Mahindra Holidays and Resorts India: Not the best of times

The stock of Mahindra Holidays and Resorts India, the largest vacation ownership (timeshare) provider in the country, is down about 19 per cent over the last year. Not surprising, given the company’s weak financial performance — consolidated revenue in 2014-15 fell 2.3 per cent year-on-year while net profit declined 7.5 per cent.

Exceptional accounting adjustments including those relating to review of member accounts took a toll on the bottom-line.

But operating profit too fell 2.2 per cent, an indicator that the business has been under stress. This is in contrast to the strong performance of nearest competitor Sterling Holiday Resorts which grew income 27 per cent in 2014-15 and turned profitable after years of losses.

A timeshare buy is discretionary spending for a customer, and a sluggish economy is not the best time for the business. Still, Mahindra Holidays, with the help of increased digital and referral sales, added to its membership base last year; it has about 1,83,000 members as of March 2015. But at 6 per cent, the pace of new member additions (around 12,800) last year was low.

Sterling Holidays with about 76,000 members grew its new member additions (around 5,500) more than 50 per cent last year. In what is essentially a two-horse race in the timeshare industry in India, Sterling Holidays (which is to be merged with Thomas Cook India) seems to be gaining pace. This has been aided by revamp of its operations and a relatively cheaper offering than Mahindra Holidays.

Despite adding to the member count last year, Mahindra Holidays’ standalone income from sale of vacation ownerships dipped 8 per cent last year. Accounting adjustments played a part, but a shift in the sales mix towards timeshare categories with lesser realisations may also have hurt revenue.

Income from sale of vacation ownerships accounts for about 60 per cent of Mahindra Holidays’ income. Dip in this key revenue generator offset improvement in annual subscription fees and resort income, and cost reduction benefits.

Mahindra Holidays has been adding aggressively to its room inventory. It added 409 rooms in 2014-15, its highest in a year to take total room count to 2,826. It plans to add at least 500 rooms in the next 18 to 24 months.

This will benefit the company in the long run when the economy and new member additions gain momentum. In the meanwhile though, the pressure on the balance-sheet could rise.

Debt levels have already risen sharply, primarily due to the stake acquisition in Finnish timeshare major Holiday Club Resorts (22 per cent last calendar recently upped to 88 per cent).

Holiday Club Resorts boosts Mahindra Holidays’ geographical reach, making the combined entity the largest timeshare operator outside the US. But the latter’s consolidated debt has increased from less than ₹3 crore as on March 2014 to ₹124 crore as on March 2015; interest cost more than doubled last year.

That said, the debt-to-equity ratio at 0.17 times remains comfortable. But debt is likely to increase further to fund the recent stake addition.

It does not help that the financial performance of Holiday Club Resorts has been weak. Its sales have been stagnant at about €120 million for the past three years while profit before tax declined from €7.1 million in 2012 to €5 million in 2013 and further to €2.7 million in 2014.

It reflects the challenges Mahindra Holidays faces in the European market.

Increasing competitive intensity in the domestic market and a possibly uphill ride in its international operations could pose challenges for Mahindra Holidays. Shareholders can exit the stock.

At ₹253, it trades at 27.5 times trailing twelve month earnings, higher than the average 25 times over the past three years.

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