Indian Hotels

Having weathered the economic downturn,Indian Hotels has come off its high valuation. Not enough room for further downside makes it a good choice

THE best time to buy in a sector or a company is when it’s out of favour with the market men. This is because the valuations would be ultra-low and most of the bad news could be already factored into the stock price. The hospitality sector is in a similar situation right now. The global economic slowdown and the resultant fall in foreign tourist inflow and corporate travel has hit the sector hard. Most listed companies reported 30-70% fall in net profit in the June ‘09 quarter. The top line fell by 10-15%. Things can’t get worse from here and most of the leading hotels stocks are trading at their cheapest levels in many years. At the current valuations any minor positive news may trigger a rally in these stocks.

And what can be a better bet than the industry leader –Indian Hotels Company. The Tata group company has been one of the worst underperformers in last three years and is right now one of cheapest stocks in the sector.

BUSINESS:

With nearly 100 properties and room inventory of 11,546 rooms (and growing), Indian Hotels is set to emerge as one of the leading hotel chains in the world. It follows distributed risk model wherein hotel properties and related businesses are housed in a clutch of associate companies, subsidiaries and joint ventures. These include Taj GVK, Oriental Hotels, Benares Hotels and Roots Corporation, among others. The company also holds a significant stake in BJets, Asia’s largest corporate air travel provider. The company has holds significant interest in Oriental Express Hotels, a US based luxury hotels chain.

For FY’ 09, the company plans to add nearly 1,800 rooms. Internationally, the company has hotels, among other locations, at USA, Australia, Maldives, Malaysia, UK, Sri Lanka, Africa and the Middle East.

FINANCIALS:

In FY ’09, the average occupancy of Indian Hotels fell to about 66% from 73% in FY ’08. The company understandably had lower average room rates (ARR) during the year, which resulted in a 38% drop in the stand-alone net profit at Rs 234 crore. For the quarter ended June, the company’s net sales and net profits plunged by 30% and 73% to Rs 262.4 crore and Rs16.4 crore, respectively. This quantum in plunge in its earnings was expected considering the severe impact of global slowdown and terrorist attacks in Mumbai in last week of November ’08. The company reported a operating profit margin of 35.7 during FY2009, which is still higher than it maintained in FY2006, which was around 34%.

FEW DOWNSIDE RISKS:

A sift through the historical performance of Indian Hotels Company shows that at its peak, its share was available at around five times its book value and in downturn the stock is trading at around 1.4 times its book value. This limits a further downside in its stock price. In fact, it is true for most hotel stocks. Indian Hotels Company, being the industry leader it would be first to gain momentum once good news starts flowing. Sentiment in the form of major events like the Commonwealth Games planned in Delhi in 2010 would require addition to the inventory of rooms, which would help the hotel industry, and in particular Indian Hotels. Recently the company acquired Sea Rock Hotel, a property to its existing Taj Lands End hotel in Mumbai. It plans to integrate the two sites in three years. Once completed, the combined property may emerge as one of the largest hotels, convention and high-end retail centre in Mumbai and will help it to consolidate its market share in the central Mumbai market. The funds for the acquisition came from last year’s Rs 1,400-crore rights issue and internal accruals. With this acquisition now, the Taj Group now five hotel properties in Mumbai. The site is also close to newly opened Bandra-Worli Sea Link which has drastically reduced the travel time from the Mumbai airport to the hotel site.

VALUATION:

Currently, IHCL’s stock is trading at around 27 times its earning per share in last 12 months. Though its looks on the higher side, investor should keep in mind that, there has been a sharp decline in earnings in last few quarters. Even and when recovery begins, the company will report a sharp rise in earnings and forward earnings will fall to single digits. At its current market price, the stock is trading at around 1.4 times its consolidated book value. The corresponding ratios for EIH and Hotel Leela are 2.93 and 0.60, respectively. All this makes Indian Hotels an interesting buy for long-term investor looking for value buy on the Street.

Indian Hotels

The Sea Rock acquisition makes Indian Hotels a dominant player in the central Mumbai market.
INDIAN Hotels Company (IHCL) recently acquired Sea Rock Hotel in Mumbai for Rs 680 crore. It has picked up 85% stake in ELEL, which holds a long-term lease of the land on which Sea Rock is built. How does this acquisition help IHCL, going forward?

