Country Club India

Annual Report Analysis

September 20, 2008 Large increase in membership revenue: CCILs aggressive expansion plans in terms of acquiring properties and offering comprehensive range of products to its clients has helped the company to grow at CAGR of 210.8% over last three years to Rs3.18bn in FY08. In FY08, CCIL added 37838 members to its existing ones and increased its total membership to 155483. CCIL spent about Rs3.83bn in FY08 for acquiring properties and refurbishing the old ones. The spent-per-head (SPH) grew by 33.5% to Rs3318. But SPH is still a small amount (on absolute basis) on the base of average membership revenue of Rs70600. Cost impacted due to high sales figure: Despite an increase in the cost from Rs0.95bn to Rs1.93bn, the actual cost increased only by 70bps from 62.6% in FY07 to 63.3% in FY08 (as % of sales). Increase on absolute basis has occurred due to an increase in the personnel and advertisement cost to generate more membership revenues. Drop in RoCE as well as RoE: RoCE decreased in FY08 to 14.3% from 20.0% in FY07 due to an increase in the total capital base (because of QIP issue, GDR issue and conversion of some amount of FCCB).As a result, RoE also decreased from 29.3% in FY07 to 16.4% in FY08. It is expected to deteriorate due to conversion of the remaining FCCBs in FY09. RoE would improve from FY10 due to strong revenues and profit growth and no further increase in the capital base. Valuation: At the CMP of Rs270, the stock trades at 4.5x FY09E and 2.7x FY10E earnings. We believe that CCIL should trade at a premium to the current valuations, given its strong revenue and profit growth. We maintain BUY rating on the stock with a target price of Rs797 (8x FY10E).

Rating Price Target Price Implied Upside Sensex

(Prices as on September 19, 2008)

BUY Rs270 Rs797 231.9% 14,042

Trading Data Market Cap. (Rs bn) Shares o/s (m) Free Float 3M Avg. Daily Vol (000) 3M Avg. Daily Value (Rs m) 5.0 18.5 23.0% 7.8 3.1

Major Shareholders Promoters Foreign Domestic Inst. Public & Others 40.1% 7.4% 36.9% 15.6%

Key financials (Y/e March) Stock Performance (%) Absolute Relative 1M (26.8) (26.1) 6M (55.8) (49.4) 12M (50.8) (35.6) Revenues (Rs m) Growth (%) EBITDA (Rs m) PAT (Rs m) EPS (Rs) Growth (%) Net DPS (Rs)
Source: Company Data; PL Research

FY07 1,518 133.4 568 351 19.0 485.1 2.0

FY08 3,062 101.8 1,124 653 35.3 85.8 2.0

FY09E 5,533 80.7 2,163 1,105 59.7 69.3 3.0

FY10E 8,884 60.6 3,456 1,845 99.7 67.0 4.0

Annual Report 2008

Profitability & valuation EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%)
Source: Company Data; PL Research

