Should you invest in the IPO of Mahindra Holidays & Resorts India Ltd in the Price Band of Rs 275-Rs 325 ?I don’t think you’re missing any Boat here

13 Years after Mahindra Holidays & Resorts India Ltd (MHRIL) set up,it is coming tomorrow to the Public to raise Equity Funds.It’s in the Business of Vacation Ownership and is a leader in this Field having a market share of over 70%.

Members are empowered with a right to stay at any of the Company’s resorts,subject to prior reservation, for a period of One to Seven Days during designated months and for a Period of 10,25 or 33 Years depending on which Plan they have joined.For this Right they have paid an average of Rupees Rs 2.5 lakh with options to spread the Payment over as long as even 5 Years…Recognition of Income is a portion of this Fee in the year of Joining,with the rest apportioned over the plan Period

In these 12 years,the progress has been slow and steady with momentum seen in only the last few years

As of March 31,2009,it has a cumulative of  92825 Members…..Currently It has 27 resorts,some owned,some on long lease and five on short (under Two year Lease) with 1261 Apartment and cottages across them

Financial Performance….In FY 09 It earned Rs 80 crs on an equity of Rs 77 crs giving an EPS of just over Rs 10…It’s networth was just under Rs 196 crs giving a Book Value of @ Rs 25

So do I like the Company ?………Yes

So do I like the IPO ?……..No

So would I rather be a Member of MHRIL than a Shareholder ?……….Neither

Why is that ?……Well,both issues should be evaluated seperately

Let’s take the prospect of being a Shareholder first

The Pedigree is good and the Prospects are fair…..but the IPO Pricing is expensive…At Rs 275-Rs 325 MHRIL is asking us to pay 30 earnings multiples and 13 Book Multiples on recent performance…That’s HIgh…They are justified in doing this only if they see strong and quicker quantum growth ahead in earnings…I don’t.Their Growth will be constrained by the Apartments and cottages thay have available for right of use…The Object for this Issue reveals that Rs 211 crs are to be spend for Five Properties…to expand at Asthamudi in Kerala and Coorg in Karnataka,to renovate an acquired property in Ooty in Tamil Nadu and to build two new properties in Tungi,near Lonavla in Maharashtra and in Theog,near Simla in Himachal Pradesh…Over Rs 150 crs are for the last two new projects…Rs 111 crs are planned for FY 10 and Rs 93 crs for FY 11,rest later…there are no definitive agreements for the capex spend as of yet…each room would cost an average of @ Rs 50 lakhs and capacity is being projected close to 1600 apartments and cottages within a few years

Now let’s examine what’s on offer…The IPO is taking the book building route and the Price band has just been announced….The total issue is of 9262275 shares of Face Value Rs 10…so the Issue size at Rs 325 tops is Rs 301 crs…However only 5896084 shares are a fresh issue and 3369191 shares are actually on offer by the Promoter,Mahindra Group…so MHRIL will only get Rs 191.62 crs max at the top band price of Rs 325…while the Object to the Issue shows a Net Proceed Usage of Rs 211 crs after Issue Expenses!

Obviously and Clearly MHRIL wanted to issue at a higher Price !  

Pre Issue Net worth at March 31,2009 was Rs 195.80 crs…Post Issue Networth would be an accretion of Rs 191.62 crs max…that’s Rs 387.42 crs…Post Issue the Equity would be Rs 84.23 crs.

Assuming it crosses Rs 100 crs PAT in FY 10,including Other Income from Interest earned on Issue Proceeds,the Net Worth after paying of Dividends would be close to Rs 500 crs.Assuming Listing at Rs 325, the top price band,the Market Cap would be just over Rs 2700 crs…yet over five times Book Value…too high

Look at some of the Risk Factors…Munnar property is a legal issue from 2007…It’s build on Agricultural land…Goa Property is now a legal issue from 2009 for illegal structure…though order was squashed,a personal hearing by the Goa Panchayat has been sought by the company….Plans for the new properties at Tungi and Theog have yet to receive Government approval  

The Company has conveniently avoided Peer Comparison by stating that they believe there is no listed company in Vacation Ownerhip with their Business model…’Country Club’ comes closest to my mind, though it’s model is different

