Profitable holidays

Mahindra Holidays & Resorts (MHR) is a Mahindra  group company with a very strong franchise in vacation ownership under the brand name Club Mahindra. Mahindra group holds 75% stake, FIIs hold about 12.5% stake and DIIs hold another 5%. So together more than 90% of the shares are owned by promoters and institutions. There can’t be any other comforting factor than these figures. This also means that the public holds merely 7-8% of the shares.

This is a very attractive company with 41 resorts and nearly 2500 rooms. Recently they have acquired a 19% stake in a leading European vacation ownership company Holiday Club. This company also has 32 resorts and 2800 rooms. And the agreement between the 2 is that in the next 2 years, Mahindra Holidays can own upto 74% stake in the company, thus making it a majority owned subsidiary. If this were to happen Club Mahindra will become a vacation ownership company not only in India but also globally.

This company had launched in IPO in June 2009 and has been growing ever since. 5 years ago, it had a turnover of merely 390 crore which has grown to nearly 770 crore today.And considering India’s demography, this growth can only accelerate in the coming years.

This company operates in markets where there is a huge young population with high aspirations. This has resulted in their membership count growing annually by about 18000. And considering the new govt’s focus on travel and tourism, MHR is bound to grow handsomely.

5 years ago, they had launched an IPO @300 per share. And despite growing ever since, this is now quoting even below that value at about 275 This only goes to show the Indian market’s utter disregard for fundamentals - management as well as growth quality. And they haven’t given any bonus or split since then.

Another thing worth noting is that recently Thomas Cook, the global travel and tours company acquired Sterling Holiday Resorts, a much smaller player in the same industry. And if u consider the valuations and price at which this deal was done, MHR is really quoting at dirt cheap levels.

This can only mean that with a very low floating stock, excellent growth prospects and cheap valuation,  Mahindra Holidays will only give handsome returns in the months and years ahead.

Beaten down way too much

Over the last year or so, the market has been on what can best be described as a roller coaster ride, going up by 500 points one day and down 300 points the next. After crossing 20K, it again sunk to 18K in a short while and has again managed to come above 19K. How things move from here will be driven by FII money/liquidity and govt.’s reforms push which all of a sudden appears to have moved into 3^rd gear.

Amidst these gyrations of the market, there have been many stocks which though fundamentally good have sunk to new depths largely due to the news flow surrounding them. Some of them are MNC stocks which were very much in the news due to being considered as delisting candidates. However, when the delisting bubble burst due to the unrealistic expectations of the investors who demanded astronomical valuations defying economic rationale, and the MNCs didn’t think it worthwhile to pay them those, a majority of them made a beeline for the OFS route to reduce their shareholding to 75% or below. Of course a few like Fresenius made a smart play by doing the OFS at a relatively low price and then 6 months or so later coming out with an open offer at a substantial premium to the OFS price thereby hugely benefiting the subscribers of the OFS. This also meant that the number of shares that they had to corner to delist also reduced significantly than from the last time. While the spirit of law was followed in letter, the spirit was certainly given the go-by.  It remains to be seen if other MNCs take a cue from Fresenius Kabi and take a similar route or if the regulator sees thru this smart move and takes some concrete steps to avoid them.

One such beaten down stock which has become attractively valued now is Styrolution ABS.

This was Ineos ABS earlier and was considered as a top delisting bet since the parent held close to 87% of the shares (Parent held 83.33% stake in Dec’11 but made an open offer to the shareholders @606.8 for balance 16.67% stake but garnered only 4% of the shares making it 87.33%).  And it reached levels of 800 at the peak frenzy. However, as mentioned above, things didn’t quite pan out as expected and this too went the OFS way to reduce its stake. But the interesting part is that it priced the OFS at around 410, a discount of 23% to its then last traded price and @P/E of just around 11, way too low for an MNC stock.

Styrolution ABS is a leading manufacturer of an engineering plastic namely styrene monomer, polystyrene and ABS. The company is a 50/50 joint venture between BASF (the German MNC) and INEOS ABS formed by combining the styrenic business of two of the largest global chemical companies. In the domestic market, Styrolution is the market leader and holds 60% market share in ABS resins segment and 68% in SAN resins segment. And it has an opportunity to reap the benefits of demand supply gap (met by imports) which has persisted for long and continues to exist. Further, CRISIL Research estimates that the supply of ABS would grow at 17% CAGR in order to meet the demand growth of 10% CAGR during CY2010-15E, thus providing revenue visibility to the company.

As per the public disclosures made by the company, FIIs predictably have cornered a large chunk of the OFS shares, squeezing the public shareholding further. So a re-run of Fresenius story can’t be ruled out.

All in all, extremely cheap valuations for an MNC company and good future prospects (demand as well as pricing power being a leader in its segment) make this a reasonable bet even for a conservative investor. A delisting offer would be an added bonus for this stock.