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Ladies and gentlemen, good day and welcome to Mahindra Holidays & Resorts India Limited Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Kavinder Singh, MD and CEO for Mahindra Holidays & Resorts India Limited. Thank you, and over to you, Mr. Singh.
Good evening, everyone, and a very warm welcome to our quarter 2 FY '21 earnings call. I also want to do a quick check whether I am clearly audible. Can the SGA team tell me that?
Yes, sir. This line is audible, sir.
All right. Today, I'm joined by Mrs. Akhila Balachandar, our Chief Financial Officer; and Mr. Dhanraj Mulki, Company Secretary, on this call. As you know, we have already uploaded our Q2 results on the exchanges. A detailed investor presentation has also been uploaded on our website. I hope you had a chance to go through the same. And in any case, I will take you some of the -- take you through some of the key features of what we have uploaded.Before I get into the details of the quarter 2 performance, let me do a quick environment scan around us. I would like to begin by saying that the process of Unlock started in June and various travel restrictions were eased off. The path to recovery in travel and tourism has picked up in light earnest, which is what we have experienced. And I would like to also make a point that in the early stages of unlock, localized lockdowns definitely slowed the pace of recovery. However, we have seen improvement month-on-month from July-August, be it in the area of bookings, occupancy and member additions.Before I again come to the specifics of our performance, I would like to highlight a few important macro trends. Domestic tourism has seen 7.3% CAGR between -- growth between 2012 to 2018, growing to USD 94 billion value -- in value in India. Of this, approximately USD 7.2 billion is in the domestic tourist spend on accommodation. And all these figures are for India. $7.2 billion is the domestic tourist spend for accommodation.While this growth may slow down this year and in the early next year due to COVID, but we believe major travel is expected to grow significantly due to the pent-up demand. The domestic leisure travel will also grow as people were not [ permitted to ] travel into international destinations. People will continue to prefer taking vacations at drivable distances, which is [indiscernible], and by the way, 80% of our resorts are at drivable distances. Drivable distances, I think, about 6 to 7 hours from the metro or the city.Additionally, we are spread across the length and breadth of the country, giving our members a great holiday proposition in terms of diversity of our resorts and beddings. The work-from-anywhere concept will become even more prevalent in times...
Sorry to interrupt you. Sir, your voice is slightly breaking. I will just reconnect you.[Operator Instructions]Ladies and gentlemen, thank you for your patience. We have line from Mr. Singh connected back to the call. Sir, you may now go ahead.
I think there's been bad connection. So I will probably start from domestic.
Sir, sorry. Once again...
I did mention...
Sir, once again, your voice has started to break.
All right. Want me to move around somewhere else, from wherever I am right now?
Yes, a little better.
Is this now better?
Yes, sir.
Okay. Shall I speak from here?
Yes, sir, please.
Okay. Am I patched in already?
Yes, sir. Go ahead.
All right. Okay, okay, okay. So I was talking about -- and I moved on to the fact that people will continue to prefer taking vacations at drivable distances. As I mentioned, 80% of our resorts are at drivable distances, which is about 6 to 7 hours from the metro or big cities.Additionally, we are also spread across length and breadth of the country, giving our members a great holiday proposition in our country. The work-from-anywhere proposition will become even more prevalent in time to come, we believe. And we also have noticed that families prefer spacious rooms in spread out resorts, and our resorts and room units are designed in line with that.We also have come to the conclusion, through the behavior of the travelers, that travelers will be comfortable with a brand they can trust in terms of their safety and hygiene. That will become foremost need for travelers when it comes to their accommodation.We are also observing a trend wherein people are keen to the outdoors, indulge in activities that are a combination of activity as well as family bonding. Identifying this as a big opportunity, we have invested in a company called Great Rocksport, which will help us bring such experiences to our resorts. Through Great Rocksport investment, we will introduce soft adventure-related experiences for our members in the cities and in our resorts.I'm of the firm belief that our value proposition holds a huge potential given the fact that there are at least 17 million to 20 million households having an income of INR 15 lakhs and more. The number of households who own vacation ownerships are approximately 350,000, which translates to barely 2% penetration. Given the fact that we are present across the length and breadth of the country, we are in a position to serve the needs of growing demand for an experiential holiday product with multiple tenures suiting Indian families' holiday needs.As and when international leisure travel begins, we are also well placed to serve the needs of our members in resorts around the world, in Asia, Europe and U.S. Our total options that our members have, including domestic, are more than 100 in our portfolio, 100 resorts.I would like to draw your attention to some key points related to our unique and resilient business model. And I will also share how this business model has played out in both the quarters, Q1 and Q2. Let me just highlight the key points of our business model.We have accumulated member base now of 260,000 plus, which generates multiple annuity revenue streams: Vacation ownership income, which is a membership fee; and we have annual subscription fee; and the third one is the resort income when people holiday at our resorts.There is this predictability to the revenue streams. If you look at our vacation ownership income, the vacation ownership income comes from the deferred revenue pool. This will grow, has grown and will continue to grow. We also have a track record of maintaining high occupancies, above 80% plus, which also ensures continuous and consistent resort revenue growth. If you look at our annual subscription fees, these revenues continue to grow from the growing cumulative member base, and that's what we have demonstrated over the last few years.If you look at our balance