Annual Report Analysis
Large increase in membership revenue: CCIL’s 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 Rs 70600.
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 FCCB’s 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 Rs 270, 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 Rs 797 (8x FY10E).
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 Rs2.67 bn 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)