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Multiple levers in place to fuel growth…

About the stock: Mahindra Holiday’s (MHRIL) enjoys a strong brand patronage through its brand ‘Club Mahindra’ and is one of the leaders in leisure hospitality space. Over the years it has solidified its presence in a unique and sustainable Vacation Ownership (VO) business model with more than 25 years of track record.

* MHRIL has a healthy base of more than 2.8 Lakh + members who ensures steady cash flows and multi-year source of value creation across the tenure of membership. It has a robust room inventory of 4940 rooms at 102 resorts (including 82 properties in India and 20 in South East Asia & Middle East)

* MHRIL enjoys a healthy balance sheet with strong cash & investments worth | 647 crores. Despite being asset heavy, MHRIL continues to be debt free (at standalone level) which depicts inherent strength of the business model.

Key Investment Thesis:

* Strong room inventory pipeline to perk membership: MHRIL has significantly accelerated room inventory over the last three years with average annual key additions increasing from 221 during FY14-20 to 372 keys in FY21-23. Subsequently, member/room ratio enhanced from 71x in FY14 to 57x in FY23. Going forward, company has envisaged to add more than 1600+ keys over the next 3-4 years (visibility of 750 keys in FY24) and has embarked capex of | 1600-1700 crore (~| 1 crore capex per key). We model in 800 rooms over the next two years taking the total count to 5740 rooms by FY25E. Healthy room addition trajectory would in-turn lead to increase in membership base over the same period. Assuming member/room ratio will sustain at current levels (56-57x), we factor in ~19000 annual membership addition during FY24-25E taking the overall count to 3.2L+ members (CAGR: 6.5%).

* Resort income to be the key growth driver: For MHRIL, despite record number of room additions in FY22-23, it reported healthy occupancy rate of 84%. As a result, MHRIL registered its highest ever resort income of | 323 crore in FY23 (up 67% YoY) with share in overall revenue enhancing to 27% (20% in FY22, pre-covid levels: 24%). With occupancy rate expected to sustain at healthy levels (86-88%) on a rising member base, we expect resort income to grow at 19% CAGR with share increasing to 30% in FY25E.

Rating and Target Price :

* MHRIL is expected to be a key beneficiary of strong industry tailwinds such as robust recovery in room occupancies, an expanding aspirational consumer segment and low penetration of VO market in India (~2% vs. 11% in USA) providing significant headroom for growth. Furthermore, sustained inflation in average room rates is expected to drive demand for VO model.

* We initiate coverage with a BUY rating

* We value MHRIL at | 400 per share (based on 20x FY25E EV/EBITDA)

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