sheet, we believe that we have a very strong balance sheet. We have a deferred revenue pool of over INR 5,300 crores with very minimal cost in the balance sheet, which keeps accruing over the years into the VO income, the vacation ownership income. Regular cash flows and free cash of INR 791 crores. I mean if you look at our track record, we have today a free cash flow of about INR 791 crores in our books. And together with the INR 1,596 crores of receivables, it provides us liquidity in excess of at least INR 2,000 crores.And I would like to end by saying in -- as far as the business model is concerned, we are a 0 debt company. That makes us extremely a unique player compared to a traditional hospitality player.Let me just move on to share how this strength of resilient and unique business model played out in the last 2 quarters. Deferred revenue pool of INR 5,300 crores ensured that we have a stable VO income, as you would have seen in our results. Even though our membership sales slowed down in Q1, and of course, it has recovered smartly in Q2, we have recovered -- we have delivered about 2,691 members in -- we have been able to enroll, even in these trying times. Our fixed and variable cost of acquisition have also been minimized, which is significant. And I will, of course, share the numbers later.We have an annuity revenue stream of ASF that kept flowing in, in these 2 quarters as well. While conventional hospitality businesses will see a slower buildup in occupancy, in our case, since we are a prepaid product, our members are prioritizing holiday at our resorts over any other holidaying option.With 0 debt on our books, significant cash flows, we are in a position to invest in acquisition of new inventory. And we believe, as we accelerate our inventory, we will be able to grow our member additions at similar pace. And as we speak, we are examining various proposals, which we will -- which are attractive, and we will be in a position to share as something materializes. And I must also mention that this is a -- this would be a time to acquire a right inventory and at the right cost.Let me move on to the financial performance. And you would now appreciate that we are not a traditional hospitality player. And despite the COVID-19 situation and lower resort revenue, significantly lower resort revenues, we have been able to deliver a robust operating performance and improved profitability, aided by substantial cost-saving measures during the quarter, even in these challenging times.We have, by the way, seen a positive correlation between the Unlock measures, our occupancies and also our member additions, despite Q2 being a seasonally weak quarter. Upcoming festive season in Q3, of course, augurs well for us, both in terms of occupancy and member additions.Let me look at the revenue. Our total revenue, even though it was down by 15% largely because of our resort income being lower because resorts were not fully operational, if you look at our profitability, our profit before tax for the Q2 FY '21 is INR 45.8 crores as compared to INR 27.7 crores in Q2 FY '20. This is up by 65.1% on a Y-o-Y basis. Our margin has also improved by 1,052 bps and now stands at 21.6%. Profit after tax for Q2 FY '21 is INR 33.8 crores as compared to INR 17.9 crores in Q2 FY '20. This is up by about 88.5%. PAT margin has also improved by 877 basis points and stands at 15.9%.Let me just highlight the significant cost control measures that we had to undertake during this time. We have been able to reduce our total costs by approximately 29%. Our sales and marketing expenses are lower by 36%. And our shares of referrals in digital is at 53% of the total member additions this quarter as compared to 40% in the same period last year. We have been able to secure significant waivers across the lease renters, both for our resorts and some of our branch offices. We have reduced our other expenses compared to last year by 41%. Our major savings in this area have come due to reduction in resort consumption, energy and travel expenses. Of course, they include waivers received by minimum electricity demand charges from various state electricity boards as well.As we talk about our cash position, our cash flows from EMI and ASF streams continue regularly and our tight control on costs in all areas of operations help maintain our cash position at INR 791 crores. In fact, it improved by INR 10 crores from March '20, which was at INR 781 crores.Before I look at our member additions -- I was talking about our member additions that we have grown more than double. We added, in the Q1, 1,270 members. And now in this quarter, we ended up adding 2,681 members. We have seen an improvement in the -- our higher tenure product offerings even in these times. In Q1, I had mentioned the over 3-year product did extremely well. It's doing well even now in Q2, but we have noticed that the preference for higher tenure product is coming back. Both the 3-year product will help us build the funnel for upgrades to higher tenure products like 25-year product, which will help us lower the cost of acquisition in the medium term.We have continued to engage with our members from the offline initiative to a digital initiative. This, of course, helped us to increase our referral and digital contribution to an all-time high of 53% in Q2 FY '21.Our focus on acquiring members with higher downpayment has continued in Q2. I would like to highlight the initiatives that we undertook in this quarter for your information. We have significantly digitized our touch points and we have accelerated our efforts. We have moved to contactless services at resorts. We have moved to virtual selling, and all our payment options are being digitized and pre-purchase of resort offerings are some of the capabilities we have rolled out in the last few months.Our safety and hygiene standard are second to none. As a trusted brand for more than 20 years with a high level of corporate governance, we have undertaken significant safety measures for our members and employees. We have launched a door-to-door solution that encompasses the member journey of holiday under the travel with confidence platform. And this travel with confidence platform is one of a kind, which addresses the expressed concerns of members through multiple initiatives.As you can probably note, that in these times, the biggest stress point for a traveler is, do I need a COVID test certificate? Where do I get it done? We have tied up with trustworthy national labs to facilitate testing at home, and discounts on COVID tests have also been provided to our members. Travel insurance with medical insurance have