Mahindra Holidays And Resorts India

Mahindra Holidays and Resorts India (MHRL) is one of the leading leisure hospitality providers in India, offering family holidays with a range of services designed to meet the diverse holiday needs of a family. In addition to providing Vacation Ownership (VO) memberships, it also manages the operations at its resorts, which helps it control the quality of its offering thereby enhancing customer experience. Apart from its flagship service offering of VO, as part of its growth strategy it diversified its portfolio by introducing new vacation ownership offerings, Zest and Club Mahindra Fundays, Mahindra Homestays and travel and holiday related services through clubmahindra.travel. As of May 31, 2009, MHRL had 96,067 Club Mahindra Holiday vacation ownership members. Likely increase in income levels to augur well for MHRL Over the next two decades, the Indian market is likely to undergo a major transformation. Income levels will almost triple and India is poised to become the fifth largest consumer market by 2025. As Indian incomes rise, the shape of the country’s income pyramid will also change dramatically. Over 291 mn people will move from desperate poverty to a more sustainable life, and India’s middle class will swell by over ten times from its current size of 50 mn to 583 mn people. Revenues extremely sensitive to incremental member additions The fact that 60% of upfront onetime membership fess is booked upfront (currently accounting for 75% of revenues), topline for MHRL is extremely sensitive to incremental membership additions. Hence, unless the incremental number of new member addition is higher than the previous year, the topline for the company may not grow. Strong parentage MHRL is a part of the Mahindra Group of companies that is amongst the top 10 industrial houses in India. Forbes has ranked the Mahindra Group in its Top 200 list of the World’s Most Reputable Companies and in the Top 10 list of Most Reputable Indian companies. The Mahindra Group’s activities have spread over various areas such as automotive, farm equipments, engineering, forging, steel, infrastructure development, leisure hospitality, information technology, systems and technology, consultancy and software services, general retailing, and trade and financial services. Outlook and valuations Although the IPO is stiffly priced, we recommend ‘SUBSCRIBE’ from a long-term perspective at the lower end of the price band, betting on the strong parentage, management track record, early-mover advantage and the company’s dominant position in the vacation ownership business suggesting growth potential over the long term. At the upper band of INR 325, MHRL is valued at 34.2x its FY09 earnings and at the lower price band of INR 275, it is valued at 29x its FY09 earnings (on a fully diluted basis). Prakash Kapadia +91-22-6620 3119 [email protected] Reuters : NA Bloomberg : NA 52-week range (INR) : NA Post IPO share in issue (mn) : 84.2 M cap (INR bn/USD mn) : NA Avg. Daily Vol. BSE/NSE (‘000) : NA Promoters : 83.1 Non-Promoters : 16.9

India Equity Research | Travel and Tourism IPO Note

MAHINDRA HOLIDAYS AND RESORTS Long-term play SUBSCRIBE

INR 275-325

June 22, 2009

Market Data Share Holding Pattern (%) Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited 1

