Stock pick of the week: Why analysts are bullish on Mahindra Holidays shares
Strengthening balance sheet, better scenario for domestic tourism, and fall in valuations has made Mahindra Holidays analysts’ pick of the week.
The company’s revenue fell 1% year on year (y-o-y) mainly because of a 7% y-o-y fall in its vacation ownership income amid lower new membership additions.
Though this fall in revenue looks bad, it is due to Mahindra Holidays’ new member-acquisition strategy. The focus of the new strategy is on acquiring quality members—people who can afford higher down payments for membership.
In line with its change in strategy, Mahindra Holidays has increased the down payment requirement for its 48-month EMI scheme. Analysts are not worried about the fall in the company’s revenue because Mahindra Holidays’ new customer acquisition strategy is helping boost the company’s balance sheet. Its cash balance has surged by more than 100% y-o-y. With the company’s member base maturing, its revenue share from other streams has also been increasing. Its annual subscription fee and income from resorts during the quarter have increased by 5% and 8% respectively y-oy.
To increase resort revenues and also member satisfaction, Mahindra Holidays is adding more rooms, to offer members greater choice. The company has added 62 rooms in the third quarter, taking its total room inventory base to 3,360. Since it is already working at high occupancy rates —85% in third quarter—the management plans to increase the company’s rooms to 3,900 by 2019-20. Improving balance sheet strength and cash levels should help Mahindra Holidays achieve this target. Mahindra Holidays’ effort at improving the performance of its European subsidiary, Holiday Club, have borne fruits, and turned around the company.
With more than 80% of Mahindra Holidays’ customers making bookings online, the company’s digital push has also started paying off and is helping it rein in employee costs. With its unique business model—ready customer base—Mahindra Holidays is in a sweet spot to benefit from the improvement in domestic tourism. More importantly, the company’s massive under performance in the past seven months—the counter fell 30%, while the Sensex rose 10% during same time—has brought down its valuations to reasonable levels.
Performance of Mahindra Holidays compared with the Sensex. Stock price and index values normalised to a base of 100. Source: ETIG database & Bloomberg
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