also been offered, special discounts for renting a car, members-only offer, car sanitization and flight bookings.And by the way, we have launched a program called Club Mahindra SafeStay initiative, which is about contactless service delivery. High-touch services are cleaned with increased frequency. And we have realigned our spaces and services in restaurants to ensure social distancing. We have also reengineered our menus for in-room dining services.And all our resorts have gone through rigorous safety and hygiene assessment by Bureau Veritas. As on date, we have 26 resorts which are Bureau Veritas platinum-certified as COVID-safe and 15 resorts are ISO 22000 under food and food safety management system-certified.Rebuilding occupancy has been a key focus area for us. As you know, there were a lot of restrictions. And as these restrictions are eased off, we are -- we have been [ regulating ] our resorts to receive our members. As we speak, we have seen the occupancy improving on -- and more on that later. We have focused on redesigning the customer-facing sales operating processes, adapting to contactless services. And by the way, our operating inventory, as I say, is now 69% of the total inventory in September. And as we speak, for the whole quarter, 54% of our room inventory was operational.Our overall occupancy month-on-month has increased, and for the quarter stands at 30%. And in September, we had an occupancy of 41%. If I look at as on date, we have 52 resorts which are operational. We are finding Maharashtra, Uttarakhand and Himachal shooting occupancies upwards of 75%. Even in places in -- as far as Binsar, Naukuchiatal, we are seeing occupancies upwards of 95%. In fact, we have noticed that there is a big demand during the holiday time as well as in the weekends. However, in the weekday occupancies, we have been positively surprised by the improvement there as well. So if I look at it for the -- if I look at currently, the resorts which are popular right now are Corbett. We have resort in Kandaghat, Shimla; Dharamshala; and Naldehra in Himachal. And we have also seen resorts on Uttarakhand, Mahabaleshwar, and Mussoorie, Binsar, Goa, they are now the highly demanded resorts, as we speak.Our CapEx plan continued even during these difficult times. And we have continued our CapEx plan for the Goa project, and that project will become operational sometime in the quarter 4, 152 room units. This is one-of-a-kind resort. Ashtamudi reserve, which is near -- which is in Kerala, will be -- there is an expansion going on. We would add another 33 room units there. We are also waiting approvals for a new resort that we will launch in Ganpatipule area, and this will be a 150-room project, overlooking Arabian Sea. And there is also an expansion project at Kandaghat, Shimla [indiscernible] with additional 160 units. We are also added -- or rather adding, as we speak, in Jodhpur and Alleppey, which is in Kerala. There will be some new inventories that will come there, which will lead to a net addition of 44 room units.We -- let me move on from here to our Holiday Club Resort company. The summer holiday season in Finland is from mid-June until end August. This year, the international borders were closed due to the pandemic. This, of course, resulted in loss of international tourists, while increasing domestic tourism in Finland.Our Spa hotel operations resumed mid-June onwards. Increased domestic tourism has helped in maintaining our resort occupancies. As we speak, as on September, 30 of our 33 resorts were operational. We experienced 90% plus occupancy in key resorts during the holiday season. The interest in timeshare has increased because of larger apartment units.The good news is that Holiday Club Resort has turned around in quarter 2 and delivered positive profit before tax for the quarter as a result of increased occupancies, improved timeshare space and effective cost control measures. This is really a big turnaround from the numbers that I will talk about.If you really look at the numbers, our loss before tax in quarter 1 was minus EUR 6.65 million. And if you compare that to the profit before tax, which is EUR 0.35 million, this is a complete movement from a negative number to a positive number, and all in just 3 months' time.And similarly, if I look at consolidated numbers, our consolidated profit before tax pace for the quarter is INR 40.9 crores as against INR 36.3 crores for the same period last year, up by 12.6% Y-o-Y. By the way, the same number, loss before tax, at the consol level was minus INR 34 crores. So it's a swing from minus INR 34 crores to INR 40.9 crores.The consolidated profit after tax is also up by 18% and stands at INR 28.8 crores for quarter 2. And at the H1 level, the consolidated profit before tax is now at INR 6.3 crores despite the loss in Q1. And this is something that we are happy about that we have been able to turn around the Holiday Club Resorts, and they are well on their way to look at -- as we move ahead, Q4 is a season for them. And Q3, of course, is one part of the month -- the December month is also a season for them. So we will see how this goes.On this note, I would like to make only one comment that, as you've heard me, our business model is unique as we have demonstrated with the strong operating performance. It is resilient and it is not a traditional hospitality model. Zero debt situation, significant cash on hand and deferred revenue of INR 5,300 crores and liquidity of about INR 2,000 crore plus, including receivables and cash, is something that we are really proud of.On this note, I would like to close my remarks, and thank you, everyone, for joining us. And I'm very, very happy to, along with Akhila, to answer all your queries. Please, I'm done. And thank you so much for listening -- patient listening. So over to the SGA team.
[Operator Instructions] The first question is from the line of Nihal Jham from Edelweiss.
Sir, there are 3 questions from my side. First one on the member addition specifically. You mentioned that this quarter also the addition of GoZest [ go-live ], but CMH 25 is seeing traction. The question was that, incrementally, is it that -- in terms of member acquisition strategy, there is a thought of initially trying to say push the GoZest product and try getting a higher number of people on board and potentially later seeing them convert into a CMH 25? Or that -- or we are planning to keep both -- the marketing of both these products separate? First, just wanted a sense on that. In normal terms also not just related to what is happening during COVID. And I'll come to my questions -- second thereafter that.
