Mahindra Holidays and Resorts India Limited will launch its initial public offering from June 23, 2009. The issue offers 9.27 million shares of Rs.10 each through a 100% book building route. Mahindra Holidays’ flagship brand is Club Mahindra Holidays, which has 27 resorts in India and Thailand and has 96,067 members. The company hopes to raise approximately Rs. 255-300 crore via this issue with a share price range of Rs.275-325. The good news is that that business has been tested and established, and the pedigree of the promoters is ‘true blue’. The areas of concern, eventthough slight, remain the pricing and the growth in real terms as opposed to the bright potential.

The promoters

Being a part of the diversified Mahindra Group, which is one of India?s top 10 industrial groups is a big advantage the company brings with it. The Mahindra and Mahindra Limited (M&M), which started in 1945 has been in the Indian markets for over 60 years and while the company started off primarily into automobiles like utility vehicles like three wheelers and tractors, since then they have moved a long way and are now major players in various sectors. Anand Mahindra, the vice chairman and managing director of the group who heads the hospitality branch of the group also comes with a strong background. However, within the hospitality industry the fact remains that the Mahindra Group is yet to prove and establish themselves. After being in the automobiles engineering and financial services sector, this is a relatively new business for the group.

Business overview

The travel and tourism industry in India over the next decade are expected to contribute a great deal more to the GDP and at least make up 8% of the same. With the household income and spending power to triple in the coming years the tourism and hospitality industry are both expected to cash in. Over the last few years the percentage of population that takes holidays has risen from 2.5% to 4.5% and the same is expected to continue in the future.

The company considers themselves to be the leading leisure hospitality providers, via which they offer family packages and deals, loosely based on the time sharing model, to its 96,000 plus members at 23 resorts in India and four in Thailand. While some of these locations are new and not yet regular tourist spots, the more popular ones amongst them include Goa, Munnar, Manali and Thekkdi. Also, being affiliated with RCI members can access resorts across the globe via RCI. This gives the business a strong footing.

Risk factors

Being a club and following a time sharing module the company takes an fee for a 25 year period which can be paid via EMI as well and as per representatives a customer can recover the money spent as fees in 8-9 years on an average. However, the company has had major issues in terms of member dissatisfaction and disputes due to their inability to provide members with the resorts of their choice during holiday season. This compiled with the fact that the company personally and even five out of eight of its directors are under litigations for various reasons, civil cases from customers, to tax cases from the government, to property disputes and the likes could be a concern for the company, especially as once it goes public, dissatisfied customers might feel more likely to sue. Also, given the fact that the company has a lock-in fee for 25 years most customers may feel cheated if they cannot get the destinations they chose when the like due to overbooking, and this too could lead to more customer complaints and problems for the management. The management while addressing this issue says ?we are looking into this problem which does exist and are trying to figure out a way around it by offering alternate locations etc.? However, how long are these teething problems likely to continue will be important? Moreover analysts also view this as a generic risk associated with these businesses.

Number talk

The company balance sheet is really promising and while the company profits did drop marginally from 2008-09, that is not hard to fathom given the downturn in economy we were facing. Having made a profit of Rs. 8.29 crore in 2004-05, the companies 2007-08 and 08-09 profits were Rs. 84.03 and Rs. 79.8 crore respectively, a jump of almost 10 times. Also the company has no unsecured loans and secured loans only worth Rs. 24.69 crore as of 2009, making it a relatively debt free company. The company based on 2008-09?s financial figures offers an EPS of Rs. 10 and a price to earnings of 27 times and 32 times at the lower and higher price band, which comes across as rather ambitious.

Issue use

The company plans to use Rs. 211 crore of the money collected on expansion plans in five resorts which will give them 500 rooms extra, easing the burden on the existing capacity during peak season. The company here has a slight problem they face since only 59 lakh new shares are being offered and the rest are an offer for sale. This means at Rs. 325 a share also, the company raises approximately Rs. 192 crore only, and this, minus the management fee and issue expenses will leave even lesser in hand for the proposed expansion plans. All in all, the company has a lot of big names backing it with the Mahindra?s being the promoters, but the basics are still not up to the level one would expect to se from a company looking to price its shares at Rs. 275-325 in its itial public offering.