. It has an option to increase the stake upto to 88%. HCR reported consistent sales in 213 and 214 inspite of weak macro factors in Finland and sorrounding European markets. For Sep 15- Mar 16 period, it has reported a profit of Euro 3.2 Mn. HCR has an efficient sales and marketing organization in addition to strong core competencies in the design of holiday homes and apartments, spa hotels and resort management. Recently, HCR 3

4 May 26, 216 has also successfully begun selling fractional membership, a concept that has been well received by its European clients. With excellent management, HCR has superior business model. There would be synergy benefits between the MHRIL and HCR. With this acquisition, the MHRIL is looking to grow in Europe and Middle East. The company has funded this acquisition partly through debt and partly through internal accruals. MHRIL is further looking for inorganic growth with attractive valuations and more space for the growth. Growth from Subscription fees and better operating profit margins from resort income: Exhibit 8: Subscription fees and Resort Income FY11 FY12 FY13 FY14 FY15 FY16 Annual subscription fees (Rs. Mn) Resort Income (Rs. Mn) Along with one time membership fees, the members have to pay a subscription fees. The cost of subscription fees is linked to CPI and WPI figures. So the yearly subscription fees from the current.199 Mn members and the good operating profit margins from food and beverages segment which is growing at double digit number in the last few years are expected to support the top line and bottom line of the company in the coming years. In the last few years, the vacation ownership members have grown at CAGR of 9.8% and the Annual subscription fees in the same period has grown at a CAGR of 19.1%. Currently, the resort income is at Rs.1727 Mn and is expected to grow as the occupancy rates and ownership members increase. Strong Promoter: Over the years, many players have come into vacation ownership business which led to increased competition in this business model. With promoter group like Mahindra owning 75% of the MHRIL, this would give the company an advantage. The Mahindra Group is a US$ 16.5 Bn multinational group based in India. Mahindra employs more than 18, people in over 1 countries. Mahindra operates in the key industries that drive economic growth, enjoying a leadership position in tractors, utility vehicles, after-market, Information Technology and vacation ownership. In addition, Mahindra enjoys a strong presence in the agri business, aerospace, components, consulting services, defence, energy, financial services, industrial equipment, logistics, real estate, retail, steel, commercial vehicles and two wheeler industries. 4

5 May 26, 216 Exhibit 9: Business Assumptions Y/E Mar (Rs. Mn) FY15 FY16 FY17E FY18E Comments Revenue The consolidated income expected to increase at an average of 14% considering the ownership growth over years and the business from HCR. Revenue Growth (%) (.5) EBITDA EBITDA Margins (%) The current level of EBITDA margins are expected to maintain. PAT (normalized) Tax rate expected to be at nominal rates. Fully Diluted EPS (Rs) Fully Diluted EPS Growth (%) (6.7) Net CFO Capex (1799) (4549) (196) (26) Net Debt Free Cash Flow 221 (3866) Higher capex in FY16-FY18E is expected because of increase in stake in HCR and the regular capex for the growth. Higher debt in FY16 is because of debt for acquisition and because of debt on HCR. Exhibit 1: Karvy vs Consensus Karvy Consensus Divergence (%) Comments Revenues (Rs. Mn) FY17E (12.8) Assumed lower growth from the newly acquired FY18E (7.3) business. EBITDA (Rs. Mn) FY17E (1.4) The current level of operating profit margins are FY18E (.3) expected to improve in FY18E. EPS (Rs.) FY17E (35.4) FY18E (19.7) Source: Bloomberg, Karvy Research 5

6 May 26, 216 Sustainable revenue from vacation ownership: Exhibit 11: Revenue Breakup (Rs. Mn) FY12 FY13 FY14 FY15 FY16 Vacation Ownership Annual Subscription Fee Resort Income The major revenue contributors are the vacation ownership, annual subscription fee and income from resorts which includes Room rentals, Food and beverages. With vacation ownership members, top-line has grown at a CAGR of 9.8% over the last five years. Currently, the vacation ownership plan with 25 years is the major subscription plan. The other tenure plans contribute less income. The other important incomes are interest income on installment sales and occasional gains from the securitization of receivables. By FY16, there are 2879 rooms available and has an occupancy of 81%. In FY15, the occupancy was at 82%. MHRIL receives advances from the new ownership members. 6% of the revenue is recognized in the current year and the remaining 4% is recognized over the tenure of the membership. The revenue from Annual subscription fees and income from resorts also showing good growth. Better profit margins: Exhibit 12: EBITDA and Net profit margins net profit margins are expected to maintain in the coming years FY14 FY15 FY16 FY17E FY18E EBITDA Margins (%) Net Profit Margins (%) MHRIL reports good operating profit margins and net profit margins. The major expenses are employee expenses, the sales and marketing expenses. As on March 31, 215, there were 3,238 people on the rolls of the company. The EBITDA margins in FY16 are at 18.1% on consolidated basis and in the next two years the current level of EBITDA margins are expected to maintain. The net profit margins in the FY16 decreased to 6.2% on consolidated basis due to consolidation of HCR numbers in MHRIL. The interest costs in FY16 increased because of the debt on the books. The dividends from the HCR could service the interest cost. The current level of operating and Working capital and capex plan: Exhibit 13: Operating Cash flow (Rs. Mn) FY14 FY15 FY16E FY17E FY18E Cash flow from operating activities Inc/dec in capital expenditure Free cash flow 1988 With these advances, the company is able to meet capex plans without raising any debt and dilution in equity over the years. The deferred income shown under liabilities is related to part of the income recognized in the revenue stream. With these kind of advances, the company has good operating cash flow. The most of the capex is related to growth. Before acquisition of stake in HCR, MHRIL is zero net debt company. Post the acquisition, the debt on the books increased because of funding for acquisition and the debt on HCR. Currently, the debt equity ratio is at.8x (FY16). Total debt on the books at the end of FY16 is at Rs. 63 Mn. 6

