Mahindra Holidays – a melting ice cube?

Mahindra Holidays is a company which sells vacation ownership for 7 days per year for 25 years – also known as timeshare. The company earns revenue from one time admission fee plus annual membership fee over the period of 25 years. In addition, it earns revenue from selling food and beverages at its resorts.

The business has a market capitalization of INR 2,600cr. They have total assets of more than INR 6,000cr. Out of this 6,000cr, they have land + other fixed assets + receivables + cash of 4,309 cr. Out of this, they have land + receivables + cash of 3,438cr. Out of this they have land + cash of 1,646cr. Plus this business has zero debt.

By looking at these numbers and comparing it to their market capitalization, it looks like market is valuing the business as melting ice-cube. So the question is – is this a melting ice-cube?

It does not seem so if we look at the numbers. The business is profitable with average return on earnings of 19% over the last 10 years. The business model is such that the capex is funded fully by money from their customers and hence they don’t need to raise any debt or equity. The business generated cash flow from operations of 332cr, 1,015 cr and 1,856 cr over the last one, five and ten years. On this basis, it is trading at multiple of 8, 13 and 14 of the average cash flow from operations over the last one, five and ten years.

The single most important number for this business in my opinion is the total number of members. That number along with the Y-o-Y growth in members is given in the figure below:

On the other hand, this is a difficult business. What would a customer not buy vacation ownership for the next 25 years? I can think of several reasons. First, I would imagine this would be a new concept for a lot of people and it would take lot of explaining to get around the mental barrier to commit. Simply put, few people plan so far ahead. But once you have made peace with the concept, you have to think about the loss of flexibility in planning vacations for the next 25 years, no less. You can only chose to vacation at places where MH has resorts. In those places, you cannot try any other hotel but settle for the MH resort only. It will be very difficult to plan vacations on the spur of the moment because most of MH resorts advance booking is required months in advance. Lastly, from an economic perspective as well, this is not a slam dunk; which is what it should be for a proposition of this kind. First, there is an annual membership fee (in addition to the one-time admission fee), which is not trivial and which keeps increasing in line with inflation. Second; in this day and age when online portals are offering unprecedented discounts on hotels tickets, you forego those attractive deals.

The member addition if the first 3 quarters of FY2019 continues at the same pace as FY2018 at 8%. Even though the growth numbers have come off, this does not look that bad. It would seem that the market is wrong in valuing the business like a lemon.

But assuming all of this can be managed. What is extremely difficult to manage are bad reviews of existing customers. I would encourage you to go online and search for the reviews of Mahindra Holidays (https://www.mouthshut.com/product-reviews/Club-Mahindra-reviews-925090576). Discover for yourself how unhappy their existing customers are. And while I can appreciate the fact that unhappy customers make the most noise online. But any customer reads the reviews online before buying anything. And I would assume that any customer would do their research committing themselves for vacations for the next 25 years. And when they do, they will not like what they see.

It is commendable that Mahindra Holidays has been able to add customers although at a declining pace over the years. Their customers have to first climb a wall of worry to become comfortable with the concept of timeshare. But once they have done that, they need to climb a mountain of bad customer reviews. In this situation, it would become increasingly difficult for them to add new customers.

It seems to me like they are swimming against the tide. Businesses have an easier time when they place themselves on the right side of a trend. MH is providing its customers with limited choices. And that provides them with the freedom to vacation without spending an inordinate amount of time on planning and booking. This was valuable during a time when it was difficult to search for and book hotels at reasonable prices. But with the arrival of online travel booking sites, this is no more the case. Tide has clearly turned against MH and they are positioned to take advantage of a consumer trend which has reversed. Time is not a friend of this business. And if nothing is done, the business will continue to get weaker with time.

I maybe wrong about the business and would welcome any contrasting views.

Value investor

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