Mahindra Holidays & Resorts India is entering the capital market on 23rd June 09 with a public issue of 92.65 lakh equity shares of Rs. 10 each in the price band of Rs. 275 to Rs. 325 per share. Of this, fresh issue is of 58.96 lakh shares while offer for sale by Mahindra & Mahindra Ltd. is of 33.69 lakh shares. So, over 36% of issue proceeds will go to the promoters.
The company needs to be valued as a hotel company or as a resort company or even as a travel & tourism company. And we feel that on all three parameters, the IPO would look expensive.
For FY09, the total income of the company was at Rs.442 crore, showing a growth of 17% over FY08 performance. Despite debt free status of the company, bottomline fell to Rs. 79.80 crore showing a de-growth of 5%. Even, cash profit of company for the year was at Rs. 102.52 crore for FY09 against Rs.99.08 crore of FY08 thus showing a meagre growth of 3.50% only. EPS for FY09 was placed at Rs. 10.37. This implies issue of shares at a PE multiple of 27 - 31 times.
If we assume price discovery at Rs. 325 per share, fresh issue works at Rs. 192 crore. Does it mean that the company does not have fund requirement of more than this? Though it is stated to be at Rs. 211 crore in RHP, for financing of expansion of resort and setting up of new projects, which seems too general.
Indian Hotels is ruling at Rs. 62 which translates into a market capitalization of Rs. 4,500 crore with enterprise value(EV) of Rs. 7,500 crore taking a net debt of Rs. 3,000 crore. Hotel Leelaventure ruling at Rs. 32 has market capitalization of Rs. 1,200 crore with EV of close to Rs. 2,000 crore. Even on earning basis, it is ruling at a PE of below 20. EHL Ltd. ruling at 127 also has a market capitalization of Rs. 5,000 crore with EV of Rs. 6,500 crore. So, this valuation looks definitely expensive, when compared to these hotels.
Also, if we see the track record of resort companies like Country Club, Sterling Holiday or Suman Motels, they have never rewarded the shareholders in the past and have always been ruling at low PE multiples. Country Club with an estimated EPS of over Rs. 10 for FY09 (on Rs. 2 face value) is ruling at Rs. 28, implying a PE of less than 3 times with market cap of just Rs.225 crore. Even in Travel & Tourism sector, a company like Thomas Cook is ruling at a PE multiple of close to 24 times.
Based on the past financial performance and even the assets owned by the company, there is no justification for a valuation of even Rs. 275 per share, as it translates into a value of over Rs. 2,300 crore. In any public issue, atleast 15% needs to be left for the prospective investors on the table. If we see this kind of stiff pricing from an established group like Mahindras, how can we expect primary market to revive and survive and reward the investors?
It is better to buy the stocks of large and established hotel companies like Indian hotels, EHL or Hotel Leela which has better business model, assets backing and growth prospects rather than going for this issue.