Rooms: Where?

On September 30, 2010, they have 117,993 members. And 1,473 apartments.

Even if they use them 100% for members, with one week per member and 52 weeks a year, they can only accomodate about 77,000 numbers. 35% of their members can’t be accomodated – 1 in 3 won’t get a chance. Given that holidays are usually taken in bunches (not spread out evenly across the year), there are likely to be even more disappointments.

Their response…

The standard reply is that listen, people don’t qualify to take holidays immediately on membership. In a mail I was forwarded, the statement made was:

…members avail of financing plans from us for their membership purchase. In light of that a certain no. of EMIs would need to realized before the member becomes “Eligible” to holiday

Oh, that way.

But…

Their member FAQs say:

The maximum that members will need to wait is 12 months, it seems.

One year ago

Let’s look back, to 15 months ago. During their IPO they said they had 96,000 members.

By now, all of them will be able to take rooms, because they’ve done their one year of tapasya. But even now, MHRIL can accomodate just 77,000. Around 20,000 will be unsatisfied. Sure the RCI affiliation takes care of some of them, but I doubt 35% of their members will want to pay the even higher RCI charges instead.

Even if we spread out holidays evenly across all members, across all resorts, and allow no “one-time” visitors or complimentary free room-nights. Which is a joke – in reality, holidays are bunched, people want to go to certain resorts (who’ll spend time in the Himalayas in winter?) and they do let in one-timers.

This model is simply not sustainable. They have to get more resorts on board. In the last one year, they have only added 200 or so rooms, but about 20,000 members. That itself is zany – 200 rooms can only satisfy 10,400 members!

Valuation

It all comes down to valuation. The stock price at 346 seems low, but is it really? Look at EPS growth:

The TTM (Trailing Twelve Month) EPS is Rs. 10.39. That’s a P/E of 34, for a company that hasn’t grown EPS much in the last full year.

Chart

Looks like a giant head and shoulder pattern. Technically the support bottom is 323. Break that with volume and this stock could go to half the current price.

Disclosure

No positions. Not even technical ones.

What brought me to the analysis was: This MoneyLife post that must be read. Yeah, I write about them too often; even I wonder why I bother. But this is an interesting lesson – markets reward branding, not performance, in the short term. In the long term, performance has to make up. (Or so I think!)

This post is written by Deepak Shenoy, at Capital Mind.

Usually for the hotel business, with a high occupancy rate, their revenues should have gone up. And that also means higher margins because you can charge higher fees to customers and walk-ins. But that’s not how it works for a timeshare – since customers pay upfront, a high occupancy rate is bad for profits, since it means you have to actually hire the staff and service the customers (whereas when you have a low occupancy rate, that bit goes into your pocket as profit).

Look at the numbers:

Revenues are down, expenses remain the same, and profits are way down. EPS is down 63%. They a trailing 12 month EPS of 12 and a market price of 491, which don’t quite make sense – which is probably why the stock has lost about 20% in the last three days.

(Click to enlarge)

Technically there should be a support level around 450, where the 200 DMA is, and further at the 400 levels. MACD and RSI are clearly negative in the short term. You could expect a dead cat bounce soon because of fading volumes on the downside, but there has not been much strength into the recent rise in the stock.

Also, that they are “overbooked” with respect to number of members and number of available rooms. Even if they took no walk-ins (remember, they do, you can book as a non-member too) they will leave about 30% of their members unsatisfied – and that percentage has not changed much in the last year.

Read my other posts on MHRIL – on their December 2009 results and my analysis of their IPO.

Hindustan Times, from IANS:

An company official told IANS on the condition of anonymity that the company has scrapped the 60 month equated monthly instalment scheme for enrolment membership.

He said the number of members enrolled during the first quarter of the current year is 1,494 lesser than what was enrolled during the corresponding period of the previous year thereby impacting the top line.

"During the quarter, the management initiated a number of measures to strengthen its acquisition process and took various steps to enhance customer satisfaction. These initiatives while impacting the numbers in the short run will benefit the company in improving productivity," Chairman Arun Nanda said.

On the reduction in sales and marketing expenses, he said the focus is now on getting prospective client lead than other advertisement spend.

And from India Infoline:

Total income from operation for the quarter ended June 2010 declined by 25% to Rs 101.78 crore. The decline in the sales is due to stringent measures taken by the company. MHRIL has increased down payment from customers to 15% from 10% earlier. Maximum number of installment also decreased to 40 months from 60 months earlier. This stringent measure will decrease the number of cancellation. Operating profit margins crashed by 2090 bps to 22.6% due to increase in the costs and lesser revenues. Finally net profit fell by 61% to Rs 13.29 crore.

