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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 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!

  • ravi says:

    >nice rewiew! i have changed my mind after reading it..thanks

  • MK says:

    >Frankly Mahindra Holidays is one hell of a con job. I was about to shell out the 2.5 lacs, but read about it on the internet and escaped. Your almost never get a booking for peak places even in thier off-season, but when you call up the resort directly, they will say rooms are avilable.

    Pretty pathetic.

  • Ankit Sharda says:

    >Awesome Review! The business side of it was elaborated and corroborated fairly well. Though dnt really subscribe to the opinion that 'Having crappy service or crappy products has never meant that the company won't grow in a stellar way going forward.'

  • LANKY says:

    >nice analysis….promoters might have got influenced by the real estate companies hurrying up with QIP's….Now or never!

  • Manish Jain says:

    >As usual dead on…yet another pathetic offering for the retail side. But, with the number of ads they are running on CNBC-18 I'm sure it will double!!!

    I'm surprised you didn't demystify the Reliance Infrastructure Fund…let me do it for you nowun:

    Stay away.

  • KPR says:

    >Nice writeup and wonderful analysis.Keep up your good writing Deepak.You got that gift.


  • M says:

    >Useful analysis. Proves that all these "consumption story / disposable income" led investment stories need to be double checked.

  • Anonymous says:

    >The key variable in any timeshare is the fact that it covers for inflation. I dont think u r comparison on data on that front is accurate. From the near heights of the dotcom era to the near bottom of this cycle when the world markets collapsed is not a good comaprison of data.(Incidentally Fort Aguada right now on makemytrip costs u Rs6300 per night. Guess what 50% higher from what u spend when inflation has turned negative). I have stayed at Fariyas in lonavala at 3000 bucks and today it costs anywhere between 8000 – 12000 bucks. This is true for most resorts.

    If u r saying ARR hasnt increased to cover inflation from 1999 onwards then I wonder why the hospitality companies are in the hotel business.

    Another good benchmark is to see how has the club mahindra membership prices increased over the last 5 years. I can assure u it is far higher than inflation. The fact that it has increased indicates that there are still ppl as u put willing to be "suckered" but more importantly at a higher price. I would grant these suckers a lil bit of intelligence that work the maths out in terms what it would cost them to live in a similar quality property.

    I havent analysed the Ipo valuations so cant comment but the principle of timeshare has its benefits if the company running the timeshare manages it well.

    I have been a club mahindra member and i think I have got some great deals including staying in Egypt for a week. Are there service complaints? Of course there will be and that is true across most properties that i have stayed or restaurants that i have dined. Thats part of life.

  • chille(a)rbadshah says:

    >Nice Article….Mahindra Holidayz..does not look like an enticing proposition.from the business aspect…Though if we approach it solely from the listing gains point of view..(i.e to put it rather crudely..make a Quick buck) may not be a bad idea 2 keep an eye on it and go for it..provided its not hugely oversubscribed in the retail segments but does so in the other segments..thus allowing scope for healthy allotment and a decent listing gain.

  • Deepak Shenoy says:

    >Anon: I paid 10K per night in 2005, and i would pay about the same right now for Aguada for a package (actually about 8k now) Hospitality is a cyclical business – I have relatives in the field – and overall there are very low periods and very high periods. But this time, the biggest gains have been business hotels, not leisure. Other than the odd 2007, and even then the mid category of hotels (3-4 star) haven't done much in rate growth. In 2007 we had been to both the mid-end and the high-end, paying about 4000 per night for the mid end at the time. Which was quite surprising, as it was a beach property, with a very spacious cottage. What I realized then was that at the mid-end prices were not moving up.

    Club Mahindra prices might have gone up – I see the rate cards moving definitely upwards – but won't it just be a matter of time before people start realizing they have too many members? They have no hope of even getting enough coverage to satisfy existing members after 2 years – so any new members will be underprivileged from the start. In such cases, the client dissatisfaction will only increase.

    RCI is an option – but it costs 14K per holiday extra (and then I think RCI charges about 17K per year?). I could buy a timeshare (without being a member) in Switzerland for about USD 600 for a week, so I doubt the holidays abroad are attractive.

    I don't place too much faith in the fact that many people have bought into this – after all, people buy into 65% commission ULIPs also. And people buy into ponzi schemes also, and terrible stuff like Amway. Plus, the deal would have been a lot more attractive at Rs. 60,000, and when they had enough capacity!

    Manish: Well said, yes, Infra fund was such a silly thing – I gave up on it.

  • Anonymous says:

    >Good post, excellent analysis.

    All said and done. My prediction, it will be over subscribed at least 7.75 to 8 times at upper limit. Retail at least 8-11 times as there was drought of IPO since Jan 2008 (RPower was last big hype). Company or media will publish first story as soon as it strat taking money in. (and then every day how many times it oversubscribed).. then ppl sitting on fence will jump in..

    on day of listing, it will be 600-700 rs..then as usual near top band price.. most ppl don't see business model, PE, EPS Growth and very few ppl will dare to say anything bad about this (as in case of Rpower).. business as usual for new ipo season. India will strat shining again. Ppl just need something to invest and they think that IPO is surest and safest way of making easy money out of market in least possible time. (30-40 days at max) rather than waiting for years and years for getting profit from buy and hold strategy.ppl unsderstand derivaties don't waste money and time in IPO's off course.


  • TimeshareRelief says:

    >I like this analysis! Most people do not have the time or inclination to do this before they purchase a timeshare. Then, they regret the purchase down the road, sometimes years later.

    The timeshare resales market has been historically difficult for sellers as many buyers are impulse buyers who visit the resorts.

  • says:

    >I'd short this one (provided availability in F&O) if it doubles on listing.

  • Gana says:

    >Edelweiss analyst says 'subscribe'!

  • Gautam says:

    >It's very well analyzed and an eye opener for those who don't have enough information about their model. Great work!

  • Anonymous says:

    >Deepak: Your third link in "some positive reviews" doesn't work. Please fix.

    As regards the business model, as I said to a friend, timeshare model might have made sense in pre-internet days (when one wanted to avoid the hassle of pre-booking over phone or hunting for acco on arrival). Internet has more or less killed this biz model. Just open a travel site and you will get hazaar choices. then why get stuck with an overpriced timeshare with no assurances on availability of choice.