So MHRIL is clearly asking the high premium,in advance from us to capitalise on any growth prospects in the future…The Returns on Networth and Capital Employed have so far been good..above 45% and a few points below 20% respectively….but these are unlikely to be sustained as there will be gestation on New Properties at Tungi and Theog, which will absorb over Rs 150 crs

However,some consolation is that MHRIL atleast has some performance on which it is seeking high multiples…Last Year,Reliance Power short circuited all of us by asking and getting Rs 450 and 427.50 (retail) for a face Value Rs 10 share in it’s IPO when it’s first significant profits are yet some years away.Our cost was softened by the Bonus to under Rs 270

You are not going to miss the Boat by not subscribing to MHRIL…You got a chance to buy Reliance Power within a year of listing at @ Rs 100,even though Anil Ambani Group held 84%…Here too you may get MHRIL at Rs 200 thereabouts and even lower if it fails to perform as expected,even though Mahindra Group will continue to hold 83% of the shareholding  

Now Let’s see the Prospects of Becoming a Member

For considering Membership,if I evaluate it financially,I find that assuming Rs 30000 is currently Lodging Charges for a week’s stay at it’s resorts and taking a 5% annual Inflation rate,it will cost be just over Rs One Lakh in the 25th year for a similar stay…While this does look a lot and is a great marketing point,I find that if I have the discipline to alternatively Invest Rs 2.5 lakhs at 10% p a…it compounds to over Rs 27 lakhs after 25 Years…If I take the incremental Growth in my returns each Year and relate it to the increasing cost of staying for a week each year,I find that in the sixth year itself the Incremental Returns are higher than the Increased staying costs…I’m not even considering the annual fee of a few Thousands payable by members for maintenance of the properties !….so why commit? I would prefer to keep my holiday options open…even if I want to holiday at MHRIL,I can do that without being a Member…Ofourse,most will not see it this way as they will not practically invest Rs 2.5 lakhs at 10% pa for compounding…and also if they do,they may need their returns for some other higher priority application,than a Holiday…so in this sense they would think it is better to commit for a Holiday with MHRIL when one could !…However,I hate to commit for 25 years…who knows….my Children and later my Grandchildren may too want to keep their holiday options open !….also operationally on two seperate occasions we have found the Booking System of MHRIL wanting….Some Years ago a close friend became a member on the express confirmation that MHRIL would confirm Two apartments at their new Varca,Goa Property for a short holiday…They did…My Friend Invited my family to join him…When we reached Goa,MHRIL told us they was no place and how could Mumbai have confirmed !They offered us alternative arrangements which we refused…finally we compromised as we did not wish to ruin our short break and arranged our stay elsewhere but used MHRIL Property the full day…it was an amusing experience though…at the time they permitted saree and salwar khameez clad women to enter the swimming pool, respecting Indian Sentiments…the other experience was just last year…we wanted to vist the North..The same member friend enquired availability for the MHRIL Resorts on certain dates to be told they were booked…I called later and said I’m a first timer with MHRIL and they called me twice to confirm bookings for the same dates at the same resorts…the difference is that I was paying and he was a member who already had ! 

To be fair to them,MHRIL has 93000 members and currently assuming a week’s stay by each,MHRIL would need an equivalent number of weeks to accomodate them….It has currently 27 resorts and 1261 apartments and cottages spread over them…that’s mathematically just over 65000 weeks…Now there is going to be a demand for the better resorts…Like Coorg and Goa….Members are going to find it difficult to reserve them,unless they plan the exact dates of their week’s holiday several months in advance…How many really can do so ?  

MHRIL will only grow it’s earnings significantly if it can grow it’s members significantly….It will face two hurdles doing so…Quality and Quantity of it’s Resorts…..Maintaining High Standards at it’s resorts and Growing them in Number,not just expanding in existing ones

This IPO will help MHRIL speed up it’s endeavour…It will have Monies in the Banks…and not Borrowed ones at that.

Fitch has helped MHRIL by rating this IPO a 4 on 5 indicating better fundamentals relative to other Issues 

If it was priced lower,I would have helped them too !