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A Lion’s eye on the Bulls and Bears

“In India, companies may fall sick, but promoters rarely do!”

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June 22, 2009

Should you invest in the IPO of Mahindra Holidays & Resorts India Ltd in the Price Band of Rs 275-Rs 325 ?I don’t think you’re missing any Boat here

13 Years after Mahindra Holidays & Resorts India Ltd (MHRIL) set up,it is coming tomorrow to the Public to raise Equity Funds.It’s in the Business of Vacation Ownership and is a leader in this Field having a market share of over 70%.

Members are empowered with a right to stay at any of the Company’s resorts,subject to prior reservation, for a period of One to Seven Days during designated months and for a Period of 10,25 or 33 Years depending on which Plan they have joined.For this Right they have paid an average of Rupees Rs 2.5 lakh with options to spread the Payment over as long as even 5 Years…Recognition of Income is a portion of this Fee in the year of Joining,with the rest apportioned over the plan Period

In these 12 years,the progress has been slow and steady with momentum seen in only the last few years

As of March 31,2009,it has a cumulative of  92825 Members…..Currently It has 27 resorts,some owned,some on long lease and five on short (under Two year Lease) with 1261 Apartment and cottages across them

Financial Performance….In FY 09 It earned Rs 80 crs on an equity of Rs 77 crs giving an EPS of just over Rs 10…It’s networth was just under Rs 196 crs giving a Book Value of @ Rs 25

So do I like the Company ?………Yes

So do I like the IPO ?……..No

So would I rather be a Member of MHRIL than a Shareholder ?……….Neither

Why is that ?……Well,both issues should be evaluated seperately

Let’s take the prospect of being a Shareholder first

The Pedigree is good and the Prospects are fair…..but the IPO Pricing is expensive…At Rs 275-Rs 325 MHRIL is asking us to pay 30 earnings multiples and 13 Book Multiples on recent performance…That’s HIgh…They are justified in doing this only if they see strong and quicker quantum growth ahead in earnings…I don’t.Their Growth will be constrained by the Apartments and cottages thay have available for right of use…The Object for this Issue reveals that Rs 211 crs are to be spend for Five Properties…to expand at Asthamudi in Kerala and Coorg in Karnataka,to renovate an acquired property in Ooty in Tamil Nadu and to build two new properties in Tungi,near Lonavla in Maharashtra and in Theog,near Simla in Himachal Pradesh…Over Rs 150 crs are for the last two new projects…Rs 111 crs are planned for FY 10 and Rs 93 crs for FY 11,rest later…there are no definitive agreements for the capex spend as of yet…each room would cost an average of @ Rs 50 lakhs and capacity is being projected close to 1600 apartments and cottages within a few years read more

Rajesh Exports at Rs 46…should you import into it ?…this is a reply reproduced as a Blog for better dissemination, to Gautam Agarwal’s response in yesterday’s Classic Diamond Blog

Dear Gautam,

Rajesh Exports is in a different league all together…It’s a Premier Trading House…..It’s sales are Rs 10000 crs ….It’s market cap is over Rs 1100 crs at Rs 46 share price…..It’s book value is Rs 33 as on 31/3/2008…Face Value is Rs 1….In FY 08 it earned Rs 200 crs on a topline of over Rs 8000 crs…that’s a small 2.5 % net margin…and in a tough FY 09,we’ve seen erosion in Profits…It will probably close FY 09 with less than Rs 100 crs Net profit,although topline would be Rs 10000 crs…That’s an EPS of Rs 4,half of FY 08 performance….so a 11 Multiple is fine currently(would include some premium for land assets too) ….Their Fixed Assets show Rs 65 crs…so the land you’re talking about at Rs 450 value crs in 2007 may not be in this Company fully…Even if it is ,the per share Value comes to Rs 18 only at this 2007 Valuation…The Land Valuation has probably dropped 40%….So Adjusted Book Value to current date would be closer to Rs 50 at best….With share Price at Rs 46,there is no real margin of safety here…..Also they show Debt of over Rs 1000 crs as on 31/3/2008 and networth is lower…Opening Cash on 1/4/2009 was Rs 5000 crs,but the current liabilities were also over Rs 4000 crs…Net Current Assets though were over Rs 1500 crs
Promoter,Rajesh Mehta has recently pledged 1.5 cr shares for personal reasons…Why would he need Rs 50 crs,assuming a hairline to today’s price ?…..52 Week High/Low is Rs 86/Rs 18…market Volumes are quite lakhs everyday

At Rs 20 it was clearly a less risky and tempting buy…At Rs 46,the risk goes up,even more in context of declining profits and margins and tight liquidity situation

On the other hand ,Classic Diamond is small…Market Cap is just above Rs 60 crs..Looks tempting to buy it out…but Enterprise Value shoots up with the High Debt…and there is a question mark on the quality of Earnings,Inventories and Debtors

But yes,Rajesh Exports has scale of Operations….and is a better bet than Classic Diamonds,if at all you want exposure in this sector.

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