October 29, 2015 / 15:55 IST
Edelweiss' report on Mahindra HolidaysMahindra Holidays’ (MHRL) Q2FY16 revenues at INR 2.3bn came in 6% below estimate (up 17% YoY) on lower resort and sale of vacation ownership (VO) income. Net member addition, at 4,300 plus, was 24% above estimate and up 49% YoY. However, focus on increasing lower category (Blue and White) memberships led to a dip in average membership fees for the quarter. As a result, VO income grew 28% YoY, lower than member addition. In line with its strategy of brand building, MHRL’s sales & marketing (S&M) spends were also robust. Overall, strong growth in member addition - fifth consecutive quarter of 20% plus growth bodes well for the company, and we expect this to continue on increased branding spend and room additions. Maintain ‘BUY’ with TP of INR 439 (INR 347 earlier)
Member addition strong, rise in lower category share limits growth
Net member addition surged 49% YoY at 4,341 - the fifth consecutive quarter of 20% plus growth. However, focus on adding lower category members led to realization falling 7% YoY to ~INR0.33mn. This along with lower upgrades led to VO income increasing by 28% YoY, lower than member addition growth. MHRL mentioned this is just a pre-emptive step to manage its business better. Resort income, at INR 349mn (up 16% YoY), came in below estimates on lower F&B and holiday spends. During the quarter, the company did not add any rooms and closed down a 24-rooms property.
S&M spend to remain high with focus on brand building
MHRL’s S&M spend remained strong, up 48% YoY/9% QoQ to INR 523mn. Referral and digital contributed 51% of total sales, though marginally down on expanded base. Management stated S&M expenses will remain high in order to boost member addition.
Outlook and valuations: Member growth continues; maintain ‘BUY’
MHRL’s strategy of continuing to ramp up branding should keep the momentum strong in member additions and drive growth. Room additions also remain sturdy with a target of adding 800 rooms over next 2 years (current room inventory at 2,867). We maintain ‘BUY’ with a revised target price of INR 439 (INR 347 earlier). We value MHRL using average DCF, P/E and EV/EBITDA methodologies, further reducing by INR 26/share to incorporate unearned revenue.For all recommendations, click hereDisclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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