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Edited Transcript of MHRIL.NSE earnings conference call or presentation 15-May-19 12:30pm GMT

Q4 2019 Mahindra Holidays and Resorts India Ltd Earnings Call

Chennai May 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Mahindra Holidays and Resorts India Ltd earnings conference call or presentation Wednesday, May 15, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Akhila Balachandar

Mahindra Holidays & Resorts India Limited - CFO

* Kavinder Singh

Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director

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Conference Call Participants

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* Aditya Bagul

Axis Capital Limited, Research Division - Assistant VP of Midcaps

* Chockalingam Narayanan

BNPP Asset Management India Private Ltd - Head of Research

* Nihal Mahesh Jham

Edelweiss Securities Ltd., Research Division - Research Analyst

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Presentation

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [1]

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Good evening. I am joined in this call with Mrs. Akhila Balachandar, who's my Chief Financial Officer; Mr. Dhanraj Mulki, Company Secretary. And once again, good evening, everyone and a warm welcome to our earnings conference call for the quarter and for the year ending 31 March, 2019.

And I just would like to, at first for -- at the first moment, I would like to apologize for the delay in uploading our investor presentation as well as the press release. This is due to the fact that the Board Meeting went on a little longer. And so you may not have had an opportunity to have a good look at the investor deck as well as the press release but while we speak, you're most welcome to keep having a look and I will, of course, take you through some of the key features. So I'm going to have maybe a little longer opening so that I take you through almost all the figures so that it becomes easier for you to ask the questions. And we would be very happy to go through your questions after this. And once again, my apologies for the delay in uploading and not giving you sufficient time to go through the numbers.

Let me start by saying that in the -- this year has been a year in which we moved into a new accounting standard Ind AS 18. The accounts were prepared for the full year according to Ind AS 115. And the old accounting standard was Ind AS 18, and we move into the new accounting standard of Ind AS 115.

Now in the Ind AS 18, there was a 60% of the membership fee was accounted as an income for the -- in the first year and 40% was deferred over the tenure of the membership. In 115, there is a change that the entire income from the vacation ownership contracts need to be recognized over the tenure of the membership. And only incremental costs which are incurred for obtaining the membership, they can be deferred over the tenure of the contract. All other costs have to be charged to the profit and loss for the period. And you have probably seen it over the 3 quarters what it has led to in terms of, obviously, the income has reduced because of this change and costs have to be taken up front and therefore, you have seen the profit numbers lower than AS 18 numbers.

Before I go into the numbers, I would like to make a very important point that with the adoption of the new revenue recognition policy in accordance with the Ind AS 115, we have had to change our revenue recognition policy, as mentioned earlier. Consequently, the deferred revenue and deferred costs had to be recomputed and they had to be stated as transition difference, which you are probably familiar as we presented in our balance sheet earlier.

I would like to mention that company has been profitable, continues to be profitable. We have healthy cash flows as seen from our cash position and have declared dividends every year since 2006.

The company is seeking a clarification from Ministry Of Corporate Affairs that this transition difference may not be considered for the purpose of declaration of dividend under the provisions of Section 123 (1), one of the Companies Act. The declaration of dividend, therefore, if any, shall be subject to receipts of the clarification from Ministry Of Corporate Affairs. So this is something that I wanted to start that the dividend is subject to now receipt of clarification from MCA because of the transition difference that came in as a result of the accounting standard.

As you know, the transition differences happen only due to switch over into the new accounting standard. It does not -- it is actually not a true reflection of our net worth. So that is one of the reasons that we have to seek this clarification. And therefore, pending the clarification, the declaration of the dividend, if any, will be subject to the receipt of clarification from MCA.

Now let me move on to these results. If I were to start with 115 results, the -- and let me start with that, but though there are no comparators available. And I will talk about AS 18 results also.

Member additions in this quarter Q4 were at 5,671 and for the full year, 18,377. The resort occupancy for this quarter is at 83.7% and the full year occupancy is at 82.9%. Quarter 4 occupancies have recovered. As you know, in Q2, our occupancies dipped due to the floods in Kerala and Coorg. After that, we have seen a steady increase in occupancy, particularly in Kerala and Coorg, which has led us to recover our occupancies upwards of 80%.

The room inventory now stands at 3,595 in 61 resorts. We added 3 new destinations in quarter 4. One in the Diu, another in Hampi and the third one is near Ahmedabad and this is a golf result where we have taken inventory.

Our income for the quarter stands at INR 252.1 crore. Our profit after tax stands at INR 14.4 crores. And for the full year, the total income is at 90 -- INR 963.4 crores and profit after tax is at INR 63.9 crores. Cash and cash equivalents now stand at INR 572 crores.

As I mentioned, for these figures, there are now Y-o-Y comparisons so what we have done in our Investor Day is shown that we have done the -- investor deck is right now getting uploaded, in fact, as we speak. And it's already done, and you can have a look at the investor deck on the website.

We have given the movement between Q3 and Q4, both for Ind AS 115 as well as AS 18 to just let you know as to why the differences are there in the 2 accounting standards and what is causing this difference.

So let me start -- before I get into the differences, let me start with the AS 18 numbers.

As far as the Q4 results of under AS 18 are concerned, we delivered an income of INR 327.68 crores, which is 7% up. Our profit after tax is at INR 49.41 crores, which is a 28.1% increase on Y-o-Y basis. So therefore, this is a sterling performance if you were to look at it from AS 18 perspective.

Full year, our turnover is at INR 1,170.36 crores and our profit after tax, highest ever at INR 155.75 crores. The full year income grew by 7% and our profit after taxes up to 16%.

