Club Mahindra Holidays IPO -Some Questions & Answers

This post offers some insights into Club Mahindra’s timeshare business by bringing out some key concerns related to their operations and gets a response from Club Mahindra as to how investors, members and prospects need not have to worry about those drawbacks and risk factors. I hate to write yet another seemingly negative post about Mahindra Holidays,[Read first one] more so after enjoying their Coorg trip. Recently Bhupesh, a Club Mahindra member wrote couple of comments mentioning key facts extracted from the DRHP and I decided to spend some time going through 342 page Draft Red Herring Prospectus (DHRP) which Mahindra Holidays and Resorts India Limited (MHRIL) has filed with Securities and Exchange Board of India (SEBI), for the upcoming Mahindra Holidays IPO. After going through this DHRP I am left with far more questions about Club Mahindra that I had before. So made an attempt to list those concerns and get them answered by Club Mahindra. I happened to read an interview of Ramesh Ramanathan, MD, MHRIL by Kiruba Shankar, an avid blogger and entrepreneur by himself. This interview is available here on CLAY, Club Mahindra’s newly launched official blog. The interview was good-covered Ramesh as a person and gave some highlights on early days of Mahindra’s operation. But unfortunately, the interview fails to address several burning issues timeshare industry is facing. A comment I wrote for that post appears to be deleted.

 

I listed all questions related to CM’s business, backed with facts extracted from DRHP, I would have asked Ramesh Ramanathan, had I ever got a chance of interviewing him. Bhupesh Gupta reviewed them and approached Ramesh to check if he can respond to these questions. In a prompt response Ramesh requested Mr. Anirudh Haldar, MHRIL’s Marketing head to respond to our concerns. MHRIL was under no obligation to respond to my questions but they have responded in good spirit within a reasonable time. Mr. Arun Nair, Sr. Manager, Web Initiatives, MHRIL (whom I’d already met and interviewed earlier-read that here) was instrumental in coordinating with Club Mahindra Management to get these answers. As a result now we have around 23 questions and Club Mahindra’s answers to them, providing strategic information any customer/investor/prospect would be interested in knowing. Since these 23 questions and their answers are running into 13 odd pages on a word document, I feel it will be too long to publish as a text in this post. So I have given below questions and answers to 3 questions believed to be critical while rest of the Q&As are being made available as a pdf for any serious reader who may wish to go through completely. Click here to view pdf LEGEND: Red: Question Blue: Club Mahindra’s answer Brown: Shrinidhi’s Interpretation/Response (Shrinidhi is not a CM member and is an independent blogger giving third party perspective) Green: Bhupesh’s Interpretation/Response (Bhupesh is a Club Mahindra member and has offered an inside perspective)

4 A Do you agree that as of now Club Mahindra has member base far beyond the cumulative capacity of its resorts? (As on October 2007 you had 707 rooms (in 19 resorts, excluding 2 Zest resorts)-since each room can accommodate max 52 customers a year, max member base you can serve is 36764. But as on October 2007 you have 63375 members (page 63, 71 and 171 of DRHP), which is 172% of your inventory, meaning around 26611 members are guaranteed NOT to get reservation every year, under ideal conditions, never mind how early they plan. Actual denial rate is far higher, since some rooms are superior rooms sold to non members, few weeks are purple season and not open to members and some units will be used by corporate clients under Fundayz)

NO. While your quoted figures are true they do not reflect an accurate picture of the scenario. Allow me to explain. In order to make Club Mahindra easier to access we run many consumer financing schemes which range from 6 months to 48 months in duration. In each of these financing schemes we have a threshold time period post which a member becomes eligible to holiday (this is called the Holiday Start Date, from which the tenure of the membership is calculated). This could be 12 months from date of enrollment depending on the payment plan chosen by the member. Thus, we need to provide for capacity on the basis of the number of members eligible to holiday. You would also appreciate that, members in default of payment of dues are also not eligible to holiday. We have based on our experience over the last 10 years, built a fairly robust method for assessing the member base that would be eligible to holiday at any given point in time i.e. those who have crossed their holiday start date and are not in payment default. Our capacity caters to this eligible base. You would also be happy to note that we have added since the filing of the DRHP a new resort at Kumbhalgarh which will have 56 rooms (i.e. the capability to service almost another 3000 members.