[…]In peak seasons, MHRIL stopped renting rooms for non-members. Also planning to stop renting rooms for non-members in non peak seasons too.

[…] Expects to add 400-500 rooms in FY'11.

Disclosure: No ownership. And I won’t be buying anytime soon. This is an “ok” stock with a very expensive price-tag.

This post is written by Deepak Shenoy, at Capital Mind.

There’s been a substantial increase in membership – their presentation says that as of Dec 31, 2009 they had about 110,000 members.

But the number of rooms is only at 1,403 over all resorts. Since they sell a week per customer per year, that’s 72,956 members they can satisfy this year. This is where the equation breaks down.

Even if ALL the members were evenly distributed among the year, about 37,000 members won’t be able to get  a room. And most people will want to holiday during certain seasons or holidays, so it’s unlikely to have even distributions – which means bunching of customers at holiday weekends, and therefore even lesser supply to demand. What happens to the dissatisfied customers?

And then, they black out certain dates – most members can’t do their holidays in the ultra-peak season of December end and so on. Plus, they sell their inventory outside – I just got a message telling me about an all-meals package for 3 nights in Club Mahindra Goa, for non members, for 16,000 per head including airfare to and fro from Delhi. If I took it, I’d steal away a few days off some other potential member’s holiday.

I was concerned about this even last year during the IPO (Read my view on the IPO) but apparently I was the only person who cared – memberships have soared from 96,000 to 110,000 while rooms only moved from 1261 to 1403 (available weeks from 66K to 72K). That means even MORE people should be unsatisfied today.

On the other hand, RCI affiliation offers members places to go when no Club Mahindra owned property is available. Yet, that’s a lot more expensive and you can’t expect 35% of members to go that route.

So I’m not particularly fond of this equation but the stock has done well. At Rs. 431 today it’s gone up 30% from the IPO price of Rs. 300, though it’s seriously off it’s highs of 530. And, it’s beaten the Nifty handsomely.

Question for you: Would you buy this stock? I wouldn’t on pure fundamentals – somewhere this stock is going to hit a wall, I feel. But I’d love to hear opinions.

This post is written by Deepak Shenoy, at Capital Mind.

Price: 275 to 325.
Size: 92.65 Lakh shares (255 to 301 cr.). Of which, 59 lakh are fresh issuances, and the remaining are for sale by existing investors.
Date: June 23 to 26, 2009

What do they do?

Club Mahindra, run by them, is a time-share and vacation holiday business. They own 23 resorts and are linked with RCI to about 4600 others. Effectively, to join their "network", you pay them a huge upfront fee - around Rs. 2.5 lakhs - and you get 25 years of membership, with 7 days a year available on any of their (or RCI's) resorts free of cost. Or, inflation free, as they put it.

Like most timeshares, the costs are hidden. Srinidhi Hande runs an excellent blog, and has written a review of the Club Mahindra membership. He mentions that the club membership costs between 2 and 7 lakhs including taxes. Additionally, one pays Rs. 7,500 to Rs. 14,000 on annual fees, regardless of whether they take holidays. Overall, this is not very exciting to someone who isn't bowled over by their presentation.

• At 2.5 lakhs, at a savings rate of 8% a year (using P.O. deposit rates) you're actually paying Rs. 20,000 a year. Plus, the 7,500 annual fees adds up to Rs. 27,500. For a week, that's about 4,000 per day. At the Rs. 2.5 lakh studio room membership, you are unlikely to get peak season bookings. For what it's worth, you will pay Rs. 3,000 to Rs. 4,500 per day for most of these resorts if you book externally - all of them are available for "non-members".
• (Don't consider that you lose the entire 2.5 lakhs at the end of 25 years- otherwise you'd have to do a complex reducing balance calculation)
• You hope that you will get the rooms when you want, in the place that you want, and in the hotel of your choice. If they have no rooms available during your kids vacations (surprise!), bad luck, try next year. Costs escalate when you consider this.
• Given that you're paying upfront, you are unlikely to get top service - after all service comes with the expectancy of repeat business, of a payout at the end. When you have committed to repeat business, and have already paid, what are the chances you'll be treated as well as, say, a walk-in visitor who's booked as a "non-member"? The incentives don't quite work in your favour.
• If you decide, at any time, to use your vacation at a non-Club-Mahindra place for a particular year, you are paying Rs. 4,000 more per day from the already sunk cost. They'll probably tell you that your days can be sold, but in practise this is extremely cumbersome.
• Holidaying has been inflation proof for the most part, in the last few years, all things considered. Goa still costs the same for 3 and 4 star resorts as it used to in 2005, in fact you could get hotels at lesser. I honeymooned in Goa, and even today would pay the same rate for the same hotel (Taj at Fort Aguada). Even if you consider that average rates were around Rs. 2000 per night in 1999 and are about Rs. 4000 now, that's a 7% CAGR - just about meeting inflation. At the increase of holiday opportunities - you could holiday cheaper in Bangkok, Malaysia or Dubai - and the increase in number of resorts, one can expect that the next ten years will not see huge price increases.