FY07 37.4 29.3 20.0 1.6 4.3 14.2 1.8 0.7

FY08 36.7 16.4 14.3 0.7 1.9 7.7 0.6 0.7

FY09E 39.1 13.8 13.5 0.9 2.3 4.5 0.5 1.1

FY10E 38.9 17.4 16.5 0.5 1.2 2.7 0.4 1.5

Ranjit Kapadia RanjitKapadia@PLIndia.com +91-22-6632 2300

Tushar Manudhane TusharManudhane@PLIndia.com +91-22-6632 2238

Country Club India

New acquisitions and increase in membership base, leading to increase in membership revenue Y/e March Membership Revenue Growth rate (%) As % of Total Sales Subscription from members Growth rate (%) As % of Total Sales Club Revenue Growth rate (%) As % of Total Sales Total Total No. of members Growth (%) Additional members Growth (%) Avg. Membership Revenue Growth (%) SPH (Rs/ member) Growth (%) Source: Company Data, PL Research 1,993 9,683 11,243 39.6 234 62,888 14.0 93 46.5 33 FY04 109 FY05 193 77.5 56.7 55 68.5 16.1 92 -0.7 27.0 341 76,398 21.5 13,510 20.2 14,303 47.7 1,924 -3.4 FY06 455 135.4 70.0 77 40.6 11.9 118 28.3 18.2 650 91,533 19.8 15,135 12.0 30,060 110.2 2,134 10.9 FY07 1,246 173.9 81.0 128 65.9 8.3 164 39.0 10.7 1,539 117,645 28.5 26,112 72.5 47,726 58.8 2,485 16.5 FY08 2,671 114.4 83.8 223 73.5 7.0 293 78.7 9.2 3,187 155,483 32.2 37,838 44.9 70,601 47.9 3,318 33.5 FY09E 4,643 73.8 83.9 355 59.3 6.4 535 82.4 9.7 5,533 206,896 33.1 51,413 35.9 90,315 27.9 4,299 29.6

(Rs m) FY10E 7,542 62.4 84.9 566 59.7 6.4 776 45.1 8.7 8,884 274,515 32.7 67,619 31.5 111,530 23.5 4,889 13.7

The major revenue contribution has been from the membership revenues (seen from the table above). It grew by 114.4% (YoY) from Rs1.24bn to Rs2.67bn in FY08. Also average membership revenue has increased by 47.9% to Rs70600. This has been primarily due to aggressive expansion plans in terms of acquiring properties at existing as well as newer locations (domestic and international) and offering comprehensive range of products to its clients, depending upon their income class and requirements. The company acquired 16 properties during the year, taking the total to 40 till FY08. Majority of these properties have been acquired in major cities like Chennai, Pune, Delhi, Kolkatta, Ahmedabad, Baroda, Surat etc. This resulted in an addition of 37838 members to the existing ones and increased the total membership base to 155483. Subscription from members and club revenues grew significantly by 76.4% to Rs516m.But the SPH (Spent per head) grew only by 33.5% to Rs3318 per member which is still a small amount (on absolute basis) on the base of average membership revenue of Rs70600. SPH, which is recurring in nature, is in our opinion indicative of the patron loyalty (since only regularly visiting members will spend at the club). We believe it is imperative for CCIL to focus on this aspect of its revenue profile even more than simply on new members. A high proportion of SPH will indicate superior earnings quality which would be valued at significantly higher multiples than membership revenue (which is non-recurring in nature) September 20, 2008 2

Country Club India

Slight increase in cost as percent of sales

Personnel Cost Other Expenses 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% FY04 FY05 FY06 FY07 FY08 FY09E FY10E Upkeep & Service Cost 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% FY04 FY05 FY06 FY07 FY08 FY09E FY10E

EBIDTA margin

Source: Company Data, PL Research

As it can be seen in the graph, various cost (as % of sales) have been impacted due to high sales figure. In addition to that, Upkeep and service cost (as % of sales) has reduced from 13.04% in FY06 to 4.7% in FY08. This is due to a small increase in the repairs and maintenance cost (this is 65% of total upkeep and service cost), which doesnt increase significantly with an increase in the membership.
Comparison of CCIL and MHRIL Particulars Advertisement Expenses Total Sales Advt. Exp as % of Sales Number of member added Advt. exp per member (Rs./member) Average Membership Revenue Advt. Exp as % of Average Membership revenue Source: Company Data, PL Research Mahindra Holidays & Resorts India Ltd FY06 449 1,567 28.7 10,200 44,019 149,727 29.4 FY07 673 2,406 28.0 14,422 46,664 161,077 29.0 FY08 1,118 3,750 29.8 20,420 54,750 172,732 31.7 Country Club India Ltd FY06 141 650 21.7 15,135 9,316 30,060 31.0 FY07 164 1,518 10.8 26,112 6,280 47,726 13.2 FY08 480 3,063 15.7 37,838 12,685 70,600 18.0

On absolute basis, other expenses have increased from Rs240m in FY06 to Rs873m in FY08. But as % of sales it has reduced from 36.9% in FY06 to 28.5% in FY08. Specifically, advertisement expense which is a part of other expenses, increased from Rs141m in FY06 to Rs387m in FY08. This increase has been primarily due to the various advertising campaigns undertaken to strengthen the companys pan-India presence. But as % of sales it has reduced from 21.7% in FY06 to 15.7% in FY08. Also, advertisement expenses (as % of total sales or advertisement expense per member) are significantly less as compared to Mahindra Holidays and Resorts India (MHRIL), which has a similar business model.

