Club Mahindra’s been getting the rough end of the stick recently. With the stock languishing below their IPO level of 300 per share about five years ago, in 2009. It trades at about Rs. 232, down around 20% from the IPO price.

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I didn’t like the IPO (Read my IPO notes) for an overvaluation and the lack of credibility of the idea of paying for a long term membership. They have been able to see revenue up, but profits have been stagnant.

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With a 24 cr. profit in March, they had shown a lower profit than five years back, when they had made Rs. 29.80 cr.!

The earnings per share hasn’t done that well, especially since they have dropped EPS 25% year on year.

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Still Have A Capacity Problem

They’ve always had a problem with the inability to satisfy customers properly. Each customer is given one week a year. There are 52 weeks in a year, so each room can effectively satisfy 52 members (max). So effectively, each room is 52 room-weeks; and if we multiply their total number of rooms by 52, we can see how many members they can satisfy. The answer continues to be horrible:

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They can’t really support over 50,000 members, around 30% of the total. This has been increasing recently.

They’ve actually cut the number of rooms this month by giving up one resort. Mahindra Holidays is trying to change this equation by building about 500 rooms over the next 18 months, spending Rs. 400 cr. on the exercise.

Run-in with TRAI Hits Member Addition

They have had a run-in with TRAI, which seems to have affected their “model”. Apparently their model was based on some kind of spam calling, where TRAI would cut off all their lines if someone complained of spam. This has been mentioned in the last two quarters. This drastically reduced their marketing ability in the last two quarters.

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Their addition numbers in my book include the net additions, which is gross additions net of cancellations and net of expiring members.

It seems they have managed to convince TRAI on a per-call basis that they have the authorization to call, such as their having signed a form etc.

My major concern is that the fix is short term. If the fact that they were calling DND numbers was causing TRAI to ding them, and they fixed that by only addressing people who weren’t in DND and who had signed something allowing them to call, this has probably resulted in a short term addition. Eventually they’ll hit that spam wall again, and the rapid growth they saw in earlier years will come down.

Exciting Enough To Buy?

Sadly, not for me. At a Twelve Month EPS of Rs. 10.75, the P/E, even at Rs. 231 is 22+. There are better businesses at far lower P/E ratios and way better growth.

And I’m not very excited about their product either. Their minimum costs are Rs. 3.5 lakh for membership, and I would do better by putting that money into a short term mutual fund, and using the money to pay for holidays each year, it seems. I just paid less than Rs. 50,000 for 6 nights for a 5 star hotel in Goa, including all meals, and all sorts of extras. This is way better than a pre-committed exercise; and has only reduced in price in 10 years!

Either ways, the issue is this: If they have 30% unserviceable members, then there’s no point even thinking of buying their product. And if enough people realize that, there’s no point buying their shares either.

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