Current scenario:

The domestic hotel industry has suffered in the past six months due to the global slowdown and terrorist attacks on the country’s financial capital. And it seems a tad difficult that occupancy levels would be higher in the immediate future. In FY’09, the average occupancy at Indian Hotels fell to around 66% from 73% in FY’08. The company understandably had lower average room rates (ARR) during the year, which resulted in a 38% drop in the stand-alone net profit at Rs 234 crore.

Impact of the Sea Rock deal:

IHCL is planning to demolish Sea Rock and erect a new hotel complex, which will also house a convention centre, besides commercial and retail outlets. The company plans to integrate the site with Taj Lands End in Bandra within three years. The funds for the acquisition would come from last year’s Rs 1400-crore rights issue and internal accruals. The location of Sea Rock would be the biggest advantage for IHCL. It has a better view as it is right on the seashore compared with IHCL’s other property Taj Land’s End. Now, the Taj Group would have five prime hotel properties in Mumbai. It would increase its footprint in central Mumbai as the city will see the opening of the Bandra-Worli Sea Link. After the sea link opens, the Chhatrapati Shivaji International Airport will be barely 10 minutes’ driving distance from the Sea Rock Hotel site. This augurs well for the Taj Land End’s property.

Currently, IHCL has 97 hotels and 11546 rooms, including hotels belonging to its subsidiaries, associate companies, JVs and management contracts. For FY’09, the company plans to add nearly 1800 rooms. This addition would come in the backdrop of declining revenues sales. Total revenue in FY’09 fell by over 10% to Rs 3918 crore, while the number of rooms increased by a similar percentage. IHCL’s financial appears to be a concern. The company’s profits are falling, while its interest expenses have increased. Its profit before other income, interest and taxes as a proportion of interest payments shrank from 4% in FY’08 to 1.7%. If the profits continue to fall further, the company may find it difficult to service its debt. The Sea rock deal would not increase IHCL’s debt further.

Currently, IHCL’s stock is trading at 18 times trailing twelve months earnings. This is on the higher side, given that its smaller peers including Hotel Leelaventures and Asian Hotels are trading at a P/E of over nine. IHCL’s stock price currently equals its book value. Historically, the stock has seen a strong resistance at this level of price-book value ratio. The hotel sector is likely to witness sluggish demand for the next two-three quarters. It remains to be seen whether IHCL is able to leverage its latest acqusition to improve its performance in the coming quarters.

Sector View on Indian Hotel Industry

ICICI Securities on EAST INDIA HOTELS (EIH)
EIH recorded 7.8% growth in its revenues, which is in line with our expected revenue of Rs 241.5 crore for Q2FY09, led by better performance of its Mumbai (Trident and Oberoi) and Delhi properties. Combined together, these two properties account for nearly 71% of its owned room base. We expect EIH’s revenues to continue to grow in FY09E and FY10E once its BKC project starts operation by Q3FY09 end.

Indiabulls Securities on INDIAN HOTELS

IHCL has hotels across various segments and geographies. However, there is a growing trend towards mid- and lower-priced hotels, which are comparatively less susceptible to the fall in the occupancy rate and the ARRs. It has planned aggressive capacity expansions for its Ginger Hotels chain, and has launched the Gateway brand, which is positioned between Ginger and ICHL’s luxury chain.

PINC Research on TAJGVK HOTELS & RESORTS

While we like TajGVK Hotels and Resorts’ business model on account of its diverse product portfolio and ability to leverage its offerings to maximise revenues, we believe that the ongoing turmoil in the global economy will lead to a clampdown in discretionary spending, by both corporates and individuals. This has the potential to impact revenues and profits.

ICICI Securities on HOTEL LEELA

Hotel Leela currently operates 1,115 rooms. The company has plans to add a further 1,486 rooms over the next four years. This expansion involves a project cost of around Rs 2,000cr. However, due to the current global financial market turmoil, liquidity crunch and expected sluggish demand for premium rooms, its project execution may get delayed in cities like Pune, Hyderabad and Chennai.

KRChoksey Shares and Securities on KAMAT HOTELS

It is one of the major mid-sized players in the Indian hotel industry. It is charting an expansion plan in the western regions of the country. It is expected to increase its owned and managed room base from 755 in FY08 to around 2,500 in FY10E. With an expected EPS of Rs 27 in FY10E, the stock is available at a P/E of 1.55 and a P/B of less than 0.4.

KRChoksey Shares and Securities on VICEROY HOTELS

The stock shows promise due to its advanced project pipeline. The room base is expected to triple by FY10. It has franchisee agreement with Marriot International. The company is expanding its geographical reach. It is also successfully tapping the huge opportunity in the F&B space though its restaurant business. Viceroy Hotels currently trades at 4x FY10E Rs 6.45 EPS. It looks attractive at a P/B of 0.48.

