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Mahindra Holidays: Great Results, Tough Equations

Mahindra Holidays announced spectacular results – an EPS growth of over 100% in the quarter, to Rs. 2.83 and a nine-month EPS of Rs. 10.44. The FY 2009 EPS was Rs. 10.65, so to nearly equal that in nine months is a pretty good feat.

There’s been a substantial increase in membership – their presentation says that as of Dec 31, 2009 they had about 110,000 members.

But the number of rooms is only at 1,403 over all resorts. Since they sell a week per customer per year, that’s 72,956 members they can satisfy this year. This is where the equation breaks down.

Even if ALL the members were evenly distributed among the year, about 37,000 members won’t be able to get  a room. And most people will want to holiday during certain seasons or holidays, so it’s unlikely to have even distributions – which means bunching of customers at holiday weekends, and therefore even lesser supply to demand. What happens to the dissatisfied customers?

And then, they black out certain dates – most members can’t do their holidays in the ultra-peak season of December end and so on. Plus, they sell their inventory outside – I just got a message telling me about an all-meals package for 3 nights in Club Mahindra Goa, for non members, for 16,000 per head including airfare to and fro from Delhi. If I took it, I’d steal away a few days off some other potential member’s holiday.

I was concerned about this even last year during the IPO (Read my view on the IPO) but apparently I was the only person who cared – memberships have soared from 96,000 to 110,000 while rooms only moved from 1261 to 1403 (available weeks from 66K to 72K). That means even MORE people should be unsatisfied today.

On the other hand, RCI affiliation offers members places to go when no Club Mahindra owned property is available. Yet, that’s a lot more expensive and you can’t expect 35% of members to go that route.

So I’m not particularly fond of this equation but the stock has done well. At Rs. 431 today it’s gone up 30% from the IPO price of Rs. 300, though it’s seriously off it’s highs of 530. And, it’s beaten the Nifty handsomely.

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Question for you: Would you buy this stock? I wouldn’t on pure fundamentals – somewhere this stock is going to hit a wall, I feel. But I’d love to hear opinions.

  • Ak says:

    >I believe they have an EMI scheme. Though you are counted as a member when you join this scheme but you are not eligible for holidays till you complete a certain number of emi payments.

  • Siddharth says:

    >unless its oversubscribed it wont be chased by other further?
    if people can buy ULIPs by millions then a meagre 110k is not such huge number. So as it happens, you get plenty subscribers.
    I think irrespective of your call on the shortfall on service to members, new prospective buyers will always think oh the membership is increasing, so I must join in as well. and makes it more and more wanted?

  • Anonymous says:

    >Irrespective of valuations or fundamentals I don't look at companies I am not comfortable with or don't understand.

    Examples include satyam, Zee, mahindra holidays, reliance power, reliance gas.

    There are hundreds of companies around, I would rather find something else.

  • arunsg says:

    >Excellent analysis. I totally agree with the equation.
    And no, I wouldn't buy the stock.

    Cheers,
    Arun

  • Raghavendra Shenoy says:

    >Good analysis. No, i won't be interested at this point. What are your views on the hotel sector, Indian Hotels for instance?

  • Anonymous says:

    >- Since there are far more bakras in this country than 110,000, EPS is going to go up for few more years.

    Remember – "People are predictably irrational."

    The growth will stop/slow when member base reaches a critical mass that everyone comes to know of bad experiences via their friend/relative/colleague etc who have a membership with them

    – I am not comfortable, so i wouldnt buy.

    – Similar thing is slowly happening with ULIPs. Now a lot of people i know in cities are aware of the high commissions etc on them either via media, blogs or friends. Not sure how it is in towns. Still people will be falling for it because of aggressive marketing but (hope) growth will slow.

  • Kiran Nataraj says:

    >Ironic – there was a Club Mahindra Ad on my RSS feed in Google Reader!

    As a member (for the last 10 years) – I haven't taken one in the last 2-3 years – I don't get a booking whenever I need it.

    I agree with you on that. But I also think that the properties are great – so there will be a demand – and as long as the demand to supply ratio is higher – the company will do well.

  • Rathin Shah says:

    >Hi Deepak,

    I guess AK is right. People who are paying EMI are not eligible as members. They become members after 2 years. (Interest income is a reported segment)

    But I agree with you, as long as they can add up rooms, they can keep their members happy.

    Regards,
    Rathin

  • Anonymous says:

    >I think that out of 110,000 members there would be

    Category 1 – People who get a reservation. They would create a fuss if they do not get a booking.

    Category 2 – People who try but do not get a reservation. These are silent contributors to EPS who wouldnt really care much.

    As long as there is Net Addition of Cat2 people, EPS is going to go up for some time and so the stock maybe a BUY for playing the market sentiment on India Middle Class coming of age.

    Stock should hit a wall when Cat1 people reach the critical mass such that their bookings cannot be satisfied on an incremental basis.

    However, as we learn from history that we never learn, Cat2 people should keep on increasing for foreseeable future!!

  • Manish says:

    >I agreed with ur analysis Deepak, even at the time of IPO and more so now. But, it's a classic case of fundamentals not driving the stock. Markets have a way of its own, irrespctive of rationality. Despite your analysis, you are as uncertain about the future stock movement as anyone else. If balance-sheets could have driven the stokcs then accountants would have been billionaires.

  • Anonymous says:

    >I dont think u r factoring in the fact that like all timeshare models they have multiple levels of membership like white, blue,, red, purple etc.

    So members entering at lower levels and a vast majority of them will be, will effectively use lesser number of room nights as compared to the 7 days that u have factored in as they holiday in higher bracket days. Also they have larger rooms like 1bhk & 2 bhk's which a family will typically use and consume greater number of days.

    Also the properties have separate rooms for non members and the objective to derive higher revenue spread across infrastructure that has been already setup.

    Yes there will be disgruntled customers but my personal experience is that they have good properties with courteous staff and good amenities for family and children at a good price point.

  • Deepak Shenoy says:

    >Thanks for all the comments.

    About the "Can't play for 2 years while on EMI" thing: I had earlier contacted a few people who had membership on EMI who said it was 6 months, but perhaps things have changed. Still, that's not a big deal – eventually, everyone needs rooms.

    Will the timeshare levels matter? It's economics in the end; even if people enter at lower levels (the lowest is around 2 lakhs!) they will desire the 7 days because that is what has been sold. When they realize that they can't really get 7 days, they'll learn how expensive it really gets. Remember the 10-12K per year maintenance fee is payable anyway – for a 3 day holiday it's nearly as much as you would pay if you booked the resort as a non member!

    Properties may have separate rooms for non-members: I doubt that anyway – but even if they do, their TOTAL rooms are 1403, inclusive of member/non-member rooms. If members can't use some of those rooms, that reduces bookable inventory even more, and therefore should tick off more customers.

    Yes, I agree that they have courteous staff and good properties. Like in Sterling Resorts, those things can change dramatically as incentives take shape – once a person has paid, he doesn't NEED to be serviced. After the IPO fervour dries, will that incentive kick in lower service quality as well? I hope not, but it's happened too often in the past.

  • Anonymous says:

    >I always find u stating what is not good whether it is ulips or Infoedge or club mahindra.

    how about telling us what is good or what to buy?

    After all this blog is for the Indian investor so what should the investor buy. Maybe you could recommend 5 stock that u think are good.