Why the stock of Mahindra Holidays and Resorts is a good buy

The hospitality sector has been among the worst affected by the pandemic – lockdowns meant a crash in room occupancies and revenue squeeze even as many fixed costs continued, resulting in big losses for many players. Some bucked this trend though. Vacation ownership provider (timeshare company) Mahindra Holidays and Resorts India grew its standalone profit 47 per cent y-o-y to ₹27 crore in the June 2020 quarter, and 89 per cent y-o-y to ₹34 crore in the September 2020 quarter.

This was despite a y-o-y dip in revenue of 29 per cent in the June quarter to ₹177 crore and 20 per cent in the September quarter to ₹186 crore. On a consolidated basis, the company’s profit grew about 18 per cent y-o-y to ₹29 crore in the September quarter, after a loss in the June quarter; consolidated profit (after minority interest) grew 3 per cent y-o-y to ₹25 crore in the September quarter.

Mahindra Holidays’ good show amid a ravaged hospitality industry was thanks to sharp cost-cutting and a revenue model with some annuity-like streams that keep flowing even when business was not good. With the unlocking of the economy over the past few months, the company’s operating metrics have been recovering. Member-additions and occupancies have been picking up.

Meanwhile, the Mahindra Holidays stock, while it has recovered well from its May low of about ₹125 earlier this year, is still below its January high of about ₹245. Investors with a long-term perspective can consider buying the stock. At ₹191, the stock trades at about 11.5 times trailing consolidated EV/EBIDTA (Enterprise Value to Operating profit), in line with its three-year average and lower than the peak of about 16 times.

Adjusted for a steep loss in the March 2020 quarter due to a one-off tax adjustment, the trailing standalone price-to-earnings (PE) ratio is at a discount to the historical average. With profit growth likely to continue, there seems to be scope for upside in the stock. Exposure can be limited though, given that Mahindra Holidays is a small-cap stock, more susceptible to market volatility.

Annuity incomes, cost-cutting

Unlike many hospitality players, Mahindra Holidays continued to earn revenue during the lockdowns from some key annuity streams. One, vacation-ownership income that accrues annually over the membership tenure from a deferred revenue pool (about ₹5,300 crore) formed from upfront admission fees. Two, annual subscription fee from the company’s 2.6 lakh plus members. Three, interest income earned when the company finances membership fees.

During the half-year ended September 2020, given the impact of the pandemic, the vacation-ownership income (the largest revenue contributor) of the standalone business fell just 3 per cent y-o-y while annual subscription fee (the next largest contributor) rose 5 per cent y-o-y. Interest income fell 30 per cent y-o-y, while other non-operating income fell 12 per cent. The fall in these revenues was much lower than the nearly 94 per cent y-o-y crash in resort income (including food & beverage and activities), and provided a cushion of sorts. Combined with lease rent waivers that it recognised as revenue, the company’s total income fell 21 per cent y-o-y in the half-year ended September 2020.

The fall in revenue was mitigated by a sharper fall (33 per cent y-o-y) in costs such as sales and marketing (down 46 per cent), rent (34 per cent), employee expenses (8 per cent) and other expenses (49 per cent). Finance costs also fell about 15 per cent. This translated into higher margins and 68 per cent y-o-y jump in standalone profit to ₹61 crore for the half-year ended September 2020.

The company’s Finnish subsidiary Holiday Club Resorts struggled in the June quarter due to the pandemic impact, posting a loss of about €4.8 million. But the September quarter was better with profit of about €0.55 million due to increased sales and cost control.

Overall, the company posted consolidated loss of about ₹4 crore in the half-year ended September 2020, dragged down by the loss in the subsidiary in the June quarter.

Improving outlook

The company’s business seems to be looking up with the unlocking. Room occupancy in the India business, generally about 80 per cent or more, had crashed in the June 2020 quarter but recovered to 30 per cent in the September 2020 quarter. The company has reported month-on-month improvement in resort occupancy and income. Occupancy increased to 41 per cent as of September 2020 from 19 per cent as of July 2020. Operational inventory as a percentage of total inventory went up from 36 per cent as of July 2020 to 69 per cent as of September 2020 as resorts are being gradually opened. Member additions that had slowed down in the June quarter (1,270) improved in the September quarter (2,681).

Further improvement in operating metrics was reported in the festive season. The trend towards short trips to drivable locations along with the company’s brand, safety measures, nation-wide resorts and digital sales focus seems to be benefiting it. The international subsidiaries’ business that was a drag on the consolidated bottom-line is also expected to do better.

Mahindra Holidays has a strong balance sheet with cash reserves of ₹791 crore as of September 2020. This has helped it continue with its capex and also look at acquisitions such as the recent 6.67 per cent stake buy in Great Rocksport, a soft adventure activities provider.

The company is open to more acquisitions that may be available at attractive valuations given the recent market conditions. Over the next three to four years, the company plans to add at least 1,200 to 1,500 rooms to increase its inventory beyond 5,000 rooms.