Kamat Hotels

Kamat Hotels seems to be a cheaper buy as compared to its peers. Investors can accumulate the stock at current price

IT IS time for a consolidation in hotels players as business has gained its growth momentum. Some players are doing away with brands that are not yielding good revenues, while others are lightening the debt burden on their books.

    At present, one added advantage players have is the discount in the peak room rates in comparison to last year's rates. Besides the usual big players, which are natural beneficiaries of a growth cycle, boutique hotels are also expected to command higher room rates and greater occupancy. One such player is Kamat Hotels, which owns and runs chain boutique business hotels in Western India. In the March 2010 quarter, the company reported an improved occupancy at its property and its now working to lighten its debt burden.

BUSINESS

    Kamat Hotels has four hotel brands — the Orchid, catering to the 5-star segment, the VITS, a luxury business hotel brand in the 4-star segment, Gadh Hotels and Lotus Resorts. The hotel at present has an inventory of 245 rooms and is planning to add 120 rooms by October 2010. Revenues of its business segment brand VITS Mumbai grew to Rs 7.7 crore in the March 2010 quarter in comparison to Rs 6.13 crore last year.

    This increase in revenues was mainly due to increase in the occupancies to 83% from 56% in the corresponding previous period. At present, the company operates (owned and managed) 1,593 rooms under the name of Kamat Hotels. The company has signed an agreement to manage 150 rooms property in NCR region, which is expected to open in June 2010.

DE-LEVERAGING BALANCE SHEET

    The company has a total debt of Rs 400 crore, which includes FCCB worth $18 million (approx Rs 81 crore) issued in 2007. It now plans to convert this in equity as a price Rs 135 per share. Though this lead to equity dilution of around 46% and the promoters' holding will fall to 51% from 74%, the company's debt will be ease considerably. The debt-to-equity ratio is likely to fall to around 1.0 from 1.69 as of FY09.

    It must be noted that, nearly 15% of the debt on its books actually represents the membership fee from customers to its holidayshare programme. Under the scheme, members pay upfront joining fee of around Rs 1 lakh, which entitles them 7 days of free stay every year for the next 25 years at its VITS brand of business hotels. The amount is shown on the balance sheet as unsecured loans. A few years ago, the company had acquired hotels sites in Coimbatore, Amravati, Raipur and Nagpur. It plans to sell-off these land parcels and use proceeds to further reduce its debt burden.

GROWTH PLANS

    The company now decided to focus on Mumbai, Pune and Ahmedabad market and plans to expand its Orchid brand of five-star hotels at these locations. By the end of FY11, the company plans to set up a 400-room

Orchid hotel in Pune, of which 120 rooms are already functional. The company expects to yield annual revenues of around Rs 150 crore from this property. The Orchid brand contributes around 58% to the company's topline. In the March '10 quarter, revenues from the brand grew by 25% on a year on year basis. The occupancy rates in the company's flagship brand rose to 78% compared to 56% in year-ago period.

VALUATION

    The stock is currently quoting at a price to book value of around 0.88, which makes it one of the cheapest in the small hotels category. If measures aimed at reducing debt falls in place, the company will emerge as a debt-free that may lead to its re-rating. Investors are advised to accumulate the stock at current market price.