September 20, 2008

Country Club India

Personnel cost (as % of total sales) has increased from 25.7% in FY07 to 27.4% in FY08. This has been primarily due to an increase in the number of employees from 3500 to 7000. Even though the number of employees has increased significantly, cost per employee is lower in this industry. So there is a marginal increase in the overall employee cost (as % of total sales) as compared to an increase in the number of employees.
Steady EBIT margins, but decline in RoCE and RoE RoE Decomposition EBIT Margin Asset Turnover Tax Impact RoCE Leverage Impact Interest Impact RoE FY04 -3.6% 23.0% 115.9% -1.0% 1271.3% 538.6% -65.5% FY05 2.4% 27.0% 124.6% 0.9% 152.9% -308.3% -7.0% FY06 11.6% 47.9% 65.7% 12.4% 122.2% 57.2% 14.6% FY07 34.4% 58.7% 72.7% 20.0% 201.3% 92.6% 29.3% FY08 34.6% 39.7% 64.5% 14.3% 115.5% 95.6% 16.4% FY09E 35.4% 49.0% 65.5% 13.5% 120.9% 86.2% 13.8% FY10E 35.8% 63.3% 65.5% 16.5% 118.5% 88.5% 17.4%

Source: Company Data, PL Research

EBIT margin has been improving notably, but RoCE improved only till FY07. In FY08, RoCE decreased mainly due to an increase in the total capital base. This increase has been due to QIP issues worth Rs1.44bn, GDR issues worth Rs3.41bn and conversion of FCCBs worth Rs222.95m. Also, the tax impact reduced from 72.7% to 64.5% due to payment of higher tax. As a result RoCE dropped from 19.9% in FY07 to 14.3% in FY08. At the same time, leverage impact reduced to 115.5%. Hence, RoE also reduced from 29.1% to 16.45% in FY08. RoCE and RoE are expected to further deteriorate to 13.6% and 13.8%, respectively due to conversion of FCCBs worth US$20m in FY09. Thereafter RoCE and RoE are expected to improve to 16.5% and 17.4%, respectively because of better utilisation of assets and no significant increase in the total capital.

Revenue recognition policy with respect to membership fee of CCIL being inferior to that of MHRIL
MHRIL classifies membership fee into two parts: 1. Admission fee, which is non-refundable, is recognized on admission of a member 2. Entitlement fee entitles vacation ownership member for the various vacation ownership facilities over the membership usage period. The entitlement fee is recognized equally over the period of usage.

September 20, 2008

Country Club India

CCIL recognizes most of the membership fee within the first year of admission of a member and does not differentiate between admission fee and entitlement fee. As such since MHRIL recognizes entitlement fee over the life of the membership (between 10-20 years), its revenue recognition policy is much more conservative compared to CCIL. In fact in the case of CCIL, the un-recognized portion of fees (i.e. Membership Advances) in the balance sheet has been falling for past two years, while as expected in the case of MHRIL it is growing along with it membership revenues.
Summary Balance Sheet MHRIL FY06 462 2,222 268 103 3,055 1,633 1,422 3,055 FY07 778 3,205 60 201 4,243 2,062 2,181 4,243 982 FY08 LIABILITIES 1,416 4,789 201 236 6,641 2,707 3,934 6,641 1,584 Networth Membership Advances (MA) Debt Deferred Tax Liability Total ASSETS Fixed Asset Current Asset Total Increase in Membership Advance (MA) 1,136 222 1,359 1,566 1,032 2,598 (143) 3,608 4,082 7,690 (130) 1,112 917 191 55 1,359 1,299 774 1,227 72 2,598 6,680 644 899 112 7,690 FY06 CCIL FY07 FY08

Entitlement fee as liabilities indicates part of the revenue is recognized over usage period

Negative figure indicates whole of membership fee is recognized in first year itself.

