Mahindra Holidays IPO looks expensive

Mahindra Holidays & Resorts India (MHRIL), one of the leading leisure hospitality providers in India offering quality family holidays and a part of Mahindra Group is entering capital markets tomorrow with an initial public offering of around 9.2 million equity shares of Rs. 10 each for cash at a price to be decided through a 100% book-building process.

MHRIL has fixed a price-band for the issue at Rs 275-325 a share. It plans to raise around Rs 2.54 billion to Rs 3.01 billion through the issue. The issue has been assigned 4 out of 5 IPO grading by Fitch Ratings India (P) reflecting above average fundamentals` of the Issue relative to other listed equity securities.

Business model
MHRIL business is significantly dependent on the continued establishment and promotion of its brands through service offerings, such as Club Mahindra Holidays, Fundays, Zest and Mahindra Homestays. As of May 31, 2009, it has 19 branches and 61 retail outlets across India of which 45 are owned and 16 are franchised. The cumulative member base increased to 92,825 in fiscal 2009 from 38,691 in fiscal 2006. Its membership enrolments have increased at a CAGR of 33.87% over the last three fiscal years. As of May 31, 2009, MHRIL has 96,067 members and 27 resorts across India and Thailand.

Expansion plans
MHRIL plans to deploy issue proceeds in setting up of new projects and expansion of some of the existing resorts. It will provide a larger range of resorts and hence a wider choice of holiday destinations to members, it said.

Financial Performance
During the financial year ended 2008-09, MHRIL reported a decline of 5.05% in the net profit to Rs 798 million over the previous financial year. Meanwhile, total income increased 17.21% to Rs 4,421.20 million helped by income from securization and interest. This coupled with rise in subscription fees and income from sale of services at the resorts.

MHRIL results of operations are affected by factors such as changes in global and domestic economies, changes in local market conditions, the cost and availability of financing and other similar factors. The current downturn in global economies has led to lack of consumer confidence, decreased market valuations and liquidity, increased market volatility and a widespread reduction of business activity generally. The resulting economic pressure and lack of confidence in the financial markets adversely affected the company`s business, financial condition and results of operations during the third quarter of fiscal 2009.

Valuation
At the cap price, the issue of MHRIL is priced at around 32 times of its FY09 earnings. The issue is priced at around 27 times of its FY09 earnings at floor price. This looks expensive when compared with Country Clubs which also engaged in the same business is trading at nearly 10 times of earnings. The IPO is at 15.3-18 times of earnings of FY10 forward estimates, which looks high, notes the brokerage firm Bonanza Portfolio. Considering this, it might possible that the stock may trade below the issue price on the listing.

However, MHRIL is the biggest player in the industry, commanding near 40% of the market that is growing at 15%. The company has shown faster growth than industry in recent years. The business is niche, with strong brand awareness and earning visibility. Investors looking for new business models with a long term view may apply.

Mahindra Holidays & Resorts India Limited (Q, N,C,F)*
* Q - Quote , N - News , C - Chart , F - Financials

Courtesy/Source: myiris.com