If you look at the profit before tax margin for this quarter under AS 18, it is at the highest ever at 20.6% -- or rather 21.7%. And our EBITDA margin, which has been -- in the last 2 years has been at 24%, this year has smartly recovered to 25%. In fact our quarter EBIT margin is at around 27.3%. So these are in terms of the profitability, in terms of the growth, these are the best ever numbers that we have seen. In fact, our profit before tax for the full year stands at around INR 242 crores.

The key point that I wanted to highlight is that both on margins as well as on profitability under the old accounting standard, we have delivered extremely good numbers. And part of the reason why we have been able to deliver good numbers is the control on both sales and marketing costs and all other over -- our overheads. Apart from the fact that we have still been able to grow our revenue at around 7%, despite the fact that our member additions for the full year are grown up by only 0.8%.

And when you will see the investor deck, you will see the reasons why our income is up by 7%. There is an ASF income growth of about 10.9% for the full year, resort income is up by 5%. Our interest income is up by 16.3%. This is the EMI interest. And that has led to a total income growth of about 7%. And the profit margins being what they are since there is an improvement in the profit margin, we have seen this kind of results. And these are very, very satisfying results from the point of view on profitability -- profitable growth as well as the revenue growth.

Our -- if you were to now -- let me turn my attention to the sequential performance, which is also mentioned in our investor deck. And I know you have not been given time, and my apologies once again, but let me just take you through the numbers. If you were to look at the Q3 to Q4 movement in the income, in Q3, we declared an income of INR 246.87 crores, it moved up to INR 252.13 crores. And if you were to look at AS 18, INR 282.92 was our income in Q3, moved up to INR 327.68. You would appreciate that the big difference is in the vacation ownership income largely and that turns in because we do not recognize 60% now, we recognize 4%. So you would notice that the income from vacation ownership moves only from INR 76.8 crores to INR 85 crores. But if you were to look at in the same period here under AS 18 it moved up from INR 123.64 crores to INR 166.75 crores.

If you were to look at the overall year performance, the same situation is applicable, if you were to look at that. But having said that, let me stay with the quarter only. And from the quarter income numbers that I gave you, now I will give you the profit numbers so that there is a comparison.

Last year, we had a profit -- last year, last quarter, Q3, we had a profit of INR 37.63 under AS 18, it moved up to INR 49.41. This -- under AS 115, last quarter, Q3, we had INR 21.25 crores profit. It has come down to INR 14.40 at -- INR 14.42. And the reason that you will be able to see clearly is due to the fact that the profitability while in AS 18 has improved very, very dramatically because we have controlled our sales and marketing expenses.

Despite controlling the sales and marketing expenses, we are noticing that since we recognize the period cost upfront and the income does not move when you do larger member additions in line with the member additions because you only recognize 4%, therefore, the effect on profit is not the way it should be under AS 18. So that is why you see the effect on profit in the sequential growth of profit is 31%, while here in the Q3 versus Q4 in 115, you actually see lower profits.

So I just want to make it clear to the investor and analyst community that the Ind AS 115, particularly when we deliver very high numbers as you can see sequentially, we have grown by 42% in member additions, will lead to upfronting of the costs, particularly sales and marketing, and that is something that we are not able to defer and that leads to lower profit. But I don't think we should worry because if you look at our cash position because while we go for growth in numbers and that is why we will continue to follow the strategy of running the business the way we have been running earlier, it is going to lead to higher deferred revenue when we have higher members and that deferred revenue ultimately is profit in hand coming over the years.

And you know that deferred revenue pool is now upwards of INR 5,200-odd crores, and that is something we are adding to the deferred pool. More members we add, more money we add to the deferred pool, and that deferred pool income will flow into other profit and loss accounts as we move forward.

So in this particular investor deck, we have also given information on movement of deferred revenue. We have also given how revenue visibility particularly in vacation ownership will accrue, so this will make your task very easy to see what will be the next year income that we will get from the deferred revenue pool. In fact, we have stated that in the investor deck.

At this point of time, I will begin to move into the member additions. Particularly, if you were to look at our cumulative performance, our cumulative member additions are around 2,43,574. So you would notice that the last year -- rather the full year, cumulative member additions were at 2,35,000 approximately. And you have noticed that we have added 18,377, how come we are at 2,43,000. That is because we have taken a onetime -- there has been a onetime cancellation of the overdue members, which we have undertaken, and that number is around 9,556. This is a one-off overdue members. As you know that we continuously look at our situation of members and if there is an overdue member and beyond a certain point, we take a call whether this is recoverable or not. But the good news I want to share with you is that while we have canceled 9,556 members and there have been 1,039 members which have retired because they were probably the best members, they were tenure members, the good news is that there is not even a rupee impact on our P&L because these members were overdue, were fully provided for as we have maintained in the past, so therefore, this change is P&L neutral. The only change you will see is in the balance sheet where the receivable and the deferred income will go down by about INR 221 crores.

So that is the change that you will see in the balance sheet, both on the deferred revenue side as well as on the receivable side, both on assets and liability side, so that will match. But there is no P&L change. And this is one thing that I wanted to make a point that we have taken a conscious call and I think it is fair because if we are not able to collect, we should show the members that we are able to collect money from. And therefore, this is a onetime decision that we have taken to come to a cumulative base of 2,43,574.

So now I would also like to mention that the terms of -- in terms of the -- in our investor deck -- okay. Let me start with one more thing that in member additions, we are continuously following the strategy of higher down payments and lower EMI tenures. I must make this statement that over the years that we are tracking this, there is a significant improvement in higher down payment, lower EMI tenures, which is leading us to an obviously much better receivable management that we have done.

