Over the past year, the stock of vacation ownership provider, Mahindra Holidays and Resorts India, has rallied 66 per cent; backed by a turnaround in performance. Membership additions in India have been healthy and profit has grown at a strong pace.

Also, the profit at Finland-based Holiday Club Resorts has increased after becoming a subsidiary of Mahindra Holidays. Planned additions to the room inventory and integration with the foreign subsidiary should boost prospects.

Investors with a long-term perspective can buy the stock. Its valuation is reasonable, thanks to healthy earnings growth. At ₹400, the stock trades at about 30 times the standalone trailing 12-month earnings, a tad higher than its three-year average of about 27 times. But with earnings expected to be healthy, there should be upside in the stock.

A good year

For Mahindra Holidays, the fiscal 2015-16 has been much better than 2014-15 when stress at the operating level and accounting adjustments, including member review, took a toll.

Adjusted standalone profit grew about 26 per cent in 2015-16 to ₹117 crore compared with the marginal dip in 2014-15.

On a consolidated basis too, Mahindra Holidays did well last year with adjusted profit growth of about 4 per cent to ₹99 crore compared with the nearly 7 per cent dip in the year-ago period — this was aided by the acquisition of majority stake in Holiday Club Resorts.

Mahindra Holiday’s member addition in 2015-16, at about 9 per cent, was faster than in the earlier two years; the membership base rose to almost 2 lakh as of March 2016. After the aggressive room addition (409 units) in 2014-15, the company’s inventory grew by just 63 units last year to 2,879 as of March 2016.

Yet, income from sale of vacation ownerships — the key revenue driver (56 per cent) — rose by more than 20 per cent in 2015-16, the fastest in many years. Besides member additions, increase in price and a shift towards categories with higher realisations seem to have helped.

Other important revenue streams — resort income and annual subscription fee — also grew robustly last year. Occupancy level remained healthy at 81 per cent. The 700 rooms that the company plans to add to the inventory over the next few years should help sustain growth.

The expected pick-up in the economy should benefit too, given that a timeshare buy is a discretionary spend. The company’s focus on digital and referral sales has seen this cost-effective channel account for more than half the sales mix in the past two years.

Subsidiary turnaround

Over the last year, Mahindra Holidays increased its stake in Finnish timeshare major Holiday Club Resorts from about 23 per cent to 86 per cent. Holiday Club Resort’s performance had been weak with sales stagnating and profit declining.

Things seem to be turning around. In the seven months from September 2015 (when the stake acquisition was completed) to March 2016, Holiday Club Resort posted profit of €3.2 million, higher than in earlier years.

The acquisition has made Mahindra Holidays the largest timeshare operator outside the US. But it has increased consolidated debt levels from less than ₹3 crore as on March 2014 to ₹124 crore as on March 2015 and to ₹643 crore as on March 2016.

The debt-to-equity ratio has increased sharply but is still within comfort levels of less than 1 time. Interest cost has risen from ₹2.6 crore in 2014-15 to ₹14.6 crore in 2015-16. Still, margins have remained at levels similar to 2014-15. Synergies between the Indian and European operations should help margin growth.

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