How do people like their service?

First, a personal opinion. I have only heard of people being dissatisfied. From friends who couldn't get any rooms when they wanted, to others who couldn't get refunds, or even get anyone to answer their call, nearly all responses were negative. The only positives I got were for individual resorts, but like a friend said "You will get that even if you book as a non-member".

Let's also look at published (negative) opinions on the service or lack thereof:

• Mouthshut reviews are all negative, with literally no supporters for the service.
• Consumer complaints have a significant number of negative views on the service.
• A court recently asked it to refund the membership to a consumer.

If you're looking to buy or sell your membership check out Srinidhi's page with an excel sheet of sellers and prices listed - list your membership there for selling, and if you're looking to buy you can get much better deals here.

Club Mahindra is only one of their offerings. They also have Zest, the 10 year version of the above. And a corporate package deal called Fundays, a holiday travel website at clubmahindra.travel and Mahindra Homestays.

What does this have to do with the IPO?

Very little, really. Having crappy service or crappy products has never meant that the company won't grow in a stellar way going forward. But this has been a subject close to heart, so I wanted to write about. Let's get on with the financials and stuff.

What are the figures like?

They have 1261 apartments/cottages, and nearly 96,000 members. This might pose a small problem because each room can only be used 52 times a year (one week for a member). That's about 66,000 member nights available, meaning 30% of their members can't be currently accomodated, more if you consider "non-members". The official response is that many members don't get eligible, either by being early on EMIs or by default, but that isn't good enough as an explanation - simply put, they need a LOT more investment before they can scale revenues, or they will lose a substantial amount of goodwill and membership.

Earnings: FY 2009 revenue was 442 cr. up 17% YOY. Net income was down 6% at 79.8 cr.

They currently have 7.83 cr. shares in issue, so their EPS is 10. So at the price band (275 to 325) the P/E ratio is 27 to 32. This is ridiculously high for a company that has flattened profit growth and is saturated on capacity.

How will they use the money? They'll spend 211 cr. on five resorts (new and expansions) which will add 500 rooms to their kitty. Note that this will add 26,000 member nights over two years, still not quite enough to satisfy their current member count. And I believe they will need to grow their member count if they have to increase revenues.

Still, there's another problem. The IPO has only 59 lakh new shares - the rest are an offer for sale, in which the company gets nothing. At the upper price of the band, Rs. 325, they will collect 192 cr. They spend 210 cr. but only collect 192 cr. max, and have to pay around 6% management fees, listing fees etc. They do stagger spending over two years but the shortfall will have to be met elsewhere. Perhaps by some debt.

They've securitised receivables for 150 cr. and if a customer defaults, they have to make good the shortfall. This is not good, if you consider that there will be reasonable dissatisfaction among customers due to lack of room inventory. They also have about 100 cr. of debt on their books.

Conclusion: Given that:

• They have about 30% more members than room nights
• New capacity from this public issue will not even satisfy current membership, leave alone new members
• Ensuing loss of members or defaults can impact cash flow negatively, since they have securitized receivables.
• Customer dissatisfaction, from what I hear, is very high
• They're asking for a P/E of 27 to 32 on very small EPS growth in the past, and very little expected in the future

This is not advice so I would encourage readers to come to their own conclusions. I'd rather see this company scale up inventory and build a more satisfied set of customers, and see the tourism cycle go through its downturn before considering investing, at any price. Perhaps in three-four years. But given my horrendous record of looking at IPOs, it might just be that this share doubles on listing. That's another reason why you should come to your own conclusion!

This post is written by Deepak Shenoy, at The Indian Investor's Blog.