Indian Hotels

Having weathered the economic downturn,Indian Hotels has come off its high valuation. Not enough room for further downside makes it a good choice

THE best time to buy in a sector or a company is when it’s out of favour with the market men. This is because the valuations would be ultra-low and most of the bad news could be already factored into the stock price. The hospitality sector is in a similar situation right now. The global economic slowdown and the resultant fall in foreign tourist inflow and corporate travel has hit the sector hard. Most listed companies reported 30-70% fall in net profit in the June ‘09 quarter. The top line fell by 10-15%. Things can’t get worse from here and most of the leading hotels stocks are trading at their cheapest levels in many years. At the current valuations any minor positive news may trigger a rally in these stocks.

And what can be a better bet than the industry leader –Indian Hotels Company. The Tata group company has been one of the worst underperformers in last three years and is right now one of cheapest stocks in the sector.

BUSINESS:

With nearly 100 properties and room inventory of 11,546 rooms (and growing), Indian Hotels is set to emerge as one of the leading hotel chains in the world. It follows distributed risk model wherein hotel properties and related businesses are housed in a clutch of associate companies, subsidiaries and joint ventures. These include Taj GVK, Oriental Hotels, Benares Hotels and Roots Corporation, among others. The company also holds a significant stake in BJets, Asia’s largest corporate air travel provider. The company has holds significant interest in Oriental Express Hotels, a US based luxury hotels chain.

For FY’ 09, the company plans to add nearly 1,800 rooms. Internationally, the company has hotels, among other locations, at USA, Australia, Maldives, Malaysia, UK, Sri Lanka, Africa and the Middle East.

FINANCIALS:

In FY ’09, the average occupancy of Indian Hotels fell to about 66% from 73% in FY ’08. The company understandably had lower average room rates (ARR) during the year, which resulted in a 38% drop in the stand-alone net profit at Rs 234 crore. For the quarter ended June, the company’s net sales and net profits plunged by 30% and 73% to Rs 262.4 crore and Rs16.4 crore, respectively. This quantum in plunge in its earnings was expected considering the severe impact of global slowdown and terrorist attacks in Mumbai in last week of November ’08. The company reported a operating profit margin of 35.7 during FY2009, which is still higher than it maintained in FY2006, which was around 34%.

FEW DOWNSIDE RISKS:

A sift through the historical performance of Indian Hotels Company shows that at its peak, its share was available at around five times its book value and in downturn the stock is trading at around 1.4 times its book value. This limits a further downside in its stock price. In fact, it is true for most hotel stocks. Indian Hotels Company, being the industry leader it would be first to gain momentum once good news starts flowing. Sentiment in the form of major events like the Commonwealth Games planned in Delhi in 2010 would require addition to the inventory of rooms, which would help the hotel industry, and in particular Indian Hotels. Recently the company acquired Sea Rock Hotel, a property to its existing Taj Lands End hotel in Mumbai. It plans to integrate the two sites in three years. Once completed, the combined property may emerge as one of the largest hotels, convention and high-end retail centre in Mumbai and will help it to consolidate its market share in the central Mumbai market. The funds for the acquisition came from last year’s Rs 1,400-crore rights issue and internal accruals. With this acquisition now, the Taj Group now five hotel properties in Mumbai. The site is also close to newly opened Bandra-Worli Sea Link which has drastically reduced the travel time from the Mumbai airport to the hotel site.

VALUATION:

Currently, IHCL’s stock is trading at around 27 times its earning per share in last 12 months. Though its looks on the higher side, investor should keep in mind that, there has been a sharp decline in earnings in last few quarters. Even and when recovery begins, the company will report a sharp rise in earnings and forward earnings will fall to single digits. At its current market price, the stock is trading at around 1.4 times its consolidated book value. The corresponding ratios for EIH and Hotel Leela are 2.93 and 0.60, respectively. All this makes Indian Hotels an interesting buy for long-term investor looking for value buy on the Street.