We are actually coming -- done a receivable collect transformation program with the help of a consulting firm also and that has helped us to move up our cash and cash balance to INR 572 crores. And this is despite the fact that we have our projects which have, as I mentioned earlier, in Goa as well as Ashtamudi, which are going on full steam and much higher capital outflow is happening. And despite that, we have landed out with the cash generation of -- cash position of INR 572 crores.

In fact, if you were to look at our investor deck, you will also notice that in the last 4 years, we have been able to generate at an operating level, a cumulative operating cash of INR 1,000 crores, in fact the number is now INR 1,000 crores. This year we generated an operating cash of about INR 291 crores. And INR 1,000 crores net of, obviously, dividends and other cash flows related to projects, we have -- now have a very comfortable cash position of about INR 572 crores.

So to us, this gives us great confidence that we are getting in members with higher down payment, lower EMI, better collections and also doing the right thing in terms of building the business brick by brick. And that is helping us to ensure that our -- and that can be also substantiated that despite cancellation of 9,566 members, we did not have a single rupee movement in the P&L.

I would also like to draw your attention to one of the presentations that we have done regarding our track record over the last 5 years, particularly on the PBT and PAT.

If you were to look at our profitability, we have grown our profits. In FY '15, we were at INR 105 crores. This year, we are closing at INR 141-odd crores. This is a 23% AAGR on profit before tax over the last 5 years.

If you were to look at our profit after tax, we were at INR 79 crores. This year, we are closing at INR 155 crores. This is 19% AAGR for the profit after tax growth. And mind you, during this period, we are still 0 debt and we have cash position of INR 572 crores. During the same period, if you were to look, our cash used to be just about INR 25 crores in the last 5 years. This INR 25 crores has grown up to INR 572 crores.

So this is an extremely healthy balance sheet, extremely healthy P&L that we have been able to build over the last 4 years. And I would now highlight a little bit about the market and what's happening in the member additions area, what's happening in our resorts.

I would say that -- let me start with the resorts. There is a significant improvement that we are able to do in our resorts in terms of engaging with members. We have been able to engage with members, both in terms of holiday activities, food and beverage despite reduction in our occupancy as well as the fact that we had Kerala and Coorg issue in quarter 2. You will notice that on a year level, we have been able to move up our resort revenues by 5%. And that, to me, is a great achievement, plus very, very smart cost controls and resorts has led us to a very, very good result profitability as well, which has flown through into the total profit numbers.

So resorts experience, whether it is our postholiday feedback scores, whether is our member feedback, we are doing extremely well. We did a very big innovation in our booking experience. Now we follow a logic, which is an open-phase source logic like Netflix uses, where members are recommended resorts based on their preference as well as availability and that is also helping us grow member engagement, leading us to continue to grow our referrals as well as digital.

Our member engagement has also given us a very, very big benefit. This year, our upgrades are possibly the highest ever. We have seen a very significant growth in upgrades, which is included in the vacation ownership income. So we are finding that our upgrades are on an upswing. It's much higher than the previous year. And at an overall level, the member addition driven by lower down payment -- sorry, higher down payment, lower EMI with higher upgrades, even though while the member addition is only 0.8%, on a cumulative basis, we are still growing at 6%, 7%. We are able to build a business which is solid and looking into the future with a lot of confidence.

I would like to also now mention that we have -- have to -- we have restructured the way we work, particularly in terms of our sales force. We have been able to reorganize our sales force to look into these new realities of getting higher down payment, lower EMI paying customers, better lead generation, referral, digital and also getting into markets which are going to be highly productive into the future whether it is Tier 2, Tier 3 markets and that's something that we -- it's a very detailed thing that I can take up with you wherever there is a meeting with -- whenever there's a meeting that happens with you all. So there is a lot of work happening on the sales and marketing and, parallelly, we are controlling our cost in the sales and marketing area like never before.

So I guess overall level, very, very satisfying quarter in terms of profitability and the margins and the occupancies as well. A very, very satisfying year in terms of the growth in profits as well as the growth in revenues.

I would like to spend a few minutes on the Holiday Club Resorts. As you know that we have published simultaneously the performance of Holiday Club Resorts. Holiday Club Resorts recorded a turnover of EUR 151.1 million as against EUR 165.5 million last year. There is a dip in the turnover, and I will talk about that. The profit after tax is also down at EUR 0.5 million versus EUR 4.7 million for the same period last year.

The performance of the Holiday Club Resorts was affected by an extended summer in Finland. Finland has never experienced the summer that they experienced this year, in July, August, September. And part of the reason for the low performance is that during the time, the activities which happened, particularly in resorts, people were out because Finland people love the fact that the summer is extended and they would like to spend time outside the resort and that affected our performance of the spa hotels.

Parallelly, the -- as you know that we get our customers, our prospects into the spa hotels from where they see the time-shared units as well as the fractional units, which we call them as villas. Since they were not in the hotel, it was difficult to get the time-share sales also going. So time-share sales were affected as a result of that. Parallelly, the holiday activities and spa hotels and the food and beverage-related income did not happen and that led to the drop. The other reason for the drop is that the -- there was a construction project of villas going on at Sweden. And we have mentioned this in our investor deck also that there is approximately EUR 2.9 million impact as a result of delay in construction caused by the contractor. And we had to organize new contractors to rework. And that led to a clear loss that we have been able to -- it's a one-off loss of about EUR 2.9 million. So if I were to take these 2 reasons of exceptionally warm summer in Finland as well as in Europe, affected the performance of spa hotels and time-share sales. Challenges in the construction project in Sweden, which I mentioned, which resulted in a one-off loss of EUR 2.9 million on account of rework and bringing new contractors to complete the work.