As we are running our business in October, we are [Audio Gap]GoZest is in minority. And we are already -- the CMH 25 is a majority. This was the situation in Q1, GoZest was majority. And when I say majority, it means more than 50%. And the tide has already turned in favor of CMH 25.Having said that, we are seeing an exciting product. It does allow...
Sir, sorry to interrupt you once again. Your voice is breaking a little bit.
Yes?
Sir, can you repeat once again?
Yes. Nihal, what I was mentioning that GoZest as an entry product was slide out in Q1. As I was mentioning, that it was a majority in the Q1. As I've already mentioned, that we are seeing that GoZest will become minority, and we are already seeing our Club Mahindra 25-year product being back in majority. Now the purpose of making this statement is that we remain committed to the Bliss product, which is a 10-year product, which is a point space product, and a 25-year Club Mahindra product. These products are the mainstay of our organization.GoZest has a strategy to create a funnel for future conversion and getting younger audience to look at us is a part -- has been a part of our strategy. It's just that pandemic gave us the boost to test this out. And we believe that all the key products will coexist and it will be a portfolio strategy for us going forward, but I still -- I am a believer that in the overall business model, it makes a lot of sense for us to have majority of our people, our customers coming in into the 10- and 15-year product. And definitely, we should have option for people to take a peek into our product depending on the life stage they are in, and then over a period of time, upgrade. And as you know, that the cost of acquisitions during the upgrade are almost nil. So that is something that we will aim, and that will hopefully help to bring our weighted average cost of acquisition down going forward.
So the second question was, I think, in your commentary, you mentioned that you have managed to see a big reduction in your cost of acquisition. Other than obviously the ATL sales and marketing which you [indiscernible], are there any other initiatives that you may elaborate on?
So just to let you know, that we do not use ATL. We've never include ATL in our cost of acquisition. So ATL going up or down would not affect our cost of acquisition, but we were able to make a big difference in reduction in our cost of acquisition due to higher focus on referrals and the fact that we were able to convert better. We have been doing, obviously, huge improvement in our sales reach, et cetera. And the fact that we have been sourcing our leads in a different manner than what we were doing. In fact, we have revamped our website, if you see. We have done a lot of things to improve our digital and referral sourcing. Plus, we also have worked on the lead acquisition strategy. And these have helped us to bring down the cost of acquisition, and quite a lot of these benefits are sustainable.
So anything specific that has helped improve the conversion rate? And if you could just give a sense of approximately what is the conversion rate, the usage cost?
So typically, we have never talked about conversion rates because they vary across the markets, across the locations and for product types. All I can mention is that there is -- the pandemic has given us an opportunity to actually do video sales. Video sales, in some cases, are extremely efficient because you are in a position to do more meetings than what you would otherwise do. That has been one positive kicker for us. And the fact that we, in these trying times, are offering an option to the customers to be able to lock-in their 25 years of holidays or 10 years of holidays at the current prices, given the uncertainty, that has also been hugely helpful in improving our conversion.We have also launched various initiatives other than, of course, referrals because referrals and digital moving from 40% to 53% would not have been possible had we not very deeply worked on it. And therefore, member engagement is actually key for us. And we are also doing work both at the on-site conversions. We are also doing work through various models that we are trying out, which includes an idea called club associates, women entrepreneurs. We are doing many things. Many innovations are happening. Some of them will play out as we see over a period of time, and that is why we were able to smartly recover in Q2. And my confidence is that in these difficult times, if we are able to deliver this kind of a number, I think we are really looking at good times ahead because I do mention that I'm a strong believer that we are only 2% penetrated amongst the households that we would like to target. I mean 2% is no penetration. And this is something -- this kind of product, this kind of usage is only going to grow.
That's helpful. And if I may, just one last question from myself. In Q1, you did highlight that a part of the cost savings was driven by obviously lower power cost and other costs related to resort. Incrementally to Q2, are there any more initiatives? And now with 6 months having passed, any sense on what can be the permanent reduction in the [indiscernible] with the market?
So I would say that we have a natural hedge, Nihal. Two things played out. I mean, as our resorts were shut and they was opening up in phases, we were able to gradually increase our revenues. However, you are right, there are fixed costs. And up to a point, you can cut them down, but you can't go below a certain point. So yes, we are carrying certain fixed costs, but we were able to reduce our big fixed costs and these rentals through the fact that there has been a situation which is never before situation.And we also did a very simple arithmetic that if we were running, and we were running at a certain occupancy lower than what we are, and if we were paying full lease rental, would we still have delivered similar kind of numbers? The good news is that it does pan out because while we lost on resort income, we made up by the cost savings.What will happen going forward is that the income will come back. Of course, some costs will come back. But the way the cost will come back, we have learnt many things in this pandemic and we will be far more efficient than possibly we have been in the past, and that will lead to a sustained improvement in margins as we move ahead.
Next question is from the line of Pavan Ahluwalia from Laburnum Capital.
