The Mahindra Holidays and Resorts India Ltd initial public offer (IPO) is the first major one since the market crash last year. One would assume, therefore, that there would be abundant caution as far as the pricing of the issue goes. But a cursory look at the company’s financials and the price band set for the IPO reveals that the company is demanding a price-earnings valuation of 27-32 times trailing earnings. The market currently trades at a valuation of 19 times trailing earnings. Of course, the aggregate valuation is pulled down by commodity stocks, but even then a valuation of about 30 times earnings looks expensive.
The issuer’s perspective is that shares had been issued last January at Rs479 per share to two institutional investors, and the price band of Rs275-325 adequately factors in the fall in the market since. The market has fallen around 32% from its peak in January, while the set price band represents a drop of between 32% and 43% from year-ago valuations.
While there are differing opinions on valuations, there’s little doubt that Mahindra Holidays is a quality company with a vibrant business model.
Unlike hotels, which can end up with excess capacity during downturns, companies that sell timeshare build capacity after they have acquired the necessary number of customers. Customers essentially purchase the right to use Mahindra’s resorts for one week every year, and hence if there are 50,000 enrolled customers, the company needs to have roughly 1,000 rooms available (each of which will be let out for 52 weeks in a year). Most members pay their membership fee in instalments, and in such cases the right to use property can be availed of only after 18-24 months of becoming a member. This gives the firm adequate time to build capacity to meet the needs of its members.
The company currently has around 96,000 members and the initial member contribution now accounts for around 60% of the total revenue. As the base of members keeps growing, the contribution of other revenue streams such as “resort services” and “annual maintained fees” will rise. So even if the rate at which new members are acquired were to reduce, revenues will have some buffer from the existing membership base.
In 2008-09, for instance, the mainstay income from membership fee grew by just 5%, but annual subscription fee grew by at least 40% and income from resort services grew by 33%. Of course, long-term growth will still depend on new member acquisition, the prospects for which are decent considering that penetration levels in the timeshare segment are rather low. Mahindra Holidays itself finances the initial contribution to be paid by members and hence earns interest income as well.
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