S: I accept the reasoning. But does this mean nearly 40% members are not eligible? Some comments I received go like this “We paid all charges promptly for 2 years but couldn’t avail any of their services as there was no availability. Now they want us to pay ASF again, we’re not sure if we’ll be able to take holiday or this money also will go waste” Some kind of relaxation for such members would be nice.

B: ClubMahindra require 25% payment before a member can start holidaying. Lengthiest EMI scheme available to member is of 4 years. So in maximum about 12 months a new member will start holidaying. So again as Shrinidhi said, why this difference is 40%? Are there to many default on EMI scheme. When Club Mahindra considers a membership as defunct and reduces it from membership count?

They are very prompt to bring out the fact that “You would also be happy to note that we have added since the filing of the DRHP a new resort at Kumbhalgarh which will have 56 rooms (i.e. the capability to service almost another 3000 members.” They should have also told that how many new members they have added in last 5 month? Extra plotting last years’ number this figure will not be less then 5000 members.

3. Don’t you think it is an obligation of timeshare company to ensure guaranteed accommodation to all its members (or at least compensate them when they fail to get confirmed booking despite planning in advance)? How can you justify the rule that member needs to keep paying “irrespective of usage” while holidaying is “subject to availability”? 

All companies need to deliver on their proposition. Our proposition is Family Holidays with great amount of flexibility, in choice of destination, Season and Apartment, apart from payments plans etc. Now to deliver on flexibility which research and consumer feedback has shown to be the highest requirement we need to allow consumer choice wherein consumer who exercise their choice in advance ahead of others stand to gain. In addition we keep taking rooms and resorts on lease from time to time to provide our members greater choice and options.

As for guarantee of accommodation in the timeshare model applies only with the fixed week model, which is also a very rigid model. We have consciously moved to the floating week floating resorts model because it allows for flexibility which as I mentioned before is highly desirable. This method is also today considered the best practice in the industry in terms for customer centricity. The Annual Subscription Fee, which is payable by the member irrespective of usage is towards the maintenance and upkeep of the resorts and was mentioned to you in my last reply “In terms of the membership fee you pay at today’s pricing and enjoy holidaying for 25 years, the only factor that is increased is the ASF which is also indexed to the Consumer price index as published by the RBI. There are no arbitrary changes done. This ASF is also towards only the upkeep and maintenance of our resorts. Our resorts at Munnar and Goa are 10 years old but are in impeccable state of maintenance. We intend to ensure that for all our resorts going forward as well. I am sure there are umpteen examples of Timeshare resorts which have steadily declined in upkeep and that will not happen to a Club Mahindra member.” As for Holidaying subject to availability I refer again to your earlier query on the same subject” B: “… Consumer who exercises their choice in advance ahead of others stands to gain.” 

In one of round table meeting with our lab director we complained that when we come in morning to office at 10.00 we do not get parking for our scooter or car. He suggested us coming early in morning so that you can get parking. How much early 8:45 AM? if people who used to come around 10:00 AM start coming at 8:45, definitely they will start getting parking. But what about those who were coming at 9:00 AM, now they will face parking problem. So if they also shift their timing and stared coming at 8:15 AM. You know what I am saying.. if capacity is not enough however early people come their will be people who will not get parking. Coming office early is not going to generate extra parking slots. In addition we keep taking rooms and resorts on lease from time to time to provide our members greater choice and options.

B: Except few, all these leased resort of only three star qualities. 

Q “The major concerns most of the members face is that they're not able to get reservations despite planning well in advance. Why so? We would disagree with the fact that most members face this issue. We have a metric we track internally of Unique member holidayed which essentially is to ensure that our efforts are geared towards getting more and more and more members to holiday.. However, in an effort to help our members plan their holidays we open bookings 6 months prior to the date of the holiday. Now, there are certain periods which have increased demand in comparison to the rest of the year, like New Years Eve in Goa. I am sure you will appreciate that we cannot build capacity in a location for a small period when that demand is not sustained through the rest of the year. Hence there are cases when some members would call in later in the day and find that period in question is fully booked up. We however have a practice of tracking a waitlist and whenever there is a booking cancellation we are able to confirm the booking for a waitlisted member. “ 