Kavinder, a couple of questions. First, on Rocksport. It'd just be interesting to think about how you thought about that acquisition, the price you were willing to pay for it. And in particular, the choice between building versus buying because while I definitely appreciate the desire to offer innovative experiences to members, how do you think about the trade-off between either hiring for rock climbing or adventure sports instructors and doing this yourself or subcontracting to someone rather than actually buying the equity in a company? And given that these companies are typically built around 1 or 2 sort of founders who really running their hands their own way, what are you really buying when we pay up for these companies? I would love to understand how you thought about it, the return on investment. What was the analysis that went into this?And second, on the membership breakdown. So I'm glad that CMH 25 is back in majority. Shouldn't we be aiming to sell the longest duration packages possible because we have paid cash upfront? You said 10 to 15 years. Logically, if I can sell it, any time I have a choice of selling a 25-year membership, if I could fill the entire capacity with 25-year memberships, I should want to do that, right? Or am I missing something here?And finally, any defaults that we've seen on annual prescription fees? Are some people saying, look, resorts are closed so I'm not paying ASF? And what's the percentage of that? And what's the company's policy on this?
So Pavan, I think -- let me start with maybe question #2 and question 3, and then come to question #1 because question #1's answer is slightly longer.So on the question #3 -- okay, let me start with question #3. So we haven't seen defaults in our business. We have seen some delays, but no defaults. Lack of desire, but the fact is that, yes, there has been some cases where they have requested for deferral, which is something which is fine because there are times when people would say that, listen, I'm not holidaying, then can I defer? Of course, there is a penalty in our system if you defer, and that's something that people are mindful of. And therefore, we have not seen -- and also, I think [ comfortably ] our customer base, of course, some of them would have been impacted as a result of the pandemic, but we have not seen anything worth reporting in that area. So that in my mind is the answer to the question #3.Turning back to question #2, on the varying tenures. I think our dream, desire is to sell higher tenure products. But the interesting part of these lower tenure products, like 10-year and to some extent 3-year, is that they are also, in some manner, the 3 and 10-year, are potential converts to 25 because as they schedule, they are more likely to convert than exit, okay? That is -- depending on how you -- we are confident about our experience and how we deal with them at our resorts in terms of providing the experience.But coming back to the 25-year product, yes, I mean, it's a product that helps us to build inventory. But if you notice, and I think I mentioned somewhere, I don't know if it was you or someone else, that we have a strategy of owned and leased resorts. It's not 100% owned. So I mean, if I today have free cash of INR 800 crores, it's also because some part of my inventory is in a lease format. So as I say that there are consumer trends, there are people who would not like to commit for 25, there are people who are okay with 10 and there are people who would like to have a sneak peek through a 3-year product. Can I take care of the diverse set of costly 20s, and in the process, also understand them better, serve them in a manner that they would like to stay with me? Yes, our business proposition has to be far more stronger if you have to convert people because they have an option of an exit after a period of time.So our view is that it's a portfolio strategy. The dominant portfolio -- dominant part coming from the 25-year product, followed by 10 and followed by 3. And when I say dominant, I mean majority. And it does help us to bring in cash. It helps with commitment. It also helps us blocking the capacity that we have for -- it's more like a committed capacity.So I think the answer is in portfolio. The answer is in reading the signals of the market. The answer is in taking care of the emerging needs of the customers without losing focus on what you stand for. This is on the demand side.On the supply side, ensure that you have both the owned as well as leasing. And then leasing definitely helps us. It's not that -- leasing does not mean that we are outsourcing. We run the resort. We refurbish it. We get into long-term agreements. And sometimes it has been of help to us because we could not have even constructed at that pace and also the fact that in some locations, construction is not even allowed.Let me move on to your question #1, on the Great Rocksport investment. It's a very small investment, but in my view, it's a very strategic investment. The reason we like these founders -- and they are not 1, by the way. They are 5 and -- or 1 or 2. And they have been in the business for about 7, 8 years. They are a positive PAT company, still a start-up. And we had started to look at them when we realized that even though we have a lot of adventure stock in our resorts, but are we able to engage with the members, both on adventure activity in the resorts and also in the cities in which they reside?Our belief through this -- the rationale for this investment, it's not even an acquisition, it's a small strategic investment, is to work with these passionate founders on soft adventure-related activities, bringing in some freshness into our resorts as well as creating an option for our members to engage with them in the city. And let me just hasten to add, they have worked with the schools and they have almost worked with about 2.5 lakh kids who have gone through their programs.We also see this is a rich source for lead generation for us. We would like to work with them to also generate leads, create opportunities for our members, to be able to engage with them in their activities because they're very unique people, and they have built the business brick-by-brick. And they have also open to looking at doing things for our members at our resorts.So we see a big positive, a big win-win in this model. And they will obviously be also able to get higher business by being able to target our members. So that's our strategic rationale for this. And this does not take away the fact that we can continuously keep building on what we want to do in our resorts, which we anyway keep doing.I have completed.
Okay. Did you buy the entire company? Or you bought 100% of it, right?
No, no, no. This is just a 7% stake and...
Okay. Sorry, I misunderstood that. So basically, they have significant skin in the game?
Yes. They have significant skin in the game and they will continue to have significant skin in the game. That's how we have constructed the arrangement.
