Mahindra Holidays and Resorts India (MHRIL), a part of the Mahindra Group, opened for subscrption with an initial public offering (IPO) of 92,65,275 equity shares of Rs 10 each for cash at a price to be decided through a 100% book-building process. The issue got subscribed 3.13 times, till 12 noon, June 26. It has received bids for 2,90,38,580 shares as against issue size of 92,65,275 shares.

Arun Nanda, Chairman, Mahindra Holidays Resorts, said even as there were reservations from quarters about the issue’s price, it had be seen in the light of its business model. “The business model is unique. People are unable to totally grasp what it is,” he said. “People are trying to compare it with the hotel industry. We are not a hotel industry model.”

“Because I am under the Sebi guidelines, I cannot give you a futuristic statement but even if you take the bad year of last year, we had a 43% CAGR growth on topline and a 78% CAGR growth on the bottom-line, if you knock off the last year and if you look at three previous years, our CAGR grew at more than 100% and we get 35% sales from existing customers referring new customers.”

Also read: Mahindra Holidays IPO subscribed 3.13 times

Here is a verbatim transcript of Arun Nanda’s exclusive interview on NCBC-TV18. Also watch the accompanying video.

Q: The feedback that we get from a lot of investors is that they like the theme, they like the space, they like the uniqueness of the model, they do not like how you have priced the IPO. What would you say to that?

A: It (the business) is the first of its kind. The business model is unique. People are unable to totally grasp what it is. People whom we met have come in but haven’t met everybody.

People are trying to compare it with the hotel industry. We are not a hotel industry model. Look at our capital: on a Rs 26 crore investment, we have got 1200 rooms, zero debt, Rs 500 crore of current assets. The hotel is exactly the opposite — I have a customer, he locks in for 25 years. He pays me annual subscription. He pays me, comes and spends money on the resort. Even in the year when the hospitality industry went through a downturn, we had a topline growth of 18% though the member acquisition number was lower.

You do not get this sort of a business model anywhere. As time will pass, you will get a compounding effect of the annuity.

Q: Actually we are not making comparison with hotels — Wyndham Resorts which is the largest player is trading at 7.5 times forward, Country Club — agreed not completely comparable — is trading at 2.5 times forward but at the lower end of your band for FY10 the pricing has been set at what indicates a valuation of 24 times. Does it seem not more expensive than your peers?

A: I do not think you would not like CNBC-TV18 to be compared with some other little-known channel. But as far as Wyndham is concerned, its business model is totally different from ours. In the US, it is accommodation only. You get no earnings from annuity from the customers because what happens is that you hand over the assets once it is sold in the trust. The members form their own associations and manage it. In our case, we are developing resorts, we are marketing and operating those and we are taking care of the customers.

Q: Compounding of annuity — many analysts have tried to project and forecast your revenues or earnings over the next few years. Are you saying that the growth in earnings over the next few years may not be linear for you at the rate at which analysts were expecting and perhaps you could talk a little bit about how that may pan out?

A: Let me take the four slices that we get. When you become a member, we take what is called an enrolment fee, which is credited to the P/L and all expenses are written off after that. We take what is called an entitlement fee which is credited to deferred income in our balance sheet, which we write off every 25^th year. So in year five, you will have five slices, in year 10 you will have 10 slices and it will keep on increasing till year 25. Only in year 26, one will get knocked off and one will get added.

The second slice of the income is the annual subscription, which keeps on increasing directly proportional to the member base and it is linked to inflation. That figure went up from Rs 32 crore to Rs 45 crore last year. Similarly revenue from resorts, which is people who come and eat and spend money on the spas — that went up from Rs 32 to 49 crore last year in spite of downturn. The fourth slice is that since our balance sheet is so strong — we are virtually zero debt — we give installment plans and EMI plan up to five years to our customers that is a Rs 500 crore-odd book that I have got on which I make interest income. That virtually doubled last year. It went up from Rs 19 crore to Rs 37 crore. That is the sort of compounding effect that you will see over a period of time and that is what is going to create this. I was surprised you said it’s overly priced.. Between Anand Mahindra and I, we decided to leave a lot on the table and we feel that this should deal us very attractively priced. We have left a lot on the table.

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