What will Club Mahindra do next?

The company has tried to course correct in the last 4-5 years. It has ramped up its inventory from 2,407 rooms in 2013-14 to more than 3,600 rooms now. The room to member ratio, which at one point was over 1:80, has also improved to 1:67.

Krishnan Raghuraman, a senior executive at an FMCG company, says that he has been able to book rooms one month prior now, thanks to the inventory expansion that the company has undertaken. “If we can book flight and rail tickets 1-2 months in advance then why can’t we plan our holidays a little ahead,” he says.

The changed sentiment is also reflected in analysts’ view of the company. The four analysts The Ken spoke to feel that the business model in itself is quite robust. The upfront amount (the money used for building resorts) and an annual recurring fee (utilised for resort operations) take care of the capital expenditure (capex) and operating expenditure (opex) for the company. Apart from the maintenance fee, guests also spend on food and activities at the resort, adding to the resort income.

The Borrowings

“Unlike an Indian Hotels Company Limited [the parent company of Taj group of hotels] or East India Hotels [the parent company of Oberoi hotels] which have to buy land at prime locations using equity money or borrowings, construct the property and wait for customers to come, here the cost is funded by the customer,” says Ankit Kanodia, Investment advisor and partner at SmartSync Services, a Sebi registered investment advisory firm.

“They don’t have to wait for occupancy to happen since Club Mahindra has a captive audience. Over and above that, they get annuity and resort income”, he adds. While Kanodia may think so, Achin Khanna, managing partner at hospitality consulting firm Hotelivate, feels that the captive audience is a double-edged sword. Unlike hotels, who make a killing with dynamic pricing during peak periods, Club Mahindra doesn’t have that advantage.

But this is what Club Mahindra can control. What it can’t control are the regulatory changes governing its revenue calculation. The government switched from the prevailing accounting standard Ind-AS 118 to Ind-AS 115, as mentioned above. It mandated that the change be reflected for all financial accounting after 1 April 2018.

While this dip in revenue doesn’t change much materially for the company, it throws off investors.

Sachin Shah, fund manager at Emkay’s portfolio management service, who has been tracking the company for some time, says that the best way to assess Mahindra Holidays’ financial position is to look at its cash reserves. This stood at Rs 694 crore ($95 million) for the year ended March 2019, up from Rs 572 crore ($78.3 million) in the previous year.

At a time when most hospitality companies are saddled with debt, having free cash reserves is what makes Club Mahindra stand out for the analysts. Shah feels that Mahindra’s strong cash position is comforting as well as worrying. Comforting because it gives the company ample room to meet its capex targets, worrying because the Mahindra group is not known for very prudent capital allocation.

Analysts estimate that the company might use this cash reserve for either acquisitions or for declaring dividends, which will be positive for shareholders.

While Club Mahindra can’t control accounting, it can tangibly control memberships—its bread and butter.

And those numbers are also not looking good.

Net member additions grew by only 4% at 7,782 in the year ended March 2019, well short of analysts’ as well as the company’s expectation of around 20,000-22,000. This financial year, too, it looks highly unlikely that this target—same as the year before—will be achieved. The net member addition up till December 2019, for one, stood at 12,081.

The company’s room inventory currently stands at 3,652 rooms across 61 resorts.

But it still needs quality inventory to reduce member attrition, say analysts.

The Ken did a back of the envelope calculation to understand the gap.

Not a young Club

Beyond attrition, a real worry for Club Mahindra would be the flat growth in net member additions. It’s not like people are travelling less either. In 2018, the number of domestic tourists stood at 1.82 billion . (26 million Indians travelled internationally.)

The increased disposable income, aspirational middle class, and a high-earning young cohort of travellers makes the market wider than ever for a product like holiday memberships.