Stock Review: Indian Hotels Company

Higher income visibility in future justifies Indian Hotels Company's high valuations. Long-term investors can stay put in the stock

 

INDIAN Hotels Company is poised for strong growth in the near term. The company had to manage without a portion of earnings from its South Mumbai property for at least eight quarters, besides the renovation of its overseas hotels had impacted its business so far. While the Mumbai property is now refurbished and reopened, overseas properties are also up for business. Now that both these segments are expected to see a steady revenue stream, investors may witness a better performance by the company going ahead.

   Indian Hotels Company (IHC) is one of the largest hotels operating under its flagship brand the Taj. The company, at present, operates around 103 hotels, under seven brands having a room inventory of over 12,000.

INVESTMENT RATIONALE:

Two factors augur well for IHC at present. First, the re-opening of Mumbai Taj hotel would provide new vistas of earnings, which for a long time were absent since the hotel was under renovation. Second, the company has also competed renovation of its hotels in the US and other destinations. These factors are expected to benefit IHC in the next four-six quarters.

   Another positive factor is the revival in the tourist arrivals. According to the web site of ministry of tourism, there has a 32% increase in foreign exchange earnings due to tourists' arrival in January-July period on a year-on-year basis. The next two quarters encompass the peak season for hotel business. This augurs well for IHC.

   The reopening of Taj Palace in South Mumbai is expected to add close to 100 crore or nearly 10% to IHC's topline in FY11. The company's hotel now would operate fully on around 500 rooms, which includes the Palace wing also.

   Also, given the pick-up in demand, IHC is well positioned to increase its peak room rates, which have remained stable so far. In the current fiscal, the company would add around 1,488 rooms. It would launch Taj Falaknuma Palace (60 rooms) in Hyderabad and a Vivanta (331) project in Yeshwantpur, Bangalore, by February 2011. The remaining rooms would come from its associate companies that share its kingpin brand.

FINANCIALS:

The June quarter is slack period for the hotel business. Besides the seasonality factor, due to closure of its Mumbai Taj property, the company recorded lesser profits in comparison to the same period last year. In the June 2010 quarter, the company's net revenues rose by 25% to 328 crore. Its net profit, however, fell sharply by 79% to Rs3 crore.

VALUATION:

Keeping the growth prospects in mind, long-term investors should hold onto the company's stock despite the fact that it is quoting a high price-to-earnings ratio of 56 times on a consolidated basis. Higher income visibility in future justifies its higher valuations. Long-term investors may remain invested in the stock.