EBITDA Margin Comparison The revenue accounting policy is one of the major factors for higher EBIDTA margins of CCIL compared to MHRIL EBIDTA Margin Particulars Mahindra Holiday & Resorts India Ltd. FY06 26.6% FY07 30.4% FY08 33.5% Country Club India Ltd. FY06 16.6% FY07 37.4% FY08 36.7%

September 20, 2008

Country Club India

Details of increase in funds in FY08 and expected increase in FY09 FY08 No of shares FCCB GDR QIP Warrants Warrants Total 0.43 4.43 1.88 0.60 0.00 7.34 5442.99 Value (Rs m) 222.95 3412.19 1447.85 360.00 FY09E No of shares 2.16 0.00 0.00 0.00 0.70 Value (Rs m) 1114.75 0.00 0.00 0.00 539.00 1653.75

Equity shares of Rs10 each were allotted at premium of Rs505 on conversion of FCCB Equity shares of Rs10 each were allotted at premium of Rs760 by way of QIP issue Equity shares of Rs10 each were allotted at premium of Rs760 by way of GDR issue Warrants in FY08 were allotted at premium of RS590 per share Warrants in FY09 were allotted at premium of Rs760 per share

Financials
Income Statement Y/e March Net Sales Expenditure Raw Materials % of Net Sales Personnel % of Net Sales Upkeep & Service Cost % of Net Sales Other Exp % of Net Sales Total Expenditure EBITDA EBITDA Margin (%) Depreciation EBIT Interest and Financial Charges Other Income PBT Tax-Total Tax Rate (%) - Total PAT PAT Margin (%) Prior Period Inc / (Exp) PAT after Ex. Items 29 12.4 62 26.6 50 21.4 83 35.3 224 10 4.3 19 (8) 37 (45) 7 -15.9 (52) -22.4 (52) 30 8.8 96 28.3 85 24.9 99 29.1 310 30 8.9 22 8 34 (26) 6 -24.6 (32) -9.3 (32) 37 5.6 179 27.5 87 13.4 240 36.9 542 108 16.6 33 75 32 43 15 34.3 28 4.4 113 141 48 3.2 391 25.7 126 8.3 384 25.3 950 568 37.4 46 522 60 21 483 132 27.3 351 23.1 (0) 351 80 2.6 839 27.4 145 4.7 873 28.5 1,938 1,124 36.7 65 1,059 126 80 1,013 360 35.5 653 21.3 653 144 2.6 1,483 26.8 249 4.5 1,494 27.0 3,369 2,163 39.1 207 1,957 269 1,687 582 34.5 1,105 20.0 1,105 1,845 222 2.5 2,381 26.8 426 4.8 2,399 27.0 5,428 3,456 38.9 273 3,182 365 2,817 972 34.5 1,845 20.8 FY04 234 FY05 340 FY06 650 FY07 1,518 FY08 3,062 FY09E 5,533 (Rs m) FY10E 8,884