So that has been the reason for the Holiday Club. I would also like to highlight that there has been a change in Holiday Club Resorts. The -- we have a new CEO who has joined. Her name is Ms. Maisa Romanainen. She comes from a very, very checkered background in the consumer sector. And she was in the retail industry in Stockmann, in -- which is the #1 retailer in Finland. And she has also taken Stockmann beyond the Finland geographies, which is what we will look at her in the days of Holiday Club also. And she has also worked in Finnish Railways and turned that business around. And Finnish Railways is a highly profitable business, and there is a lot of [SMB] income that they derive.

So there is a very strong leader that we have who will join on 1st July, and we believe that the Holiday Club, the resorts and the company is heading for a turnaround after this -- after the new CEO joining.

And I have been personally involved in her recruitment. And I have met her -- and I have spent some time with her, and she is beginning to get into the business as we speak.

So at an overall level, even Holiday Club Resorts going forward should do much better. And of course, the only thing is we are definitely watching the summer in July, August, September, which is from all indications that we have, it is not going to be as severe as it was last time.

In Spain, in Gran Canary, we have restructured our business model. And instead of time-share sales, we are focusing on rentals and that has helped us in profitability increase by about EUR 0.7 million compared to the prior year. So that's a good news coming in from Spain, which is a part of the Holiday Club Resorts.

So I think at an overall level, a very satisfying year, looking forward into the future with a lot of confidence and very happy to field your questions. And once again, apologies for not being able to give you sufficient time to share the data in advance.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Aditya Bagul from Axis Capital.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [2]

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A couple of questions from my end, sir. One is on -- in our hotel room base, right? So we have added about 120-odd rooms in FY '19. Just wanted to understand what proportion of this would come from lease rooms. And how much have we done organically -- or on greenfield in doing so? And under the same breadth, is there a change in our thought process? Because earlier, we used to think about it as 65% own rooms and 35% leased. Is there a change in the thought process there?

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [3]

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Okay. Your first question, let me answer that out of these 123-odd rooms that have come in FY '19, how many have come through the greenfield, how many have come from the lease route. All the rooms that have happened this year have happened through the leasing route. We have been able to add a lot of destinations. As I mentioned in Q4, we added 3 destinations. Prior to that, we added another 3 destinations. So total, about 6 resorts came in during this year. We have been able to add, increase our presence in northeast. We have now Darjeeling, Kalimpong, Namchi, these were the 3 locations that we added. We added Sri Lanka. We added Ahmedabad. We added Diu. And we added Hampi. So as a result of which, we are now far more widespread.

However, I agree with you, that this year, we did not add anything greenfield. Part of the reason is that the projects of Goa and Ashtamudi, the Ashtamudi product was supposed to come in March. I had gone on record saying that it will be up and running in March. The good news is it was ready on 31st March, and I went and saw it. It's an amazing property development that we have done, about 56 rooms. And the project is complete but we could not get it going in the last quarter. And therefore, as we speak, we should be in a position to -- in Q1 open up those 56 units, which are there in Ashtamudi because they are complete. As we also speak in Goa, we have a 200-room resort under construction. Approximately 150 of those rooms should get opened sometime in the third or early fourth quarter of this year. There are a number of times we want to improve facilities and sometimes we have to go back to regulatory authorities for changes and that sometimes delays the approval process. But as far as our construction is concerned, the good news is, since we are -- our capital is not an issue, so our projects never get delayed because of capital not being available.

So -- however, this year, Akhila will give you the numbers. We have definitely spent much more money in projects. INR 150 crores compared to what we have done in the past. All of it is, obviously, not capitalized. It's a capital work in progress. So our philosophy, which is your key question, that -- has there a change in philosophy? Answer is no. We are quite happy and satisfied to be between 60% and 70% owned and about 30% to 40% lease. But remember one thing, even in lease, we do spend money on the resort. We actually refurbish it, and we run it. There are very few properties where the owner is running it. When the keys are very small, then the owner runs it. But again, he has to comply with our standards and therefore, we are quite mindful that our brand standard should not be compromised. Lease, try lease is not a problem because we run the property, and we are in full control. And we really invest money. We do long-term leases, which is as good as our own property. So when I say 60%, 40%, I think we should not worry because all that 40% is controlled by us. There is not a chance for anyone to be able to run the property in any other way that we want to run. So as far as the customer experience is concerned, that is something we are very mindful about.

Yes, certain locations, I think I mentioned earlier, it is not possible to buy land and construct because of environmental considerations because some of the locations, leisure destinations, government is not keen to allow permission. So there, we have to use the leasing route to build the thing. And I must give you one more perspective here, while we look at 3,595. Please do -- and we don't generally talk much about it, but we are running a very, very interesting experiment and it's basically yielding huge results.

We are running an inventory exchange program. There what we are seeing is we have tied up with about 70 to 80 hotels in India and abroad, in some of the finest destinations. I mean you name a destination, we are there. Okay. And just to give you an example, Agra, Mysore, Koh Samui, Phuket, you name a place, we are there. We have tied up with some marquee hotel properties and what we have done is because we are an institutional customer, we have been able to get very, very sweet rates from those places.

We don't commit any inventory, therefore, there's no P&L impact. What we do is we only show or showcase those properties to our members if they want to go to a destination beyond Club Mahindra. And they enthusiastically will pack their room nights. We will take their room nights. And there will be an exchange fee because we can't be P&L negative. And we ensure that the members are able to go to at least 70 more destinations beyond our 61 destinations.

