UR Bhat

The received wisdom about successful stock investing is that one should invest for the long-term in companies that are likely to generate significant and sustainable value for investors on the back of long term profitable growth. It follows that the attributes investors generally look for in a company are: a growing addressable market; a sustainable and unique competitive advantage in the market place demonstrated by robust pricing power; good execution capabilities; and a quality management with integrity, committed to the stakeholders of a company. 

While most companies strive hard to achieve excellence in these attributes, it is certainly not easy to identify them sufficiently early in their life cycle to generate outsized return. Still, there are several sectors that are in the early stages of growth and have the potential to grow at a healthy pace for several years. For example, improving lifestyles have the potential to catalyse the demand for affordable hospitality in the form of vacation ownership, which surprisingly has not been a popular concept in India, despite a large roster of holidays. There have been a few companies that tried to capture this opportunity over the past two decades but most have failed to correctly position the product and market it effectively, resulting in a crisis of confidence in the industry. 

Making its mark

The Mahindras, a respected name in Indian business, entered the vacation ownership business in 1996, offering a differentiated product of a floating holiday for a week at any of their resorts for 33 years (subsequently reduced to 25 and then 10 years) instead of the fractional vacation resort ownership relating to a specific location for 99 years that was prevalent then. The concept took several years to gain widespread acceptance, given the failure of competitors to meet their commitments to their customers, but the tenacity and perseverance of the company has now taken it to a stage where the potential for robust profitable long-term growth can be realised with some assistance from a turnaround in the economy over the next couple of years. Mahindra Holidays & Resorts has 44 Club Mahindra resorts with close to over 2,500 apartments, a third of which are on long lease, the rest being owned. Success in sales and marketing has been the hallmark of the company and this has resulted in a current membership of 165,000. 

Given that the product on offer is a floating holiday, success in sales and marketing has to be ably complemented by a robust expansion in apartment inventory. To this end, four more large resorts are under construction and expansion projects are on at several existing properties. Land has also been acquired at a dozen more places for resort development. Land acquisition for new resorts, as also expanding capacity in the more popular resort destinations, is a continuing activity. This has the potential to generate robust growth in apartment inventory and, with successful marketing, both topline and profit growth. 

Business growth has been almost entirely funded through internal accruals and sale of holidays. Sale of a new membership is accounted for by taking the admission fee, typically about 60% of sale proceeds, to revenue and the balance as advance that is amortised over the tenor of the holiday product. The company has been constantly improving the holiday experience for its members while offering new and exciting locations that Indians like to travel to, including a few foreign destinations. The recent restrictions on commercial telephone calls introduced by the telecom regulator have affected customer acquisition efforts of the company, which was hitherto significantly based on leads through telephone calls. A new strategy has been put in place with an accent on referrals through members and effective follow-up on digital leads. The large untapped potential in tier 2 towns is sought to be aggressively targeted and with these initiatives, the short-term negative impact on sales growth because of the ‘do not call’ regime is likely to be addressed. 

Room for growth

Mahindra Holidays is clearly the leader in the vacation ownership business with a dominant market share and a superior product offering. The market penetration of vacation ownership in India is indeed very low with less than a third of a million households owning vacations. Even if half the number of car-owning households in India is seen as the potential market size, there is scope for at least a 16-fold increase in the market for vacation ownership. The track record on good execution, the competitive advantage demonstrated by market dominance and robust growth with an accent on customer delight, leads one to believe that the company is in a unique position to service this growing market profitably. 

At around 20 times current earnings, the stock is not trading cheap and a successful execution of growth plans is already substantially factored in the price. Mahindra Holidays went public in mid-2009 with a pricing of ₹300 a share of face value ₹10 and since then, the scrip has traded in the ₹220-560 range. It is currently trading at ₹241 with a market capitalisation of about ₹2,200 crore.

With a return on equity of around 18%, Mahindra Holidays has the potential to successfully address the three fundamental value drivers of a business — namely, top line growth, margin expansion and asset intensity — with a large unexploited market for its product, good product quality as well as the increasing prosperity of its target customers. The potential softening in business growth on the back of the ‘do not call’ regime may affect short-term financial and stock performance. This might indeed offer a good entry point for long-term investors who believe in the growth potential of the business and the company’s ability to profitably service the opportunity. 

The stock market is replete with examples of successful companies that have reoriented their business strategies to deal with short-term adversity to create long-term value for investors. Mahindra Holidays has the opportunity to become another example of such companies. Long-term investors may find it worthwhile to accumulate the stock at dips.

Neither Dalton Capital nor the writer have an exposure to the stock