Mahindra Holiday Resorts Edelweiss Securities Limited 2

Investment theme

Unique business model Mahindra Holidays and Resorts India (MHRL) is one of the leading leisure hospitality providers in India, offering family holidays with a range of services designed to meet the diverse holiday needs of a family. In addition to providing Vacation Ownership (VO) memberships, it also manages the operations at its resorts, which helps it control the quality of its offering thereby enhancing customer experience. Apart from its flagship service offering of VO, as part of its growth strategy it diversified its portfolio by introducing new vacation ownership offerings, Zest and Club Mahindra Fundays, Mahindra Homestays and travel and holiday related services through clubmahindra.travel. Club Mahindra Holiday membership currently entitles members the choice of holidaying at any of its 27 resorts, for seven days each year, in a season and apartment type of their choice, for 25 years. In addition, members can choose to access a range of resorts globally through our RCI affiliation. As of May 31, 2009, MHRL had 96,067 Club Mahindra Holiday vacation ownership members. Right to use not ownership MHRL memberships provide members the right to use its resorts over the period of their membership. This type of a membership, gives members the flexibility to choose a different resort and the time to holiday every year. The holiday seasons are generally divided into three or four seasons, based on the demand for a particular resort in a particular season. Each of the resorts has a unique week classification for the different seasons offered by them. Venture into other segments will help strengthen presence Apart from VO, MHRL launched Zest in November 2006, which targets young urban families for short break holidays. Zest membership currently entitles members the choice of holidaying at any of its five Zest resorts, for six days each year, in a season of their choice, for 10 years. Club Mahindra Fundays was launched in October 2006 and targets corporate houses. The membership currently entitles corporates for a period of 10 years to offer family holidays to their employees. It also launched clubmahindra.travel in April 2007 to provide a one-stop shop for travel and holiday related services. Mahindra Homestays was launched in July 2008, which markets homestays to overseas and Indian travelers wishing to experience the real India by lodging with a host family in India. Additionally, a mixed-use model of being a vacation ownership company and also providing non-members access to its unutilized apartments on a per-night-tariff basis enables MHRL to enhance revenues through optimum occupancy and sales from its restaurants and other services. Likely increase in income levels to augur well for MHRL Over the next two decades, the Indian market is likely to undergo a major transformation. Income levels will almost triple and India is poised to become the fifth largest consumer market by 2025. As Indian incomes rise, the shape of the country’s income pyramid will also change dramatically. Over 291 mn people will move from desperate poverty to a more sustainable life, and India’s middle class will swell by over ten times from its current size of 50 mn to 583 mn people. Mahindra Holiday Resorts Edelweiss Securities Limited 3

Travel and tourism in India is expected to give a very dynamic performance over the forecast period, driven by strong economic growth, an expected increase in its share of GDP to over 8% and increased traveler confidence. (Source: Travel and Tourism – India: Euromonitor International: Country Market Insight, November 2008) India has seen an increase in expenditure on leisure and recreation to INR 370 bn in 2005 from INR 270 bn in 2003. Good track record; membership addition key to success Of the total revenues of MHRL, income from sale of vacation ownership accounts for 75% of the total operating income. The balance 25% comes from a combination of annual subscription fee, and income from resorts. Over the past four years, the company’s operating income has posted a CAGR of 40% on account of increase in the cumulative member base from 28, 491 in FY05 to 92,825 in FY09,

which have shown a 34% CAGR increase over the same period. Of the income from sale of vacation ownership, MHRL accounts 60% of its revenues upfront in the year of the membership addition; the balance 40% is accounted over the period of the membership, which ensures an annuity stream from its existing members. The strong growth of membership addition, we believe, is on account of changing demographics, increasing aspirations of the middle class, emergence of low-cost airlines and an integrated business model that entails presence across the value chain right from member acquisition (marketing and sales of lifestyle offerings), servicing of and contact with members, identifying land and developing resorts, acquiring resort properties, to resort operations (delivering family holiday experiences) and providing value-added services. Apart from the income from sale of vacation ownership, the annual subscription fee contributes to more than 11% of the income from operations, which are ~ INR 6100 per member on the membership base last year. While MHRL has been able to grow its member base at a healthy growth rate in the past, sustaining similar growth rates over the next couple of years may not be as easy given the recent economic slowdown as it relies on heavily on discretionary spending by consumers. Strong parentage MHRL is a part of the Mahindra Group of companies that is amongst the top 10 industrial houses in India. Forbes has ranked the Mahindra Group in its Top 200 list of the World’s Most Reputable Companies and in the Top 10 list of Most Reputable Indian companies. The Mahindra Group’s activities have spread over various areas such as automotive, farm equipments, engineering, forging, steel, infrastructure development, leisure hospitality, information technology, systems and technology, consultancy and software services, general retailing, and trade and financial services. Revenues sensitive to incremental member additions; topline could decline despite membership growth The fact that 60% of upfront onetime membership fess is booked upfront (currently accounting for 75% of revenues), topline for MHRL is extremely sensitive to incremental membership additions. Hence, unless the incremental number of new member addition is higher than the previous year, the topline for the company may not grow. What this also means is that even if the overall membership base for the company will grow due to new member additions, the topline will not grow unless the incremental member additions is higher than the previous year. If the recent phase of economic slowdown and job cuts persists, it could affect the company’s growth. Mahindra Holiday Resorts Edelweiss Securities Limited 4