7 Improvement in returns Exhibit 14: RoE% and RoCE % FY14 FY15 FY16 FY17E FY18E RoE (%) RoCE (%) May 26, 216 The EBITDA and EPS are expected to grow by 22.6% and 32.7% in FY18E. The effective interest rate is very low so the interest outgo for the current debt is expected to decrease further and net Debt/Equity is likely to dip to.6x by FY18E. With this growth in numbers, the RoE and RoCE are expected to improve in the coming years. MHRIL has RoE and RoCE of 14.2%/6.9% in FY16 and we estimate it to reach 19.3%/7.7% in FY18E. Exhibit 15: Company Snapshot (Ratings) Low High Quality of Earnings 33 Domestic Sales 33 Exports 33 Net Debt/Equity 33 Working Capital Requirement 33 Quality of Management 33 Depth of Management 33 Promoter 33 Corporate Governance 33 7

8 Valuation & Outlook May 26, 216 With well established resorts, strong network and credible promoter, MHRIL placed well in the Leisure vacation ownership business. The new inventory in pipeline, the acquisition along with growth from the consistent resort and annual subscription business, RoEs and RoCEs in the coming years are expected to improve further. On the back of these growth initiatives, we initiate coverage on MHRIL and assign P/Ex multiple of 27.5x to FY18E EPS and give BUY rating with a target price of Rs.472, with an upside potential of 19%. Exhibit 16: PE Band Mar-1 May-1 Jul-1 Oct-1 Dec-1 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 PE Band Source: Prowess, Karvy Research Key Risks ydip in vacation ownership business: The major revenue growth driver for the company is vacation ownership. Any dip in this component could affect the topline and cash flow of the business. yweak growth in Finland: In the last few years, the weak growth in Finland economy and currency depreciation have affected the business of HCR. Any continuity of the weak market could further affect the net earnings of the company. 8

9 May 26, 216 Financials Exhibit 17: Income Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Revenues Growth (%) 17.6 (.5) Operating Expenses EBITDA Growth (%) Depreciation & Amortization EBIT Other income Interest Expenses PBT Tax Adjusted PAT Growth (%) (4.3) (6.7) Exhibit 18: Balance Sheet YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Cash & Cash Equivalents Trade receivables Inventory Loans & Advances Non current Investments Net Block CWIP Other current and Non current assets Total Assets Current Liabilities Debt Deferred tax liability Trade Payables Non current Liabilities and L.T. provisions Deferred Income Total Liabilities Shareholders Equity Reserves & Surplus Total Networth Minority Interest Total Networth & Liabilities

10 May 26, 216 Exhibit 19: Cash Flow Statement YE Mar (Rs. Mn) FY14 FY15 FY16E FY17E FY18E PBT Depreciation Net Interest flow Tax Paid (411) (398) (612) (678) (89) Inc/dec in Net WC (2428) (969) (3531) (159) (1981) Deferred income Cash flow from operating activities Inc/dec in capital expenditure (1256) (1799) (4549) (196) (26) Inc/dec in investments Other income Cash flow from investing activities (881) (397) (4412) (2758) (3449) Inc/dec in borrowings (28) (34) (67) Dividend paid (416) (416) (416) (515) (515) Interest paid (11) (26) (147) (18) (179) Cash flow from financing activities (729) (761) Net change in cash 55 (31) 94 (35) (163) Exhibit 2: Key Ratios YE Mar FY14 FY15 FY16 FY17E FY18E EBITDA Margin (%) EBIT Margin (%) Net Profit Margin (%) Dividend Payout Ratio (%) Debt/Equity (x) (.1) RoE (%) RoCE (%) Exhibit 21: Valuation Parameters YE Mar FY14 FY15 FY16 FY17E FY18E EPS (Rs.) DPS (Rs.) BV (Rs.) PE (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) ; *Represents multiples for FY14, FY15 & FY16 are based on historic market price 1

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