And what was the -- and why did they want to sell you a 7% stake? Was it just a need for liquidity in a lean period where fewer people were going out? So you want an equity stake, they got some liquidity, and you set up a strategic relationship?
For them, being associated with our group, our company, this is then definitely a leg up in terms of their own stature, number one.Number two, they believe they can target our member base for their activities, which we are very happy because their activities are far excellent. We have observed that.Number three, for them, this becomes growth capital, and it's something that they would be very excited. And as we move forward, and let's see how this relationship grows, they may, at different points of time, will raise capital and we will see how it goes.
Next question is from the line of Ankit Kanodia from Smart Sync Services.
Congratulations on good set of numbers. But if you just move away from the quarterly numbers or even from the P&L, as I understand, your business model is basically like conducting a business model where you take money upfront and then basically use that money to build resort and build experience for your customers. So what really surprises me or puzzles me is that why are you not using this INR 800 crore of cash a little aggressively to buy some good properties at this juncture when -- due to COVID scenario, maybe you would be getting a very good deal? Can you throw some light on that? Other than that, I think -- that's it, if you can throw some light on that.
So we typically deploy our cash in 2, 3 ways. One, as I was mentioning, we do build greenfield projects. And some of our resorts, which we have built ourselves, even today, they are marquee resorts and people keep going there again and again, and we have stood the test of time. So we definitely believe that some part of this capital will go in building our own resorts. But of course, that does not mean full utilization of this capital because we can do a simple ballpark arithmetic, we will generate -- of course, over the last 4 years, we've generated about INR 200 crores, INR 250 crores free cash, and this will continue to get generated barring this COVID year. And once that happens, then obviously, we need to look at things, like you mentioned, beyond our own investments.First of all, can we accelerate our own investment? That's something that we are doing. I'm already on record that we are going to add at least 1,200 to 1,500 rooms and grow our inventory beyond 5,000 in about 3 to 4 years' time. And part of that will obviously be our own, and part of that will come through acquisitions and part of that will come through leasing. And then when I say leasing, in the leasing also, we spend money on refurbishment, and that depends on the type of the resort. And so we believe that whether it is built, whether it's buy or whether it is taken on lease or whether it is expand an existing resort and create capacity there, that is also an area of investment that we engage in.So definitely, this cash -- the good part is that we keep deploying the cash, but more cash gets generated. So it's nice. And we need to see now the fact that we have built it up to this level -- and of course, pandemic was a one in a hundred year event. Once we come out of this, definitely, we are seeing opportunity, as you mentioned, coming to us. All we are doing is we are carefully evaluating that. We definitely want to see that the opportunities that are coming are value for money. And more importantly, they will meet the requirements of our customers, our members. And that, to us, is paramount. And if we don't find that fit coming in -- because we are not in the market to look for a cookie-cutter hotel. We are looking in the market for a resort. Even if it's a smaller resort, we can build it again. We want to see whether there's a possibility to expand, and also at what price it will come to us. These are the criteria that we are using, and we are definitely a buyer in the market.
All right. That helped. The only point I wanted to make in response to this was that, as you have seen -- already seen in the past pre-COVID scenario when there is too much of a demand during the holiday season, that is the only area where you probably need to improve on the customer satisfaction in terms of getting [ their need ] [indiscernible], their ideal room booked. So as we are already expecting that pent-up demand to come forward when this whole COVID thing gets over, don't you think it would be wise for us to be a little aggressive right now with this cash on the books?
Yes. I mean you're right, you're right. And I think this is the time to be ahead of our needs on inventory. And I can confirm to you that's exactly the intention, and the Board is completely supporting me on doing that. And we are committed to run ahead than just to be in line with our member additions. So that, I think, is a very definitive statement I'm making. And I agree with you. I have no agreement with [indiscernible].
And that's really comforting. And just last one point. If we are having such INR 800 crore of cash with us, and when market is actually not valuing the company as per the real potential of this business, why don't we signal the market by announcing a buyback?
Okay. I think we have a bit of an accounting issue there. Akhila, would you like to explain why we can't do the buyback or even dividend, we have not been able to pay? Would you like to answer that? Akhila, are you there?
Sir, her line [indiscernible].
No problem. I'll handle this. I'll handle this. So I will explain it. There is a -- when we transitioned into Ind AS 115, there was an entry that we had to pass, what we call as transition reserve. If you look at our balance sheet, you will see that entry. And that -- and despite the fact that we revalued our assets, land assets, what happened is that the -- as per the requirements under the company's act, we are not in a position to pay out the dividend or even do a buyout because our net worth, as per the calculation, turns negative, though we are at -- we have had a dividend-paying record. We are having cash on our books. You can see the assets that we have, replacement value upwards of INR 3,000 crores, about INR 1,600 crores of receivables, INR 800 crores of cash. Yet because of this transition entry, which is an accounting entry, which is actually not a loss, has ended up making our net worth negative.Now that's something that we have taken up with Ministry of Corporate Affairs, and we are representing to them saying that this intention of the act is correct, but I think it is not applicable in our case because when probably the act was made, nobody thought a situation like this can develop where an accounting entry can make your net worth negative when the company has assets in excess of about INR 5,500 crores, INR 6,000 crores.
Next question is from the line of Nagraj Chandrasekar from Laburnum Capital.
Hello. Am I audible?
Yes, you are audible, Nagraj.