September 20, 2008

Country Club India

Balance Sheet Y/e March SOURCES OF FUNDS Equity Share Capital Equity Share Warrants Reserves & Surplus Membership Fee Networth Total Debt Deferred Tax Liability Total APPLICATION OF FUNDS Gross block Less: depreciation Net Fixed Assets Capital WIP Investments Current assets Inventory Days Debtors Days Other Current Assets Cash Loans & Advances Current Liabilities/Provisions Creditors Days Liabilities Provisions Net Core Working Capital Days Net Current Assets Days Profit & Loss A/C Miscellaneous Expenses Total 6 254 116 43 67 56 17 31 48 218 339 1,017 4 405 164 5 5 159 59 63 308 330 86 1,259 8 329 183 8 4 175 60 34 222 125 1,359 1,145 219 435 100 24 220 115 (56) (13) 974 234 2 2,586 2,930 1,172 722 228 27 409 86 (176) (21) 3,432 409 1 7,714.7 1,771 1,231 975 273 18 642 60 (204) (13) 2,096 138 1 11,281 487 117 370 429 333 1 14 72 113 723 137 586 279 472 2 21 62 66 1,007 166 841 286 9 405 1 11 67 37 1,736 202 1,534 78 1,409 2 12 43 10 3,575 259 3,316 965 4,154 6 27 46 5 9,650 465 9,185 3,071 12 30 57 4 80 898 39 1,017 87 (7) 87 52 684 823 390 45 1,259 87 107 917 1,112 191 55 1,359 87 423 774 1,285 1,230 72 2,587 155 36 5,825 664 6,679 921 114 7,714.7 8,628 520 9,334 1,774 174 11,281 185 FY04 FY05 FY06 FY07 FY08 FY09E

(Rs m) FY10E 185 11,276 377 11,839 1,923 272 14,034 12,150 738 11,411 3,999 19 30 72 3 2,617 1,292 1,377 328 13 1,007 42 (238) (10) 2,622 108 1 1 14,033

September 20, 2008

Country Club India

Key Ratios Y/e March Growth Ratios (%) Net Sales EBITDA PAT EPS Margins (%) EBITDA PAT Tax Rate Dividend Pay out Asset Based Ratios (%) ROCE/ ROI ROE/RONW Gearing Debt/Equity Per Share (Rs.) EPS BV DPS CEPS FCPS Velocity Debtors Inventories Creditors Valuations (x) P/E P/CEPS P/BV M. Cap/ Sales EV/EBITDA EV/Sales (45.1) (69.8) 29.5 10.1 321.1 13.9 (74.3) (242.2) 2.9 6.9 90.6 8.1 83.3 13.6 2.1 3.6 23.6 3.9 14.2 5.9 1.8 1.6 4.3 1.6 7.7 5.8 0.6 1.4 1.9 0.7 4.5 3.8 0.5 0.9 2.3 0.9 2.7 2.4 0.4 0.6 1.2 0.5 113 14 67 66 21 5 37 11 4 10 12 24 5 27 27 4 30 18 3 30 13 (6.0) 9.2 3.0 (3.9) (3.6) 94.2 6.1 (1.1) (38.7) 3.2 127.2 3.0 19.9 (2.3) 19.0 147.0 2.0 45.4 6.1 35.3 431.4 2.0 46.4 (115.8) 59.7 504.1 3.0 70.8 (247.7) 99.7 639.4 4.0 114.4 (3.3) 11.23 0.47 0.17 0.96 0.14 0.19 0.16 -1.0 -65.5 0.9 -7.0 12.4 14.6 20.0 29.3 14.3 16.4 13.5 13.8 16.5 17.4 4.3 (22.4) (15.9) (50.0) 8.9 (9.3) (24.6) (167.3) 16.6 4.4 34.3 92.5 37.4 23.1 27.3 10.5 36.7 21.3 35.5 5.7 39.1 20.0 34.5 5.0 38.9 20.8 34.5 4.0 45.3 199.2 -39.3 -39.3 91.1 256.2 189.2 189.2 133.4 426.1 1139.6 485.1 101.8 97.9 85.8 85.8 80.7 92.4 69.3 69.3 60.6 59.7 67.0 67.0 FY04 FY05 FY06 FY07 FY08 FY09E FY10E

September 20, 2008

Country Club India

Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India. Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 PLs Recommendation Nomenclature
BUY Reduce Trading Buy Not Rated (NR) : : : : Over 15% Outperformance to Sensex over 12-months Underperformance to Sensex over 12-months Over 10% absolute upside in 1-month No specific call on the stock Accumulate Sell Trading Sell : : : Outperformance to Sensex over 12-months Over 15% underperformance to Sensex over 12-months Over 10% absolute decline in 1-month Rating likely to change shortly

Under Review (UR) :

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

September 20, 2008