Stock Review: Kamat Hotels

Stock Down 20% in One Month, But Fundamentals Strong

 

THE stock of small-size hotels player Kamat Hotels has fallen by around 20% in the past one month following the weakness in the broader market indices. The fundamentals of the company, however, remain intact. The company has plans to expand its capacity by 20% over the next year. This, in the backdrop of strong demand, augurs well for the stock in the medium term.

 
   Kamat Hotels owns the luxury 5-Star brand Orchid and 4-Star brand VITS. Both these brands cater to business travellers and contribute more than 75% to the company's top line. The company is in the process of expanding its capacity by 270 rooms from 1,490 rooms. Over half of the new capacity will come on stream by the end of December 2010.

   The new capacity comes when average hotel room rates are rising. Hotel players are increasing room rates in response to firm demand from business travellers and tourists. Kamat Hotels is also expected to charge higher room fares since its room occupancy has improved from 56% to 84% over the last year. Moreover, the next two quarters appear to be lucrative for hotels players considering the holiday and travelling season in most parts of the country.

   These factors augur well for the top line of Kamat Hotels.

   While the operating environment for the company is improving, it is also taking steps to reduce its debt burden. It plans to repay one-fourth of its over . 400 crore debt through sales of five lakh square feet land in Pune, Maharashtra.

   A further reduction in debt is expected after its foreign currency bonds worth . 200 crore are converted into equity over the next two years. The whole exercise is expected to reduce its debt-equity ratio from two to less than 0.5.

   This, together with the expectation of higher profits, should strengthen its balance sheet.

   The company trades at a price earnings multiple of 12 on the trailing 12-month earnings.

   This is at a discount to valuations of its mid-sized peers such as Taj GVK Hotels & Resorts, which commands a P/E of 19, and Oriental Hotels, with a PE of 30.