So this has also helped us to manage, particularly in peak times, the requirement. And this is not -- it's not very significant in terms of room nights but what it does is a sense of choice. And this is not to say that our inventory movement or other increase should be slowed down because we have an inventory exchange program, that is not the message I am giving you. We will remain committed to growing our inventory in line and little ahead of member additions. However, these are external arrangements that we do just to create a choice. And this is not very significant today in our business for us to get into the details. But it's just a very consumer-friendly initiative that we have done, member-friendly initiative we have done.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [4]

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Great. So as I understand, we have a pipeline of about 580-odd rooms. Would it be safe to say that that would be coming on stream somewhere in FY '20?

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [5]

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So out of the 500, if you recall, 150 now there are -- already came in last year. So that made us go to 385. Out of that 150 I mentioned will come this year, plus 54 of Ashtamudi, so another 204 should come this year, which is the '19, '20, FY '19, FY '20. We are definitely looking at 200-odd units coming through that. So that takes away about 315 units of that, and we are left with about 185 units. The balance, 185 units, was coming through 2 projects. One is in a project in [PO], which is 40 units. Another 140 project unit was supposed to come out of Kandaghat. Now, Kandaghat, there have been some developments on the regulatory side and as a result of which we could not. But as we speak, there are some positive developments happening. So the moment we get the regulatory approvals, we will go ahead with that 140 expansion. The PO project also, as we speak, we are breaking the ground, and we are moving ahead with another 40 units. So that will take us to the full 500 units program.

While we speak, I must make a point that we have sufficient land banks available. And as we speak, at least, we are planning to break ground in at least 2 more greenfield locations, which I'll be able to share with you in some time once we are able to get a clarity from within. So -- and that would, obviously, add to 500 number, which will be even more.

So as far as we are concerned, we have committed to capital expenditure, which is required for building our business. We are also committed to acquiring resorts if we can get good quality within India, abroad. And the last but not the least, we are very, very happy to increase through leasing route also if the resort is of great quality. And we can invest money, get long-term lease. And we invest serious money in that to bring the experience up to the level. So we will use all the strategies to keep growing our room additions in line with our member additions or maybe even more actually.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [6]

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Perfect, sir. Sir, and if I may squeeze in one question. We've gotten one-off cancellation of about 9,500 members. If I recollect correctly, the last time we enter -- took part in such an exercise, it was 2014. And I just wanted to understand that -- whether there are still a set of members which are noncompliant because of which we could see some kind of cancellations going forward as well. So over and above the regular run rate that we see.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [7]

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Yes. So one thing I wanted to tell you, Aditya, the way it works is that we anyway -- whatever number we give you, these are met of cancellations, which are happening as they happen, so they're like-to-like. The onetime cancellation, if I recall, in 2014 was not of this order, and I don't think there was any members which were canceled. So what I remember is there was some accounting adjustments that were done and that was highlighted, I think, properly. We can go back and maybe spend off-line some time with you. But I can tell you from the time I have in my memory, this is the first time we are doing this because we realized that after we ran this transformation program, that -- this consulting firm, we realized that these members who are overdue beyond a certain period are not likely to pay. And the good news was that because we have very prudent provisioning policies, because we have -- as you know, the corporate governance norms are extremely high, so we are suitably provided for. And if you notice, despite these cancellations, there is no single rupee impact in P&L. For me, I think that is what you should really look at as to if the company is providing for estimated credit loss, which is the methodology that has been there in the past and going forward also, that if we are suitably providing for our -- the guests who are not likely to pay -- and there is a methodology we follow. And that methodology fortunately has worn out in the last 3 or 4 years, and it has played out well. For the fact that when we canceled these numbers, there was not a single rupee movement in P&L. To me, that is very, very satisfying. And in a business where we have 2,40,000-odd members, I mean this translates to only 3%, 3.5% of our total base. And I'm very comfortable with that, and I think that is the right thing to do.

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [8]

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Sure, sir. But just, Akhila, ma'am, if I could ask 1 question. Would there be a significant cash flow impact because of this? Because most of the members would have -- already had paid their EMIs or ASF component. So just wanted to understand what would be the cash flow impact for these 9,500 members.

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [9]

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You're talking of a cash flow positive impact? Or a cash flow negative impact?

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Aditya Bagul, Axis Capital Limited, Research Division - Assistant VP of Midcaps [10]

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Cash flow negative impact.

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [11]

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Okay. So what we have done is, like Kavinder mentioned, we've done a fairly detailed assessment before conducting such an exercise. And we've been fully provided. So in terms of a cash flow impact, we will not have any cash flow impact because all these people have not been paying up, and we are very well governed with the rules and we've been following up with them. We send them reminders, notices and all. So we will not be having any cash flow impact on account of this.

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Operator [12]

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(Operator Instructions) The next question is from the line of Nihal Jham from Edelweiss.

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [13]

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My first question was the -- just the start of the quarter. I know in the opening remarks, we made the comment that you're looking at moderating our sales trend for this quarter. But if I look at the other expenses, they have sequentially gone up from INR 138 crores to more like a INR 150 crore kind of a number in Q4. So just wanted to understand what is the reason for that increase.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [14]

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You're looking at the sequential numbers in AS 18?

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [15]

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115, the one as they've been reported. This quarter as well as last quarter.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [16]

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Q4 versus Q3?

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [17]

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Yes.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [18]

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INR 38 going up to INR 55, are you referring to the sales and marketing expenses?

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [19]

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Yes, the total other expenses.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [20]

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Oh, total other expenses.

