Accumulate Mahindra Holidays; target Rs 250: Emkay

Emkay's research report on Mahindra Holidays

• A strong franchise in leisure travel space, with a USP of a family-oriented experience at prominent locations for the growing holiday-craving Indian middle-class population
• MHR’s cash outflows (mainly capex) are as discretionary as its cash inflows (largely VOS sales), ensuring prudent capital management and lower business risks
• Transitioning from a ‘Push’ to a ‘Pull’ strategy, due to a TRAI directive and adding newer destinations are key challenges. We est. new members at 13K/15K in FY14/15E vs 17K in FY13

"Vacation Ownership Service (VOS), though a high discretionary offering, has strong business potential in India, thanks to large and growing holiday-enthused families. The VOS concept, pioneered by Mahindra Holidays & Resorts (MHR) in the country, has high entry-barriers in terms of capital intensity, gestation period and credibility. Broadly, the offering, though competes with the conventional hotel booking, has differentiated itself by providing a family-oriented holiday experience in terms of the room-size, amenities & children-friendly environment. We understand that MHR has garnered just 5 percent of the VOS potential market in India, which continues to grow year on year."

"MHR’s business model is similar to commercial lease space model, wherein the assets generate cashflows on increase in tenants (members for MHR). Hence, we value MHR on an OCF yield basis, which will be comparable to the cap-rate of rent generating asset. We assign yield of 10.3 percent to OCF of Rs 2.3bn in FY15E, giving us value of Rs 22bn or Rs 250/share. At value of Rs 22bn, the EV/room-owned comes to Rs 9mn for FY15E."

"Initiate coverage with a accumulate rating and TP of Rs 250. Valuing MHR on OCF-yield basis, with yield of 10.3 percent (150bps over 10-year G-sec) to FY15E OCF of Rs 2.25bn," says Emkay Global Financial Services research.

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