Growth in members has slowed down in FY09, leading to profit decline During FY09, MHRL reported 11.5% Y-o-Y growth in revenues and 13.6% fall in EBITDA. This, we believe, is on account of marginal decrease in the addition of members during the year. Addition of incremental members stood at 19,292 in FY09 against 20,420 during FY08. The decrease in the incremental members can be attributed to the IT slowdown in the southern region, and volatility and fall in stock markets affecting sales in the western region. EBITDA margins drop substantially in FY09 Of the total operating costs, employees and sales promotion and commission are the two major costs. The share of employee and sales promotion has been steadily rising from 45.7% in FY05 to 57.5% in FY09. During FY09, since the membership base saw a marginal decline and costs saw an increased pressure, EBITDA margins saw a huge fall from 33.9% in FY08 to 26.20% in FY09. During FY09, 35% of its sales were through member referrals. Despite this, we saw an increase in sales promotion and commission and discounts offered, clearly indicating deferment in purchase decisions by consumers leading to increased costs. Issue details Issue opens June 23, 2009 Issue closes June 26, 2009 Fresh issue 58,96,084 Equity shares Offer for sale 33,69,191 Equity shares Face value INR 10 Price band INR 275-325 Source: Company

Objects of the issue Objects of the issue are (a) Financing of expansion of some of the resorts and setting up of new projects (b) For certain general corporate purposes The company intends to utilize the net proceeds from the issue in the following manner: (INR mn) Particulars

Total fund requirement Amount deployed till May 31, 2009 Estimated Amount to be utilized from the Net Proceeds Financing of expansion of their resorts & setting up of new projects 2 ,368.9 2 59.4 2,109.5 Source: Company

The year-wise break-up of the proposed utilization of the net proceeds is set forth below: (INR mn) Particulars Estimated Amount to be utilized from the Net Proceeds Amount to be utilized in Fiscal 2010 Amount to be utilized in Fiscal 2011 Amount to be utilized in Fiscal 2012 Financing of expansion of their resorts & setting up of new projects 2 ,109.5 1,117.7 9 34.2 57.6 Source: Company

Mahindra Holiday Resorts Edelweiss Securities Limited 5

As per the current business plan of the company, it intends to expand the inventory of apartments, enhance facilities at its Coorg (Phase IV in Karnataka) and Ashtamudi (Phase II in Kerala) destinations, and renovate its newly acquired resort at Ooty (Tamil Nadu). Further, the company also intends to construct new resorts at Tungi and Theog. Details of expansion of resorts are as follows: (INR mn) S. No. Location of resort Total fund requirement Amount deployed till May 31, 2009 Estimated Amount to be utilized from the Net Proceeds 1 Ashtamudi 368 36.1 331.9 2 Coorg 163.1 0 163.1 3 Ooty 121.7 39 82.7 4 Tungi 969.6 164.4 805.2 5 Theog 746.5 19.9 726.6 Total 2368.9 259.4 2109.5 Source: Company

Shareholding pattern The table below presents shareholding pattern before and after the proposed issue: No. of shares (%) No. of shares (%) (mn) (mn) Promoter Mahindra & Mahindra 73.4 93.6 70.0 83.1 Others 0.0 ESOS Trust1 1.3 1.7 1.3 1.6 State Bank of India 1.6 2.1 1.6 2.0 Nylim Jacob Ballas 0.8 1.1 0.8 1.0 Employees and Directors 1.1 1.4 1.1 1.3 Others 0.1 0.2 0.1 0.1

Public 0.0 0.0 9.3 11.0 Total 78.33 100.0 84.23 100.0 Pre-Issue Post-Issue Source: Company