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [21]

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So Nihal, again, apologies for the delayed uploading of the data. So what you are seeing possibly is the Regulation 33 upload format. We've also uploaded the investor deck. And we've split it up into the components, the other expenses, where we have given the details of sales and marketing, rent and other expenses. So what really has gone up in the other expenses is the component of sales and marketing cost, which again, if you compare to Ind AS 18, the same sequence, it would be higher but definitely gives us far more in terms of the profitability. If you see all other expenses have been either flat or fairly well contained on a quarter-on-quarter basis.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [22]

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So I would just add one more point, Nihal, to this. Since the movement is only in sales and marketing expenses, even if you were to do a last year comparison on Ind AS 18, we have seen a movement. And that is what we have done in the investor upload, which unfortunately was not...

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [23]

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What you can do, Nihal, is you can possibly refer to Slide 33 of the investor deck.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [24]

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And that has an answer to your question. And it is very clearly correlated to 42% increase on a sequential basis of member additions, directly correlated.

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [25]

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Okay. Fair enough. I got that, the sales and marketing spend. Now just coming to our member addition. I know that we've sequentially seen an improvement but generally in Q4, as an additional, always been much higher than Q3. And even if I look at it on a yearly basis, the point is that there has been a degrowth in the member addition. And even if I look at the last 3 years, which is '17, '18 and '19, the annual run rate of addition has been around the 18,000 rate. So I just wanted to understand your thoughts on the growth aspect of members and what do you think could be the reason for this.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [26]

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Yes. So 2, 3 points I want to make. If you look at Q1 and Q2, we were growing. We were growing in double digits. In Q3, we were down by 5% and Q4 on a Y-o-Y basis, we were down by 10%. We have definitely faced headwinds in Q3 and Q4 in terms of member additions. Part of the reason is that we are continuing to focus our strategy of higher down payment, lower EMI, we are not letting that part go. And we are very, very clear that that's one thing that is sacrosanct. We will drive that. And we will not get into a situation where by reducing the down payment, we can show a higher number. So that's one thing.

Second, having said that, in terms of sales and marketing, we'll have to restructure some of our sales and marketing operations as a result of this challenge of growing from 18,000 and beyond. I only want to make a point that 4 years ago, we used to do 12,000. We moved up to 16,000, and then we moved up to 18,000 rather too fast. When we look at our systems, processes, capabilities, probably we needed some time to consolidate it. When I say some time to consolidate, consolidate what? We are consolidating on the right type of member additions, which is higher down payment, lower EMI, better collections, people who will eventually pay us in time, which is what has led us to a significant improvement in our cash position, which is what has led us to a significant improvement even in our profitability because we have been also parallelly controlling sales and marketing costs. We have been driving sales and marketing cost containment. We have been driving cash collection. We have been driving the right type of members and you can see that. That whether it is our PBT growth on a CAGR basis of 23% and on a PAT growth of about 19%. That is all happening because whether it is our ASF collection, whether it is our delinquency, whether it is our usage of our membership, we are driving consumption of our existing members in resorts. We are driving holidays. We are driving -- getting the members who can pay the right down payment and a lower EMI. We used to have many members at 48 EMI. We have shifted that 48 EMI, a large percentage of them into 36 EMI. So we are doing constantly, as I said, business process reengineering to get members who are going to be with us, stay and enjoy. So the improvement over the last 2 years, if I may say, '17, '18 and '18, '19 is in this area. And that has led us to the performance that I've talked about because delivering PBT at a 23% CAGR over 5 years and PAT at the rate of about 19% over the 5 years could not have been possible had we not been doing the right things, both on member additions and cost containment and resort experience. So it's a simultaneous act, which is going on everywhere, and simultaneously increasing our inventory to -- from 2,800 to about 3,500. So as I see it, as for the long-term business, we see things not necessarily quarter-on-quarter, we are looking at how we are adding cumulatively to our member base and how much are we collecting out of them and how much are we ensuring that they are holiday-ing at our place. So we are constantly focused on those metrics. Definitely, we would like to grow our members beyond 18,000. And that is something that we have to look forward in this coming year.

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [27]

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Sir, would you say that the addition of the new membership category that we started this year, that could add to any growth in the coming year?

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [28]

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Are you talking about the Bliss product?

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [29]

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Bliss product, yes.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [30]

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Yes, yes. It's not -- Bliss product, it's small today. It is, as you know, a 10-year product. It's a points-based product, targeted at senior citizens. When I say senior citizens, I mean above 50. So no offense to anyone who's above 50 because I am also above 50. But having said that, we are trying to see whether this product is getting acceptance, and we are finding there is not only good acceptance, a very good behavior in payments also. 50% of the members who were coming on this product are paying full upfront. There is no EMI. Okay? And the -- not only they are coming upfront, the balance are coming at maybe 12-months program, where there is anywhere no interest that is charged. So it's a free interest 12-month EMI. So we are finding that 90%, 95% of the members are able to pay this upfront. It's a very -- probably affordable at that level of income bracket and that level of age bracket. So we are seeing momentum. But let me be honest, we are not going all out and trying to grow that for the simple reason we believe that our core 25-year product is a significant cash generator. We do not want a very significant cannibalization to happen as a result of Bliss into our core 25 because we are keeping a very sharp eye on our operating cash generation. And for us, that is also as important as adding members in terms of numeric count.

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [31]

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Fair enough. So just one more question.

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Operator [32]

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(Operator Instructions)

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [33]

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I would -- just want to take this last question around then I'm going to queue. Not -- you mentioned about the profit going at 40%. If I look at the annual operating cash flow, that is actually fallen from INR 330 crores to INR 290 crores. So I don't think we've seen the details in the presentation, but could you allude to why the OC has fallen for the year?

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [34]

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Yes. Okay. INR 331, INR 291 is the question of Nihal, the operating cash.

