Mahindra Holidays and Resorts India: Explore the destination - Buy

The stock of vacation ownership provider Mahindra Holidays and Resorts India is down more than 50 per cent since its July 2017 high. Two factors have contributed to the stock’s rout. First, the carnage in many smaller stocks last year did not spare Mahindra Holidays. Next, the transition to a new accounting standard from April 2018 - IND AS 115, resulted in an apparent sharp dip (50 per cent plus) in profits in the June and September 2018 quarters.

The stock’s fall, though, presents a good buying opportunity for investors with a long-term perspective. One, the valuation has turned attractive.

At ₹201, the stock trades at about 28 times the trailing 12-month earnings, compared with the three-year average of about 36 times. Two, the company’s operational performance has remained healthy with steady additions in memberships and room inventory and healthy room occupancy; this is expected to continue. Three, on a comparable basis (IND AS 18), the company’s profit grew 7 per cent Y-o-Y in the half-year ended September 2018 in contrast to the decline reported under IND AS 115. Reported profit could decline for two more quarters (December 2018 and March 2019) due to the accounting transition, but comparable profit should rise with healthy operating parameters.

Exposure to the stock can be limited though, given its small market capitalisation (around ₹2,700 crore). Market volatility tends to hurt smaller stocks more than the larger ones.

Healthy operating metrics

Mahindra Holidays is the leading vacation ownership provider in India with its flagship brand Club Mahindra. It also has significant presence overseas through its Finland-based subsidiary Holiday Club Resorts and tie-ups with other vacation service providers and exchange programmes.

Thanks to favourable demographics with a largely young population, increasing disposable incomes in India, and its strong position in the industry, the company was able to register good operating metrics despite disruptions in the economy such as demonetisation and GST rollout. The operating performance has been healthy in the half-year ended September 2018 too — the membership base grew by about 8,700 (13 per cent increase Y-o-Y) to more than 2.4 lakh cumulatively.

The number of resorts increased to 58 as of September 2018 from 53 a year ago, and the room count grew from about 3,300 to 3,500. Occupancy levels, consistently above 80 per cent over many years, dipped to 76 per cent in the September 2018 quarter due to the impact of the floods in Kerala and Coorg. This also impacted the average room rate in the quarter which otherwise is over ₹4,000 and hovers around ₹4,500 for the full year.

With normalcy returning, occupancy levels and room rates should revert to usual levels; also, the second half of the year is usually better for the business than the first. In the coming years, expansion plans should keep growth ticking.

For now, the company has planned capex of ₹500 crore and resorts in Goa, Ashtamudi (Kerala) and Kandaghat (Himachal Pradesh); this should add about 500 units to the room inventory. Product offerings such as Bliss that are targeted at the 50-plus age group should also aid growth in membership. Focus on digital too should help business growth.

Competition from players such as OYO and Airbnb should not impact Mahindra Holidays’ business, given that they cater to different market segments with varied product offerings.

Accounting change impact

Until FY 2018, the company, under IND AS 18, used to account for 60 per cent of the non-refundable admission fee as income in the year of sale of membership, and the remaining 40 per cent was deferred over the membership tenure. But from April 2018, under IND AS 115, the income from vacation ownership contracts has to be recognised over the tenure of the membership. Also, all the contracts from inception have to be restated in line with the new accounting standard.

Besides, under the new accounting standard, only incremental costs incurred for obtaining the membership can be deferred over the tenure of the contract; other costs have to be charged to the P&L account as and when incurred. The cumulative effect of these changes dragged down the reported revenue and profit of Mahindra Holidays in the half-year ended September 2018. But for this, revenue and profit growth would have been around 7 per cent Y-o-Y.

The reported results will become comparable with prior periods from April 2019 onwards. The advantage of the accounting standard transition is an increase in deferred revenue and better revenue visibility. With membership tenure typically of 25 years, about 96 per cent of the membership fee will become deferred revenue, and then gradually shifted into the P&L, 4 per cent each year. This will not have an impact of the company’s cash flows but will aid in revenue visibility.

Mahindra Holidays has a strong balance sheet with zero debt and cash and equivalents of about ₹500 crore. This has been aided by a focus on high upfront payment for membership.

The Finland-based subsidiary, Holiday Club Resorts, has been on the revival path with profit of €4.7 million in FY 2018, compared with a loss of €1 million in 2016-17.

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