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Stock Recommendation | MAHINDRA HOLIDAYS & RESORTS LTD (MHRIL) – BUY – Target Price : 315
Publish date: NOVEMBER 2, 2018
MHRIL Q2FY19 results was below our estimates (on like to like basis under old accounting standards) due to lower VO income and lower EBITDA margins. The company has adopted new accounting standard Ind AS 115 from 1st April 2018, due to which actual reported Q2FY19 numbers are not comparable. The company has also reported Q2FY19 numbers under previous Ind AS 18 and we have analyzed results based on the same.
■ Standalone net revenue for the quarter grew at slower rate of 4.8% yoy to Rs 2.5 bn due to lower VO income and decline in resort income. One of the reasons for lower growth of 5.2% yoy in VO income is due to increased contribution from low realization product ‘Bliss’.
■ EBITDA margins at 19.8% was below our estimates (of 22.2%) on account of decline in resort income due to floods in Kerala and high rain fall in Coorg which contributes large portion of room inventory for the company.
■ The new membership addition grew by 11.9% yoy to 4145 with increased contribution from low tenure product (of 10 years) ‘Bliss’. The company has added new inventory in Q2FY19, and is on track to add ~450 rooms in the next two years through greenfield expansion.
■ We have cut our revenue and earnings estimates based on previous Ind AS 18 factoring in increased contribution from low realization product and lower margins. However, the company would continue to generate strong cashflows in the long term.
■ The stock is presently trading at FY19E/20E PE of 21.9/19.3x based on revised EPS of Rs. 10.4/11.8 respectively. We maintain Buy on the stock with revised SOTP based target price of Rs 315 (Vs Rs 390 earlier).
Net revenue for the quarter grew by 4.9% yoy to Rs 2.5 bn due to lower growth rate of 5.2% in VO income (below our estimates) due to increased share of low tenure product Bliss. The resort income for the quarter declined by 8.4% yoy to Rs 425 mn due to Floods in Kerala and high rainfall in Coorg affecting occupancy rate and room revenue. These two locations contributes high share (~30%) of room inventory for the company. MHRIL reported 8.3% yoy decline in EBITDA with lower EBITDA margins of 19.8%, declined by 280 bps yoy, and was below our estimates of 22.2% for the quarter. The margin was lower on account of decline in resort income. PAT for the quarter was at Rs 319 mn as against our estimates of Rs 343 mn, grew by 0.6% yoy due to lower EBITDA.
In the quarter, the net membership additions stood at 4,145, up 11.9% yoy which took the cumulative membership base to 244,514. The new product Bliss with lower membership tenure (for higher age group) helped the company in growing its membership base. The growth in membership was affected in Q2FY18 and Q3FY18 as MHRIL adopted corrective measures such as 1) targeting members of the right profile, 2) encouraging higher down payments with increased share of members who are paying 50% down payment and 3) stopped 48 EMIs in its Blue Studio product. Now, the company is focusing on adding right kind of members. The company’s focus on adding right quality members will positively impact its margins and cash flows in the longer run.
MHRIL has added three new resorts at Darjeeling, Jodhpur and Orlando (USA, through inventory arrangements). As a result of this, the total number of resorts increased to 58 with its total room inventory stood at 3520 at the end of Q2FY19. As part of its greenfield capex plans, MHRIL is adding over ~450 new units at three location with capex of ~Rs 5 bn. The expansion at three properties at Asanora, (Goa, ~240 rooms), Ashtamudi (Kerala, ~50 rooms) are on track. Regarding Kandaghat (Himachal Pradesh, ~140 rooms), the company is awaiting certain approvals. These all greenfield projects would be delivered in the next two years. Apart from these, the company is exploring expansions at new and existing location through lease model. The addition of new inventory is expected to drive growth in membership in coming years.
The company has adopted new accounting standard Ind AS 115 retrospectively on total membership base under which VO income is recognized over the tenure of membership as against previous accounting standard (Ind AS 18) under which 60% of new membership fee was accounted upfront and balance was deferred over the membership tenure. This 60% upfront booking was covering entire membership cost. Under the new AS, only direct expenses related to membership acquisition (like certain commission, incentives, etc) can be deferred over the membership period. The new AS will reduce total reported revenue and EBITDA margin, but it will not affect overall profits over the membership tenure, operating cash flows and free cashflows in the long term.
■ The average realization in 25 years membership product is ~ Rs 0.33-0.34 mn while in 10 years tenure product ‘Bliss’ it is in the range of Rs 0.18-0.19 mn.
■ The company has taken 7-8% hike in membership fee across products for 25 years membership product in the third week of October 2018.
■ The company is focusing on high potential new markets for growing membership base. It is also focusing on tier 2 and tier 3 cities.
■ The company plans to add inventory at new locations through leased model or acquisition of resorts. In past few years, 35% of the inventory addition took place through leased resorts. This also helped company to meet members to room ratio at optimum level and also help it in expanding reach at locations where greenfield projects may take longer time.
■ The company has revalued its freehold land across resorts. As a result, the gross block net of deferred tax increased by Rs 7.3 bn and the same amount has also been credited to revaluation reserve (in other equity).
We have cut our revenue, EBITDA margins and earnings estimates based on previous Ind AS 18. We have assumed 14%-15% lower realization for FY19E-20E in our assumption and lower growth in resort income for FY19E. Our assumption on lower realization is based on new membership addition mix where Bliss has witnessed higher growth in the recent quarters. We have maintained our growth estimates for cumulative membership base at 8% per annum. We have also reduced our EBITDA margins estimates based on lower growth assumption in resort income and lower realization. Based on revised estimates, we expect MHRIL’s revenue and PAT to grow at a CAGR of 10.9% (Vs 15.4% earlier) and 8% CAGR (vs 20.5% earlier) respectively in FY18-20E.
We have given our projection based on old Ind old AS 18 (as company has provided P&L and balance sheet number for H1FY19) due to like to like comparison. We believe that the change in AS has no impact on business fundamentals, profits over membership tenure, operating and free cash flows, etc. We believe that the company will continue to generate strong cash flows in the longer run. The stock is presently trading at FY19E/20E PE of 21.9x/19.3x based on revised EPS of Rs.10.4/11.8 respectively. We maintain Buy on the stock with revised SOTP based target price of Rs 315 (vs Rs 390 earlier).
Mahindra Holidays & Resorts India Limited (MHRIL), part of Mahindra group and founded in 1996, is a leading player in the leisure hospitality industry operating under brand name ‘Club Mahindra’. The company is the market leader in the vacation ownership (VO) business in India with over 20 years of track record. MHRIL has built a membership base of over 2 lakh members, offering them holidays across 50+ resorts across India. In FY15, MHRIL acquired Finnish vacation ownership player ‘Holiday Club Resorts”, a leading vacation ownership company in Europe. MHRIL initially acquired 18% stake in Holiday Club Resorts Oy (HCR) which subsequently increased to around 95%. With this acquisition, MHRIL has become the largest vacation ownership company outside US with a bouquet of 81 resorts across Thailand, Malaysia, Dubai, Finland, Sweden and Spain. Further, its members can choose to access a range of resorts globally through its RCI affiliation. The company delivers quality family holidays experience at its properties by offering various activities such as sports, adventure, fun, dance, etc. Its resorts are located at different terrain such as beaches, hill stations, jungle, deserts, etc giving bouquet of experiences.
BUY - We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months SELL - We expect the stock to deliver negative returns over the next 12 months NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA - Not Available or Not Applicable. The information is not available for display or is not applicable NM - Not Meaningful. The information is not meaningful and is therefore excluded. NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
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