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [35]

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So that's right. So basically, there are a couple of things in this. We have done some additional investments into our resort renovations. We've done more on CapEx and stuff like that. And therefore, it was even -- the cash position has grown from INR 265 to INR 470 and has moved INR 572. This is on account of, as I said, 2, 3 things, more renovations in a couple of our resorts. Adding to things like -- our CapEx has also grown at INR 150. Plus there are certain investments that we've been doing on softer stuff, improvement in our IT systems. So all these, I think, have little -- slowed the -- from INR 332 to INR 291. But I think INR 291 itself is a very good number given the fact that if you say that our -- it's almost equivalent to my PBT in Ind AS 18, it's the same number. So I think we're fairly comfortable on that.

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Nihal Mahesh Jham, Edelweiss Securities Ltd., Research Division - Research Analyst [36]

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This CapEx will be something that wouldn't be counted in this INR 290 crores, I guess?

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [37]

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Sure. I have a -- I agree with that. The CapEx will not be counted. And I also, therefore, referred to my cash position moving from INR 265 to INR 470 and moving from INR 470 to INR 572 this year. So it's a result of multiple things, which includes, obviously, CapEx and also other things. Coming back to INR 291, I think that's also a fairly good, healthy number given the fact -- I mean it's -- if you look at our PBT for the year, INR 207 crores.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [38]

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No, INR 240 crores.

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [39]

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INR 240 crores?

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [40]

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For this year.

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [41]

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For this year. It's almost more than the PBT that we have done.

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Operator [42]

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(Operator Instructions) The next question is from the line of Chockalingam Narayanan from BNP Paribas Mutual Fund.

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Chockalingam Narayanan, BNPP Asset Management India Private Ltd - Head of Research [43]

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Two questions from my end. One on the balance sheet front. That is the transition result, which is being created. Does that mean that we could start paying out dividends? Or (inaudible) clients any dividend (inaudible)? So if you can throw light on that one. And a related question is -- related to the accounting changes, does it defer tax liability of about 2 verticals, which has come up in the balance sheet from 0? So if you can point out, highlight what's the primary reason behind this. And secondly you've also mentioned on member additions on the underlying business front, things have been reasonably stable. One point that you mentioned on member additions, if there's 1039 members who kind of retired. Now is it -- have they come back into the system? Have they renewed their membership? Or -- because being -- having been in the system for so long, them renewing will -- is also a testament to your product. So if you can highlight on these metrics, that will be really helpful.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [44]

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Okay. I'll handle the first question; then second question, Akhila will handle; and the third question, I'll come again on the members 1,039.

The first question that you asked is about the dividend. I think in my opening remarks, what I've done is I have tried to explain -- and this is also there in our press release. With the adoption of the new revenue recognition policy as for the standard, which is Ind AS 115, we realized that it's obvious that the deferred revenue and deferred cost had to be recomputed. And when you compute right from the beginning of the -- our business because our contracts are still in force and the standard is applicable to all the standards, all the contracts, which are imposed as on 1st April 2018, since -- after the long 10-year product. All the contracts that we had signed with the members are subjected to this. Now when you restate them, there is a transition difference that will get created, which is of the order of about INR 1,210.45 crores. The moment you do that, what it does is that it actually creates a situation under Section 123 (1) of the Companies Act, which probably does not realize that such a situation can happen as a result of transition into a new accounting standard. When you transit into a new accounting standard and when you have a transition difference of INR 1,210 crores and if your reserves are lesser than that, you are in a situation where you are not allowed to declare the dividend. What we are clearly saying is that this company has been regularly declaring dividends every year since 2006. We not only generated profit in the past year, also generated profit this year even after moving into the new standard. And we have healthy cash flows as are evident. Therefore, this transition, this different number should not ideally impact us, our desire to give dividend because we are in a position to give dividend. We have made profits. And as for our dividend distribution policy, we would definitely want to give dividends. Only unfortunate part is that if you were to go by the literal reading of the Section 123 (1) of the Companies Act, it does not allow us to declare dividends unless we see clarifications from Ministry Of Corporate Affairs, which we intend seeking. We will have to keep this decision pending until we are able to get clarification. So that, to my mind, explains the dividend distribution.

I would urge Akhila to explain you the question of this INR 240 crores deferred tax point, which has been raised.

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [45]

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So the deferred tax basically -- there are 2 parts to the deferred tax. And so we had at the time of the transition created -- I mean -- so one of the things of the transition was to recompute the deferred revenue from the inception. So when my deferred revenue got increased, we had to create a corresponding deferred tax asset in our books as per the accounting and the tax laws. We also have revalued our land during the year as part of a change in accounting policy. This, again, gives rise to a gain, a revaluation gain for which we had to create a corresponding deferred tax liability. Generally, the deferred tax assets and liabilities can be netted off. But according to the rules and regulations, the liability created on account of the revaluation of gains cannot be netted off because they are different types of -- or different classes of tax assets and tax liabilities. So therefore, in our balance sheet, we have 2 line items, deferred tax assets as well as deferred tax liability. But in our investor presentation, for ease of reference, we have [plotted] together under head deferred tax asset. I hope that clarifies your question.

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Chockalingam Narayanan, BNPP Asset Management India Private Ltd - Head of Research [46]

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Sure, ma'am. Just -- so effectively what you're saying is you need to pay the effective taxes to the remaining 33%?

