Edelweiss reports Stable quarter; even as inventory addition continues
Mahindra Holidays & Resorts India Limited (MHRIL) is a leading player in leisure and hospitality sector in India and offers a unique vacation ownership model to Indian consumers with resorts spread across India and abroad. The company provides holiday resorts over a period to members by charging an upfront membership fee and an annual charge, while retaining the title of the property. Members can avail a week of holiday annually for 25 continuous years, across any of the resorts based on certain preconditions. The company uses the upfront membership fee charged from members to build resorts.
Club Mahindra is the flagship brand of the company along with Club Mahindra Fundays, Club Mahindra Travel and Svaastha Spa. MHRIL has also invested and now owns more than 86 per cent stake in Holiday Club resorts, Finland. Holiday Club offers conventional vacation ownership program and engages in resort management contracts earning fee from managing resorts.
As of December 31, 2016, MHRIL has 211,000 vacation ownership members and operates 46 resorts across India and abroad and its subsidiary, Holiday Club Resorts Oy, Finland, a leading vacation ownership company in Europe has 57,000 members and 31 resorts across Finland, Sweden and Spain.
Domestic Tourism of MHRIL is booming with its unique business model; it is in a good position to gain from growth in the Indian domestic tourism. The company’s investment theme also involves that the asset ownership rights of resort property partly financed with upfront payment from members lies with MHRIL.
The focus of the company is on annuity income. Although the stock has lead-in recently, MHRIL’s focus on adding the right quality members will shoot profitability along with moderation in receivables, boosting cash generation. It does not expect inventory to be a constraint on growth of members.
For the quarter ended in June’17, MHRIL’s revenue stood at Rs 270 crore grew 8 per cent from the previous sequential year. This increase was driven by vacation ownership income, which jumped 14 per cent year on year to Rs 140 crore. Profit after tax increased 7 per cent YoY to Rs 32.3 crore led by higher other income also resort income rose 10 per cent YoY to Rs 57.3 crore. EBITDA was flat at Rs 57.3 crore due to sharp increase in employee expenses, lower sales & marketing spends due to savings in digital marketing.
Member addition in Q1
MHRIL added 4,005 members raised by 10 per cent YoY, during the first quarter of fiscal 2018. Various factors such as food & beverages section income has gained traction; MHRIL launched Club Mahindra Bliss; the ratings on Trip Advisor have improved significantly and contributed to increase in members of the company. Apart from digital and referral, a major portion of the balance 50 per cent member additions are ensuing via alliances with various brands which is also driving member addition. In addition to this, the Tier II cities have been seeing a significant amount of interest.
The performance of member addition from Dubai segment has been muted because of the current economic situation present in the segment.
Addition of rooms and increase in Capex
During April-June’17, MHRIL added 55 rooms and in the fourth quarter of 2017 added 148 rooms at Naldhera, increasing the total room inventory to 3,207. It also plans to add 600 more rooms at four locations with a planned investment of Rs 600 crore. The addition of planned rooms includes 110 rooms at Naldhera, 250 rooms at Asanora, 100 rooms at Ashtamudi and 150 rooms at Kandaghat.
The fiftieth resort at Naldhera has been commissioned. The vacation ownership company is exploring for properties in Western Europe, Sri Lanka, South-East Asia and Orlando & Las Vegas in the US. MHRIL is looking at acquiring properties and not companies. The process of land acquisition in some of the exciting places is already under way.
Impact of GST
Under the new tax system, membership fee is revised from the earlier 15 per cent rate and is currently charged at 18 per cent. The product pricing is fixed and extra taxes are levied. Depending upon whether the restaurant is air conditioned or otherwise, the food & beverage restaurant are taxed 12 per cent or 18 per cent. The F.I.T business, known as free independent travel or for individual travelers will be dependent on the room rate as applied to normal hotels under GST. MHRIL will witness increasing income and profitability on the resort level given the rise in food & beverages and holiday activity revenue from members.
Off role employees on board
The company has taken on board a significant number of employees off roll; largely tele marketers and sales force. Owing to this employee expenses have increased sharply to 28 per cent YoY. This, along with fall in cost of digital marketing, led to sales and marketing (S&M) expenses falling 8 per cent YoY.
Incentives to off roll employees are accounted for in S&M expenses and other off roll salary expenses are charged to service charges in other expenses.
Sales & marketing activities
The company has taken initiatives in this sphere as it improved customer facing process. The customer mobile application has seen a significant increase in penetration. The share of digital & referral in the sales mix was stable at 49 per cent.
The targeting cost of acquisition clocked at 25 per cent of sales. The cost of acquisition through the digital route is falling and only in the April-June’17 quarter has the cost the digital come down. Mahindra Holidays & Resorts have tied up with Disney where the company is getting very good pricing on these properties.
MHRIL, on its website is offering the option of gifting experiences, in across seven cities. One of such offers is named as, Zo Zo day is given to the members at very reasonable rates.
ASF income and Lease Rentals
The annual subscription fee (ASF) fell by 5 per cent YoY as the company changed its accounting standards to Indian Accounting standards (Ind-AS). Under the new standards, expected credit loss provision had to be provided. The fall in ASF income on account of credit loss dented revenue growth.
The lease rentals rose as 148 units were added in the fourth quarter of 2017 under lease.
The major risks that MHRIL face are low net member addition and its aggressive accounting policy. The new member addition member cancellations and consumer dissatisfaction are some of the factors that could provide risk to the estimates of the company. In addition to this, the company follows an aggressive revenue recognition policy with 60 per cent revenue being recognized upfront and services being offered over 25 years.