Key Risks

Economic recession could adversely affect MHRL’s business Inability to manage the timing of vacation requests of members could lead to member dissatisfaction and loss of revenue generation opportunities There are income tax proceedings pending against MHRL which, if finally determined against the company, can have an adverse effect on its business Mahindra Holiday Resorts Edelweiss Securities Limited 6

Financial Statements Income statement (INR mn) Year to March FY05 FY06 FY07 FY08 FY09 Income from operations 1,017 1,527 2,323 3,527 3,932 Total operating expenses 789 1,121 1,620 2,332 2,900 Employee cost 143 195 283 474 608 Sales promotion and comission 218 351 530 845 1,057 Other expenditure 4 28 576 807 1,014 1,235 EBITDA 2 28 406 703 1,195 1,032 Depreciation and amortisation 6 5 78 89 113 168 EBIT 1 64 328 614 1,082 864 Interest 4 3 33 36 33 70 Total other income 4 5 40 90 245 489 Profit before tax 153 328 671 1,296 1,284 Provision for tax 7 0 128 246 456 486 Core Profit 8 3 201 425 840 799 Profit after tax 8 3 201 425 840 799 Profit after minority interest 8 3 201 426 840 799 Shares outstanding (mn) 7 8 78 78 78 78 EPS (INR) basic 1 .1 2 .6 5.4 10.7 10.2 Diluted shares (mn) 7 8.3 78.3 78.3 78.3 78.3 EPS (INR) diluted 1 .1 2.6 5.4 10.7 10.2 Summary statement of assets and liabilities as restated (INR mn) As on 31st March FY05 FY06 FY07 FY08 FY09 Gross block 1,493 1,917 2,257 2,734 4,293 Less: Depreciation 235 307 383 479 641 Net Block 1,257 1,610 1,874 2,255 3,652 Capital work in progress 18 22 127 450 513 Net fixed assets (A) 1,275 1,632 2,001 2,705 4,165 Investments (B) 45 0 59 0 0 Current assets, loans and advances Inventories 6 9 18 35 53 Sundry debtors 782 1,457 2,187 4,034 4,826 Cash and bank balances 39 77 94 76 328 Loans and advances 188 262 419 621 665 Total current assets (D) 1,016 1,805 2,718 4,766 5,871 Liabilities and provisions Loan funds Secured loans 220 268 60 201 247 Unsecured loans 13 - - - Advance towards members' facilities 1,640 2,263 3,242 4,825 6,410 Deferred tax liability net - 92 202 236 295 Current liabilities and provisions Current liabilities 229 380 406 609 821 Provisions 2 3 112 171 306 Total liabilities and provisions (E) 2,104 3,005 4,021 6,041 8,078 Net worth (A+B+C+D-E-F) 233 433 757 1,430 1,958 Represented by Share capital 284 284 284 764 770 Reserves and surplus 0 149 473 666 1,188 Sub-total 284 433 757 1,430 1,958 Less: Profit and loss account debit balance ( 52) - - - Total 233 433 757 1,430 1,958

Naresh Kothari Co-Head Institutional Equities [email protected] +91 22 2286 4246 Vikas Khemani Co-Head Institutional Equities [email protected] +91 22 2286 4206 Nischal Maheshwari Head Research [email protected] +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Miscellaneous: Opto Circuits, Page Industries and Lakshmi Energy & Foods Recent Research Rating Interpretation Buy appreciate more than 20% over a 12-month period Accumulate appreciate up to 20% over a 12-month period Reduce depreciate up to 10% over a 12-month period Sell depreciate more than 10% over a 12-month period 19-Jun-09 Opro Well-grounded; 162 Buy Circuts Result Update 16-Jun-09 Page Steady going; 481 Buy Industries Result Update 04-May-09 Lakshmi Problems of surplus; 73 Accum. Energy & Result Update Foods 02-Feb-09 Bombay No surprises disappoint; 103 Accum. Rayon Fash. Result Update Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Distribution* 44 50 26 8 128 Market Cap (INR) 70 44 14 > 50bn Between 10bn and 50 bn < 10bn Date Company Title Price (INR) Recos Rating Expected to Buy Accumulate Reduce Sell Total

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