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [47]

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So as per the accounting norms, the tax calculation as per the books will be at the -- there will be a current tax and a deferred tax. And therefore, effective rate of tax on the book profit will be some -- deferred from what is the actual tax under the income tax calculation. Now in our case, it is not as simple as that. This deferred tax asset has arisen because I have recomputed my deferred revenue right from the past. And this is an -- the revenue on which I've already paid my tax liabilities, right? And therefore, I end up creating a deferred tax asset because I gave the benefit of that going forward.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [48]

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Okay. Now I will come to the answer on the question regarding 1,039 members retired. What we do is that we constantly look at members who are on the verge of retirement, and we do create offers for them to continue. What happens typically is that there are people who, based on their life stage, may have grown out of the product. Some of them have moved out of the country as well. Having said that, I want to mention, since you mentioned that it also reflects on the strength of the product proposition, our strength of the product proposition comes through the fact that we have a very significant part of our members upgrading. And we believe that the huge momentum that we have in our [place] is a clear testimony to the fact that our proposition has impact. And these 1,039 members have chosen to retire, and we are constantly in dialogue to see whether they may want to upgrade. But some of these members came into a product called ZEST, which was a 10-year product and for the low value product. So they were anyway probably not really members who could graduate into the 25-year product because we no longer sell that product, which was a 10-year product.

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Operator [49]

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The next question is from the line of [Rajesh Beladia] from [Gadid Capital].

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Unidentified Analyst, [50]

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Question is on the deferred revenue, Slide 35, where you had mentioned less than 1 year is INR 341 crores as of March '19. So this INR 341 would be the -- to be booked, and this is the minimum amount in FY '20 for VO. Is that -- is my understanding correct?

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [51]

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Yes, your understanding is correct. So what we have done to explain this much better is that the entire deferred revenue pool because there have been some of the questions from the investor community in a lot of our past meetings as to what is the membership profile and how does it pan out, we thought it would be better to give this kind of an information as it will help you in modeling the whole P&L better. So this INR 510 crores, which is sitting on my books today, base -- sorry, INR 5,000 -- INR 5,100 crores, will it spread over my 2,35,000-plus members and how I will be able to book this revenue going forward is what we've tried to depict. So in the next 1 year, we would be booking INR 341 crores. And going forward, for this existing member base, the rest of the amount is what will come in.

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Unidentified Analyst, [52]

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And this is getting reduced by -- from 1 to 2 years, 2 to 3 years mainly because there would be a retirement in -- going forward?

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [53]

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That is correct. There will be a -- so this is on as-is basis of the pool, so there will be people who will retire. And what you're saying is perfectly right. And therefore, it will keep coming down. Again, that will be a mix of the members between various scenarios that will be a mix of people who purchase at various points in time, upgraded at various points in time. So this factors a whole host of those things.

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Unidentified Analyst, [54]

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Great. Next question is on HCR. Is -- will HCR require any funding from MHRL (sic) [MHRIL] in next, 1, 2 years?

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [55]

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So as we see -- going forward, we work very closely with the HCR to see that such a situation does not arise. They seem to be in a position to manage their cash flows fairly well. It depends on our strategy, if they were to go aggressively into newer markets, we will have to see. But fortunately, their relationships with the banks, which they have relationships with in Finland are extremely good, and banks are quite satisfied in lending the money, which is in line with their working capital needs. I also believe that the fact that we -- they are -- their dividend covers our interest cost, as we have mentioned earlier. So as you know that we did not borrow, we have only given corporate guarantees. And go on a consolidated level, you do see the debt on our books. But these are guarantees, and these dividends for all these interest loans have been paid out of the surplus generated by Holiday Club.

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Unidentified Analyst, [56]

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Okay. One last, if I can squeeze in. Out of your 2,40,000 members, how many would be paying their ASF on time or within, say, some predicted year? If you can give some idea on that.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [57]

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So normally, we do not share what is the status of ASF being paid or not because the way it works is there are times when people do not pay ASF, they are not planning to holiday. But eventually, our policy is very clear that they cannot holiday unless they clear all ASF dues of the past. So the good news for us is that there are times when we get members paying 3 years at 1 shot. And sometimes, there are members who have not paid the first ASF but they'll pay the second, and then they will come back and they will have to, obviously, pay the first also. So what happens is, there is a movement that happens up and down both in terms of the overdues that are there in the ASF area. Again, here, we have very, very strong provisioning policies, which are in place, which are approved by our auditors and our board, where we continuously see this if there were to be people who would not be paying the ASF over a longer period of time. By the way, the -- a very simple way to look at this is if you can see the growth in the ASF income, that is a fairly good surrogate of how we are able to ensure the overdues at a certain level because if the overdues were higher, it will lead to provisioning and the income would get impacted.

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Operator [58]

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Ladies and gentlemen, due to the time constraints, that would be the last question. I now hand the conference over to Mr. Kavinder Singh for closing comments. Thank you. And over to you, sir.

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Kavinder Singh, Mahindra Holidays & Resorts India Limited - CEO, MD & Executive Director [59]

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I would like to thank all of you who came in for this conference. It's unfortunate that we could not stick to our time, which was originally at 6 p.m., and we started at 6:45. And the entire -- apologies from our side as a team. We would endeavor to do better. This has never happened in the last 4 years that we have been. Unfortunately, the Board meeting ran a little over in terms of time. And therefore, the uploads happened a little late. And I'm extremely happy that all the relevant questions related to our business were asked, and we look forward to these interactions because they are huge learning opportunities for us.

With that, I would like to sign out and say thanks to once -- to all of you from the entire team here, which includes Mrs. Akhila Balachandar and Dhanraj Mulki, who is our Company Secretary. Thank you very much.

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Akhila Balachandar, Mahindra Holidays & Resorts India Limited - CFO [60]

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Thank you.

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Operator [61]

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Thank you very much.