Asian Hotels

Asian Hotels could benefit post demerger. Its P/E compared to the peers is pretty attractive

Delhi-headquartered Asian Hotels is a leading owner and operator of five star hotels and resorts in the country. The company’s properties are operated by Hyatt International that provides marketing, branding and management services. Beginning with Hyatt Regency in Delhi, the company now has one property in Mumbai and Kolkata with total room inventory of around 1,200.

RE-STRUCTURING:

The company is in a restructuring mode and it will be divided into three independent companies each owned by its Asian Hotels key promoters –the Jatia Group, the Gupta Group and the Saraf Group. These three promoter families together own 63.6% stake in the company. Post de-merger, nonpromoter shareholders will get an equal numbers of shares in three companies. For every existing 10 shares held in the company, the shareholders would be allocated five equity shares in each of the three entities post the demerger.

The flagship Delhi property will remain with Asian Hotels; Kolkata property and development option at Bhubaneswar besides some cash will be spun off into Vardhman Hotels, while Mumbai and development option at Bangalore and some cash will be merged into Chillwinds Hotels. In the past all major demergers and spin offs such as the one in Reliance Group and Bajaj Auto have created shareholders value and there’s nothing to believe why it would be different in this case.

FINANCIALS:

The company’s net sales have grown at a CAGR of 11.7% in the last three years ending FY09. Its net profit has increased at a CAGR of 47% in the last three years. The company in March 2008 entered into a new business segment of power generation. With the exception of FY08, when it cut its dividend pay-out by 90%, the company has been generous in sharing profits with shareholders and never missed dividends in last 15 years.
The company is into cash conserving mode and is parking its free cash flows in safe investment vehicles.

GROWTH PROSPECTS:

With Commonwealth Games scheduled in Delhi next year Asian Hotels is likely to be a major beneficiary. With over 500 rooms, Hyatt Regency is the largest hotel in NCR region and in FY08, it accounted for nearly 48% of Asian Hotels’ annual revenue of Rs 513.5 crore. The company’s cash flow from operations has grown at a CAGR of 30% to Rs 176.56 crore in the last three years till the year ending March 2008. It has been consistently generating positive cash flows from its operations.

VALUATION:

In last one and half months, the stock has appreciated by nearly a third, but at a price-to- book value of 1.23, it’s still one of the cheapest stocks in the sector. Moreover, it’s nearly debt free and flush with cash unlike many of its peers. At its current stock price of around Rs 400, its P/E is around 14 times its earnings in last 12 months. In comparison, its peers such as EIH, Taj GVK and Hotel Leela is trading at P/E multiple of 20-30 times. All this makers it an attractive buy for long-term investors.