Mahindra Holidays & Resorts India - Prabhudas Lilladher

Mahindra Holidays & Resorts India (MHRL), a part of the US$14.4bn Mahindra Group, is a leading leisure hospitality provider in the country, with 42 resorts across 35 diversified locations. Being the largest within the timeshare industry in India, with a member base of 147K, it provides quality holidays through the vacation ownership model - a significantly under-penetrated model in India.

- Strong expansion underway, member addition to follow: MHRL has nearly doubled its room capacity to 2049 in the FY09-12 period, with 425 rooms added in FY12 and a target of 700 in FY13. Besides increasing availability to the existing members, the plan is to aggressively increase its member base which stands at ~143K as of March 2012. Members have increased at 15.6% CAGR over FY09-12 which is expected to increase to 16.7% between FY12-14.

- Addressing complaints to drive new sales: In order to live up to its 'Mahindra' brand, the management's focus is to address the key complaint of nonavailability of rooms. The three-pronged strategy to increase inventory ahead of member additions, restrict giving out rooms to non-members and setting up a transparent online booking system is already helping in reviving referral sales.

- Robust model ensures capex funding from internal sources: MHRL has maintained a debt-free model as resort running expenses and majority of the corporate expenses are funded from recurring income streams. Therefore, membership fees need to fund only the member acquisition costs and a small part of running expenditure, leaving a large chunk for capex requirements.

- Valuations: We have valued MHRL on an 'Average of DCF and PER'. At present, on account of capex, FCF generation is negligible. However, at the end of 25 years when the rooms are re-sold to new members, FCF generation shall accelerate. The DCF value stands at Rs359. Although MHRL has a much stronger growth & return profile, it trades at a PER of 12.2x FY14 as compared to 17x for its peers. At 17x FY14, the value stands at Rs372. Our target price, Rs366 is based on an average of the two values. We rate the stock 'BUY'

Source : Equity Bulls

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