S: This exactly same paragraph was given as answer by Arun Nair few months earlier (link) he added that the internal metric you are referring to stood at 75% for last year. No further comments. 5 D Can we do something to bring in more accountability in our sales staff? Let us consider insurance agent vs a CM sales rep. My insurance agent will never make false promises to me because though he may manage to sell a policy by making unrealistic promises, he will suffer a loss if I don’t keep my policy in force by paying premiums and do not buy any more policies from him. In other words, an insurance agent is interested in building a long term relationship with his customers. Coming to timeshare sales rep, their sole objective seem to be meeting their targets for enrolling new members which they often achieve by making unrealistic promises and not disclosing various limitations. They are not concerned about the woes of customer later since they gain nothing if customer is happy and lose nothing if he is not. I believe this can be fixed if we can restructure their remuneration in a way similar to insurance agents-pay in stages over few years and link it to member satisfaction. What do you think? 

CM: Since we are not in the insurance business, it wouldn’t be appropriate to comment on that. As far as we are concerned, sales remuneration is linked more to a membership perpetuating over time and less to enrollment, in the event of cancellation of membership they stand to lose their entire remuneration for the same – I would also mention that in Insurance this measure is a statutory mandate and in our case a self regulation. Your statement regarding the motives of our holiday consultants is hence ill founded. S: Ok. Good to know their enumeration is well designed. But like any sales force CM sales reps are also known for exaggerating benefits and suppressing limitations. In some cases when this goes beyond an acceptable limit that severely hampers the credibility of the organization. Let us hope such incidents do not occur in future. B: If one want to learn how many false promises or exerated figures a CM sales representative can make/present to a prospective buyer, Listen to this: 

11. What is your opinion about the fixed week timeshare model? (Where in a member owns a particular resort unit between two specific dates every year till his membership ends, allowing him to exchange/sell/gift his units without having to depend on resort company for reservations) Will that not be more beneficial to customers?

This practice is falling in to disuse across the world as it is extremely restrictive from a consumer standpoint. Imagine having to go to the same destination every year at the same time, it would be very monotonous. Instead the floating week floating resort model brought to India by Club Mahindra is emerging as the international best practice. It provides far greater flexibility for the consumer to choose from a range of destinations across a range of dates and not be limited with no options. S: Fixed Week Model failed earlier due to lack of an effective communication medium among members, using which resort units could be traded. Currently, with the advance of internet, I believe that hurdle is totally eliminated. A member can easily exchange his room with some other member owning a room at some other resort/season, or sell it in open market, thanks to power of internet (auction it on ebay or put a classified in Sulekha or advertise in personal blog or Club Mahindra itself can provide a forum wherein members can trade/exchange their holidays. This post highlights the advantages of fixed week model over floating week.

Acknowledgements:

Ramesh Ramanathan, MD, MHRIL

Anirudha Haldar, Head, Marketing, MHRIL

Arun Nair, Sr. Manager, Web Initiatives, MHRIL

Bhupesh Gupta, an esteemed customer, Club Mahindra Holidays.

Club Mahindra logo is sourced from internet and is a property of MHRIL

Disclaimer: Prepared in public interest. Questions are based on DRHP filed by MHRIL with SEBI and answers as given by Club Mahindra executives. Author has no vested interests in the operations of MHRIL and views offered here are independent and personal to author. His employers, family members and others are not related with this in any way. Readers are encouraged to verify the facts on their own and rely on their judgment and discretion.

Looking to BUY/SELL a used Club Mahindra Membership? Visit here

October 2008 updates: MHRIL has put IPO on hold due to bad market condition and in the meanwhile planning to double its inventory, by acquisition of more properties. Data gathered in this post (from DRHP) are over an year old now and I assume we can expect an updated Red Herring Prospectus once market condition improves and Club Mahindra gains confidence to introduce IPO

June 2009 Update: The IPO finally happened and received a wonderful response-oversubscribed by about 10 times. Let us see how this helps MHRIL transform its business in near future.

Club Mahindra FAQs: What are the pros and cons of CM membership? * What are the latest membership prices at Club Mahindra? * What are the Escalation points at Club Mahindra? * Where can I buy/sell a used Club Mahindra membership? * How best to Cancel a Club Mahindra membership? * Zest breaks Review * interview with CM official * MHRIL IPO Q&A* Resort Review-Binsar, Coorg * Indexed cost of CM membership * Fixed vs Floating week membership *