Just a few questions. Just wanted to understand, you mentioned that you're building occupancies back to 41% and you mentioned getting most of our resorts open now, specifically you mentioned -- so basically all of them. Could you give a sense of what October and leading into November, December, given that our bookings are a bit forward-looking, given members book the rooms quite ahead in advance, what they would look like for the holiday period?And secondly, what our outlook is on member adds? Are you getting closer to the sort of [ 4,000 ] per quarter member add savings as we speak?
Okay. So you would appreciate that the environment is uncertain, but I can definitely make an attempt to answer you. And definitely, able to see bookings ahead, as you rightly said, because we do bookings in advance. And we are definitely seeing very, very good bookings into the future. And even October has been good, okay? And November and December are looking even better.So as I was mentioning in my remarks -- opening remarks, that we are seeing -- and I also gave the names of the resorts where there is a big drop that we are seeing. And we believe that occupancies will definitely be better than Q2. In any case, Q3 is a seasonally good quarter and that Q2 -- Q3 occupancies will be there. [Audio Gap] [indiscernible] that I would like [Audio Gap][indiscernible] a number. It could very well exceeded or maybe a few percentage points lower. I can just guess ballpark where we will be because this is the time people are heading out for vacation. And the good part is that we have taken a lot of steps in travel with confidence, SafeStay program. That has given them the confidence. So that is helping us. Definitely, that's helping us. We're seeing a very positive momentum on the occupancy side.Coming back to the member additions, I am seeing a very interesting positive correlation with the occupancies, with the member additions. And also, we are finding a good correlation with our collections, whether it is the annual fee or the EMI of the people who have signed up with us. I'm finding that these 3 are very beautifully and positively correlated. And I'm seeing momentum as we see into Q3 -- as we move into Q3, already 1 month is more or less [ implement ]. So I'm able to make this statement because I am seeing October, I am seeing November and December ahead from whatever data I have. And of course, I'm assuming that the travel restrictions will not come back. I'm assuming that the second wave or whatever we are seeing in Europe may not happen here because I think we have done a better job than what probably has been done elsewhere. So these are assumptions built in, but yes, the answer is a solid year.
Understood. And just -- that's good to hear. I just wanted to get a sense of -- you mentioned a few new projects. Now obviously we're coming to the close of Goa and Ashtamudi now. So if could you give a sense of CapEx this half year and for the FY? And the CapEx you envision in response for the new projects which you've announced, you mentioned Alleppey and a couple of other names?
Yes. So I think, as we speak, yes, Goa definitely would -- should come to an end in the quarter 4. And by the way, Goa also has a second phase to it. While 152 rooms will definitely get delivered, there are another 57 rooms, as we speak, we have already started. So the next year, that 57 will come in. The Ashtamudi 33 would also come in into the next year, maybe in the quarter 2. And as we speak, we should break ground in Ganpatipule in 1 or 2 months, maybe before December or January. And that will be another 150-room project, and we are already awaiting approvals in the area. We have an existing resort in [ Kandaghat ], which is in -- near Shimla. There's another 160 units that we are putting up. If I add 160 plus 150, that's another 57 plus 33, I mean, it's about INR 400 crores, INR 500 crores kind of a CapEx that we think is in play as we speak. And that has been always the case, INR 400 crores, INR 500 crores kind of a plan in play, but we are looking at expansion opportunities in some of our existing resorts. As we speak, we are on the drawing table doing that. And we are also looking at -- we have also been able to acquire an extremely beautiful piece of land very recently and -- in Maharashtra, and that will also help us to look at into the future in terms of planning for more resorts.So acquisition would definitely be in play apart from, of course, building our own. So I think capital expenditure and acquisition put together -- since we do not see any constraint. If there is any constraint, it will be an execution constraint. It won't be a constraint on capital. So that's how we see capital expenditure in our company, and pandemic hasn't changed our position on that.
Understood. That's just good to hear. And could you just, on the previous participant's question, just expanding there, but you've clearly explained to us the difficulty we face on return on capital because of the [indiscernible] structured around membership -- our entity. So any thoughts on -- and you also mentioned the time line by which book value would be positive and then you can start returning capital in earlier calls. Any thoughts on any methods you might have discussed on being able to potentially accelerate that perhaps from a sale-leaseback of one of our projects? Because our units would be quite attractive because the other hotel units for a potential buyer, given the annuity revenues and the parentage we have. So this could be a good method of freeing up some capital and potentially getting our book value back in the black. Any thoughts at all to this?
So I would say that, obviously, we want to do it, ideally, the right way by going to Ministry of Corporate Affairs and seeing whether -- because all that we will do would be to deal with the problem that we have, which is, in our opinion, this is a problem which does not reflect the true fixed trends of the company. So our energies are definitely focused on the MCA, and we have made some headway there, but we really would see -- it out -- it will all play out in time because we really don't have time line there.Now talking about the second point, which you mentioned, structuring. How do you do structuring to be able to do that? I would say all options are on the table, but I must say that we have focused more on the MCA route rather than on the structuring route. But it is definitely on our mind to see how we can -- we have had a dividend-paying record from the time we got listed. So we would definitely want to go back to those days, and that's definitely on our agenda. I think, beyond this, I won't be able to say because there are obviously a lot of things that we are trying to do, which will help us to do that.
