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Mahindra Holidays IPO: My View

After a long time, I’ve decided to analyse an IPO draft prospectus. Note that this is not advice, just my opinion.

Price: 275 to 325.
Size: 92.65 Lakh shares (255 to 301 cr.). Of which, 59 lakh are fresh issuances, and the remaining are for sale by existing investors.
Date: June 23 to 26, 2009

What do they do?

Club Mahindra, run by them, is a time-share and vacation holiday business. They own 23 resorts and are linked with RCI to about 4600 others. Effectively, to join their “network”, you pay them a huge upfront fee – around Rs. 2.5 lakhs – and you get 25 years of membership, with 7 days a year available on any of their (or RCI’s) resorts free of cost. Or, inflation free, as they put it.

Like most timeshares, the costs are hidden. Srinidhi Hande runs an excellent blog, and has written a review of the Club Mahindra membership. He mentions that the club membership costs between 2 and 7 lakhs including taxes. Additionally, one pays Rs. 7,500 to Rs. 14,000 on annual fees, regardless of whether they take holidays. Overall, this is not very exciting to someone who isn’t bowled over by their presentation.

  • At 2.5 lakhs, at a savings rate of 8% a year (using P.O. deposit rates) you’re actually paying Rs. 20,000 a year. Plus, the 7,500 annual fees adds up to Rs. 27,500. For a week, that’s about 4,000 per day. At the Rs. 2.5 lakh studio room membership, you are unlikely to get peak season bookings. For what it’s worth, you will pay Rs. 3,000 to Rs. 4,500 per day for most of these resorts if you book externally – all of them are available for “non-members”.
  • (Don’t consider that you lose the entire 2.5 lakhs at the end of 25 years- otherwise you’d have to do a complex reducing balance calculation)
  • You hope that you will get the rooms when you want, in the place that you want, and in the hotel of your choice. If they have no rooms available during your kids vacations (surprise!), bad luck, try next year. Costs escalate when you consider this.
  • Given that you’re paying upfront, you are unlikely to get top service – after all service comes with the expectancy of repeat business, of a payout at the end. When you have committed to repeat business, and have already paid, what are the chances you’ll be treated as well as, say, a walk-in visitor who’s booked as a “non-member”? The incentives don’t quite work in your favour.
  • If you decide, at any time, to use your vacation at a non-Club-Mahindra place for a particular year, you are paying Rs. 4,000 more per day from the already sunk cost. They’ll probably tell you that your days can be sold, but in practise this is extremely cumbersome.
  • Holidaying has been inflation proof for the most part, in the last few years, all things considered. Goa still costs the same for 3 and 4 star resorts as it used to in 2005, in fact you could get hotels at lesser. I honeymooned in Goa, and even today would pay the same rate for the same hotel (Taj at Fort Aguada). Even if you consider that average rates were around Rs. 2000 per night in 1999 and are about Rs. 4000 now, that’s a 7% CAGR – just about meeting inflation. At the increase of holiday opportunities – you could holiday cheaper in Bangkok, Malaysia or Dubai – and the increase in number of resorts, one can expect that the next ten years will not see huge price increases.

That’s just what I think of the business model, of course. And I don’t think it’s sustainable. Once a friend or an acquaintance gets sucked in, a person usually “wises up”; it’s very rare to see many related people buying the membership. Nowadays, it even seems to be a matter of shame, like “I got suckered”. But that’s my inference, please make your own.

How do people like their service?

First, a personal opinion. I have only heard of people being dissatisfied. From friends who couldn’t get any rooms when they wanted, to others who couldn’t get refunds, or even get anyone to answer their call, nearly all responses were negative. The only positives I got were for individual resorts, but like a friend said “You will get that even if you book as a non-member”.

Let’s also look at published (negative) opinions on the service or lack thereof:

Positive stuff: I could only find some positive reviews on the individual resorts.

If you’re looking to buy or sell your membership check out Srinidhi’s page with an excel sheet of sellers and prices listed – list your membership there for selling, and if you’re looking to buy you can get much better deals here.

Club Mahindra is only one of their offerings. They also have Zest, the 10 year version of the above. And a corporate package deal called Fundays, a holiday travel website at clubmahindra.travel and Mahindra Homestays.

What does this have to do with the IPO?

Very little, really. Having crappy service or crappy products has never meant that the company won’t grow in a stellar way going forward. But this has been a subject close to heart, so I wanted to write about. Let’s get on with the financials and stuff.

What are the figures like?

They have 1261 apartments/cottages, and nearly 96,000 members. This might pose a small problem because each room can only be used 52 times a year (one week for a member). That’s about 66,000 member nights available, meaning 30% of their members can’t be currently accomodated, more if you consider “non-members”. The official response is that many members don’t get eligible, either by being early on EMIs or by default, but that isn’t good enough as an explanation – simply put, they need a LOT more investment before they can scale revenues, or they will lose a substantial amount of goodwill and membership.

Earnings: FY 2009 revenue was 442 cr. up 17% YOY. Net income was down 6% at 79.8 cr.

They currently have 7.83 cr. shares in issue, so their EPS is 10. So at the price band (275 to 325) the P/E ratio is 27 to 32. This is ridiculously high for a company that has flattened profit growth and is saturated on capacity.

How will they use the money? They’ll spend 211 cr. on five resorts (new and expansions) which will add 500 rooms to their kitty. Note that this will add 26,000 member nights over two years, still not quite enough to satisfy their current member count. And I believe they will need to grow their member count if they have to increase revenues.

Still, there’s another problem. The IPO has only 59 lakh new shares – the rest are an offer for sale, in which the company gets nothing. At the upper price of the band, Rs. 325, they will collect 192 cr. They spend 210 cr. but only collect 192 cr. max, and have to pay around 6% management fees, listing fees etc. They do stagger spending over two years but the shortfall will have to be met elsewhere. Perhaps by some debt.

They’ve securitised receivables for 150 cr. and if a customer defaults, they have to make good the shortfall. This is not good, if you consider that there will be reasonable dissatisfaction among customers due to lack of room inventory. They also have about 100 cr. of debt on their books.

Conclusion: Given that:

  • They have about 30% more members than room nights
  • New capacity from this public issue will not even satisfy current membership, leave alone new members
  • Ensuing loss of members or defaults can impact cash flow negatively, since they have securitized receivables.
  • Customer dissatisfaction, from what I hear, is very high
  • They’re asking for a P/E of 27 to 32 on very small EPS growth in the past, and very little expected in the future

I will not subscribe for this IPO.

This is not advice so I would encourage readers to come to their own conclusions. I’d rather see this company scale up inventory and build a more satisfied set of customers, and see the tourism cycle go through its downturn before considering investing, at any price. Perhaps in three-four years. But given my horrendous record of looking at IPOs, it might just be that this share doubles on listing. That’s another reason why you should come to your own conclusion!

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