DARE - Because Entrepreneurs Do

After a long lull India's initial public offering (IPO) market seems to be coming to life. IPO of  Mahindra Holidays & Resorts, part of the Mahindra conglomerate, is all set to hit market on Tuesday (June 23, 2009),  aiming to mop up anything between  Rs255-301 crore.  Club Mahindra IPO is the first equity offering by a major group in 15 months.

The company, which has 27 resorts in India and Thailand (of which 11 are company-owned),  is going to sell 92.65 lakh shares representing 11 per cent of the fully-diluted post-issue paid-up capital through its IPO. The company has fixed a price band of Rs 275 to Rs 325 per equity share of the face value of Rs 10 each for the initial public offering (IPO). The proceeds of the issue are expected to be deployed in setting up new projects and expansion of some of the existing resorts.

 Company officials are delighted about the recent spurt in the sentiment of investors, reflected through rising Sensex.  The firm's revenues and earnings have grown 43% and 76% respectively, on a compounded basis, over the past four years, and its membership (close to  93,000) has shown consistent increase as well. This must have boosted the confidence of the company to price its IPO in the said band.  But is the pricing on the higher side?

There are reasons to believe so. The firm was priced at Rs349 per share last year, when it placed minority stakes with a private equity player to raise resources. The firm's value was estimated at $815 million in the international market. Compared to it, considering the price band announced and the number of shares put on the offering, the present market value of the firm is anything between $480 million and $565 million.

Considering Club Mahindra depends almost solely on the discretionary expenditure by holiday makers, the pricing seems quite a high. At a time when the economy is on the path of recovery after a slowdown, possibility of people not responding warmly to the IPO at this price range cannot be ruled out completely. It won't thus be surprising that company does not get the kind of response it is expecting. Perhaps Club Mahindra is relying heavily on the brand name of Mahindra, which has made big news recently in other sectors, particularly by acquiring Satyam. What also seems to have swayed the company to go for this pricing is the fact that it is a market leader in time share segment in the market. Close to 72 percent of the market is with the company. But it should not have ignored another fact that time share is not a popular trend in India. Many people do not even understand the concept.

The company also understand this. This probably  explains why the company is planning to make a foray into budget segment in future.This if for future though. Presently, we will have to wait and see how public responds to the IPO. Hopefully, it will work for the company.