Stock Review: Indian Hotels

LUXURY hotels are doing brisk business in India. And, occupancy levels are expected to remain robust across India this year, too, thanks to steady demand from the domestic market and upswing in tourist arrivals from abroad. Analysts believe average room rates are likely to rise 5-8 per cent across luxury hotels in the second half of the current financial year.

This trend has been demonstrated in the fourth quarter performance of the Indian Hotels Company, which grew its bottom line by 55.3 per cent year-on-year (y-o-y). The stand-alone net sales of IHCL grew 19.7 per cent y-o-y to `530.9 crore (the highest revenue growth in six quarters). The growth was driven by a strong improvement in the occupancies and average room rate (ARR) during the quarter. The occupancies stood at 7080 per cent, while the ARRs improved 5-10 per cent in most of the cities.

The company is expected to add 730 rooms over two years. While the domestic market remains healthy, analysts believe a key trigger for the stock could come from news of a turnaround of US operations. Roughly 14 per cent of the total revenues come from the US, and a turnaround could help ease pressure on consolidated profit. The stock trades below its historic one-year forward EV/Ebitda of 15.5x, which leaves enough room for upsides, says India Infoline.

In recent times, the balance sheet has been strengthened with the infusion of `500 crore by Tata Sons. The infusion has happened through preferential and part-conversion of warrants at Rs104 a share, which would help lower leverage debt/equity ratio down to 1.1x from 1.5x in FY10. With a lightened balance sheet, the focus is now on turnaround of US operations, which posted cash loss of $22 million in FY11.

In its after-results meet, the company indicated Pierre, its flagship US property in NY, could have additional $200 ARR headroom above its FY11 average of $618, which would then put it at par with other comparable properties. Analysts say domestic revival will help the company improve margins. Encouragingly, the company's FY11 fourth quarter stand-alone margin of 35 per cent is the highest since the third quarter of FY09. However, if the US operations take longer to turn around and average room rates don't move up in India, then things would look very different for the stock.