Stock Review: Oriental Hotels

AFTER few quarters of weak business, the travel and tourism business is once again looking up. This was clearly visible in the June '10 quarter results of hotels companies. Hotel Leela Ventures, for instance, reported an eight times jump in its net profit in the June '10 quarter. It is most likely that most leading hotel chains would come out with better numbers for the June '10 quarter. This makes mid-size hotel companies such as Oriental Hotels (OHL) attractive investment candidates given their strong balance sheet, low debt and relatively high dividend yield.

BUSINESS & FINANCIALS:

Oriental Hotels, promoted by the Reddy group of South India, has a technical agreement and operating contract with Indian Hotels Company, the country largest hotel chain. It operates four Gateway hotels, Taj Coromandel, Taj Malabar and Fisherman's Cove in Andhra Pradesh, Chennai, and Karnataka and Kerala, amounting to around 500 rooms.

   After weak business for few quarters, the June '10 quarter is likely to be one of the best for hotels chains in many quarters. Take for instance, Hotel Leela Ventures. It clocked eight times jump in its net profit and 25% jump in its revenues in the quarter. Just as Oriental Hotels, the company also has hotels in Chennai and Bangalore. This suggests that revenue per available room and occupancy levels in these locations have improved. Hence, it is quite likely that the June '10 quarter for Oriental Hotels (OHL) would definitely be a better one on year-on-year basis.

   In the coming quarters, the company will also benefit from an expansion in its Gateway hotels. Indian Hotels Company, that holds 19% in Oriental Hotels, had announced plans to expand its Gateway hotels to 50(13 hotels by 2012) from 20 at hotels by present. Being an associate company of Indian Hotels Company, Oriental Hotels would benefit from this expansion.With improvement in the locations such as Chennai and Bangalore on revenues front, this expansion drive will certainly boost the company's bottomline in the coming quarters. For the March '09 quarter, OHL's net profit zoomed up by 59% to Rs 12.5 crore from Rs 7.8 crore during the corresponding period a year ago. Also in March '09, the company's revenues increased from Rs 53 crore to Rs 61 crore. Comparatively, the March '09 quarter was better for Oriental Hotels than that of its peers.

VALUATION:

Oriental Hotels is one of the cheapest stocks available among the mediumsize hotels category. At present trading at a P/E of 24 times, while its immediate peers like Royal Orchid Hotels and Taj GVK Hotels & Resorts are trading at a P/E of 26 and 29 times respectively. Also on the earnings per share (EPS) front, the company is far better than its peers. At present, the company's stock is yielding an EPS of Rs 12.96, while Royal Orchid Hotels and Taj GVK Hotels & Resorts are yielding an EPS of Rs 3 and Rs 5, respectively. Long-term investors should buy into the stock at the current market price.