Next question is from the line of V.P. Rajesh from Banyan Capital Advisors.
You mentioned that you revalued your land and some of the properties. So if you can just give some more color as to when it was done? And what was the original value? And now what is the current value?
I think these are fairly detailed questions. Maybe we can answer you offline. And I think if Akhila is there, maybe she can give you a ballpark number. Akhila, are you there?
Yes, yes. Sorry, got disconnected [indiscernible].
No problem.
Yes. This is something -- we've done this around a few years back. It's not something that we paid recently. And this was something around INR 700 crores plus got added to our revaluation [ result on account of this ]. More details, I think, as Kavinder mentioned, we can take it offline.
Sure, sure. And then the way to understand your deferred revenue is that these are the members who are going to pay their fees contractually over the period of the contract, and we're just essentially looking under some total of that value. Is that the right way to think about the deferred revenue?
You're talking about deferred revenue? Did I hear you right?
Yes.
Yes. I think the deferred revenue, the way to think about it is that if I'm getting INR 100 for selling a membership, I can only keep INR 4 this year. I have to defer INR 96 into the deferred revenue pool, right? And that has to keep coming in every year. There is a very small cost, which is directly attributable to the contract, which is also kept there -- deferred there, but almost all the cost of getting that contract is accounted for. Only a cost which can be directly attributable to say, let's say, the incentive paid to a salesman, that can possibly be deferred. So if you really think about it, it is an income earned but coming in every year. There's minimum cost. So it is actually a profit sitting there. That's the way to think about it.
I see. But we have seen the cash [indiscernible].
Sir, sorry to interrupt you. Your voice is breaking terribly. Can I request that you repeat your question?
Yes. So my question was, as you were saying that you sold it for INR 100, can you just clarify that the INR 100 that sits today is cash in your bank account. Is that the right...
Yes. I mean, you are right. I mean we definitely have more cash as down payment because, obviously, we also sell on EMIs. It's not that INR 100 comes in. I mean, of course, some people do full payments also, but if you take less, if someone has done a full payment, I have INR 100 with me, but income will get recognized over 25 years. That's true.
I see. I see. And sir, sort of the renewal rate. I didn't see it in the deck. So what is actually the renewal rate that you're getting [indiscernible] because you're trying to transact, but let's say, they want to get out of it?
Yes. Yes. So I would say renewal rate is not relevant for us because in our business, we're anyway trying for longer-term duration. There is definitely an upgrade happening both from -- we have [indiscernible] seasons. People who have signed in as a new member, who is the lowest, which is more, let's say, offpeak season, most of the peak season it is perfect. So people keep constantly upgrading. They keep going up on the curve, and that's a part of the income that we get on the VO side, vacation ownership. And of course, they can upgrade from studio to 1-bedroom to 2-bedroom apartment. So those opportunities of upgrade exists. You have an opportunity to upgrade from a 3-year product to a 10-year to a 25-year product. This is very recent. So the point is that the upgrade opportunities exist. And if you call that as renewal, then definitely it is happening and [indiscernible] happens.If you were to talk in terms of the drop-off rate, first of all [Audio Gap]or whatever drop-off may have happened. But I can -- I have confirmed this in the past also that the drop-off rate is negligible. In fact, if I were to call it -- if I were to put a number on it, it will be probably in low single digits. And that also is something that -- we have a retention team which is constantly working on getting people to think about not leaving us.So that's not an area of concern for us. It is -- what is of importance for us is to get people to regularly holiday, which helps us to get our resort incomes. And once they are at the resort, if they can be at the resort and enjoy the food and beverage offerings, the holiday activities, which helps us to boost our resort revenues. If you go back in time, you will see our resort incomes have grown by at least 15%, 16% CAGR over the last 5, 6 years.
Right. Right. And finally, just one quick operation question. As you are opening up your resorts, how are you handling any potential COVID breakouts in the resorts?
You will have to repeat the question. There was a break on your side.
Hello, Mr. Rajesh? Can you hear us?
No, I'm not able to hear [indiscernible].
All right. I will ask you separately. No worries.
Ladies and gentlemen, due to time constraint, that will be the last question for today. I will now hand the conference over to Mr. Kavinder Singh for closing remarks.
Okay. I just want to thank you for patiently listening, coming and talking to us. And I want to just confirm to you that, as I mentioned in my opening remarks, the uniqueness and resilience of our business model, coupled with the fact that we have been focused on cost management, which is the need of the hour, has helped us deliver this excellent performance in quarter 2 and even in quarter 1. The turnaround of Holiday Club also bode well for us as we look into the future.And as we have been asked or as we have been -- as there have been observations, are we on the lookout for inventory? The answer is I mentioned that we are a buyer. We are active buyers in the market. We are looking at opportunities. And we believe that the good opportunities will come at the right price and for meeting our investment criteria. And we would be ready to seize the opportunity.On that note, I would like to say thank you very much. And it's been -- we always learn -- whenever there are these interactions, we get to understand your concerns, issues and clarifications. We are more than willing to sit with you, after properly planning for the time to answer any more questions that you would have one-on-one. Thank you very much. Bye-bye. Good evening.
Thank you very much. On behalf of Mahindra Holidays & Resorts India Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.