Sharekhan views on KSB Pumps, Indian Hotels, Bharti Airtel

Sharekhan on KSB Pumps
Sharekhan has maintained its buy rating on KSB Pumps in its research report.

"KSB Pumps has reported a strong top line growth of 31.4% to Rs175.4 crore for Q4CY2008. However, its margins declined on both year-on-year (y-o-y) and sequential bases on account of a change in the product mix and a greater contribution of the project business in the earlier quarters. KSB Pumps is likely to spend about Rs 200 crore over the next four years to raise its capacities. Looking at its almost debt-free status, funding of the same is not likely to be an issue, though we would try to get an update from the management regarding any changes in its capex plans. We maintain our Buy recommendation on the stock while we put the price target of the stock under review," says Sharekhan's research report.


Sharekhan on Indian Hotels - Target of Rs 82

Sharekhan has maintained its buy rating on Indian Hotels Company with a price target of Rs 82 in its research report.


"A significant slowdown in business and leisure travel has led the occupancies of the hotel industry to fall from 75% to 58% year on year (yoy) and the average room rate (ARR) decline by 17% yoy in January 2009. As for the hotel industry, we believe the occupancies and ARRs of Indian Hotels Company will also remain under pressure in Q4FY2009 and FY2010,
however the addition of new room inventory should help drive growth in FY2010. We maintain our buy recommendation on the stock with our price target of Rs 82," says Sharekhan's report.


Sharekhan on Bharti Airtel - Target of Rs 789

Sharekhan has maintained its buy rating on Bharti Airtel with a price target of Rs 789 in its research report.

"As per media reports, American Tower Corporation (ATC) is all set to acquire India-based independent tower company, Xcel Telecom. The deal, if it materialises, can give us certain indications of the ruling valuation of the domestic tower company and be used as a yardstick to value Bharti Airtel’s tower business."

"If we use the Rs 0.52 crore per tower valuation of Xcel Telecom to value the 61,355 towers of Bharti Infratel as on December 2008, the value for Bharti Airtel works out to Rs 31,814 crore and that for Bharti Airtel’s 92% stake in its tower subsidiary works out to Rs 154.2 per share. This is much ahead of the value of Rs 112 per share taken by us in our price target for the stock based on the discounted cash flow method. We maintain our Buy recommendation on the stock with a price target of Rs 789 per share," says Sharekhan's research report.

Stock views on Tata Power, Bombay Rayon, Indian Hotels

CITIGROUP on INDIAN HOTELS

CITIGROUP has downgraded Indian Hotels to ‘hold’ from ‘buy’ rating with a target price of Rs 47. The downgrade is based on lower earnings estimates to take into account the recent terror attacks in Mumbai, which will lead to temporary shutdown of the company’s flagship property in Mumbai and likely lower occupancy of the company’s other properties in India. Indian Hotels is the largest hotel operator in the country and is looking to enter the budget hotel segment through its new brand ‘Ginger’. It already operates 11 budget hotels and plans to add 35 such hotels in the next few years with an investment of Rs 400-600 crore. Indian Hotels also plans to foray into the adventure business with wildlife lodges. The company is looking to expand overseas through acquisitions/management contracts. There is limited upside from current levels, given the unfavourable outlook for the hotel sector in India. The target price is based on 10x (versus 13x earlier) FY10E P/E as Citigroup builds in concerns of slower earnings growth, given expectations of lower occupancy, economic downturn and upcoming room supply.

MOTILAL OSWAL on TATA POWER

MOTILAL Oswal maintains a ‘buy’ rating on Tata Power with a target price of Rs 751. Tata Power has achieved financial closure and placed equipment orders for 5,660-mw projects under development. Its total equity commitment stands at ~Rs 6,000 crore, of which Rs 2,900 crore is likely through internal accruals, Rs 1,900 crore through issue of warrants and preferential allotment to Tata Sons, and Rs 1,200 crore via rights issue and/or monetisation of investments. In FY08, the company raised Rs 380 crore via sale of part stake in Tata Teleservices Maharashtra and Rs 710 crore via share issuance to Tata Sons. Tata Power is expected to commission 2,663 mw of capacity by FY12, including the first unit of Mundra UMPP (800 mw) in September ’11. Despite initial delays, capacity addition in FY09 and FY10 is expected at 530 mw and 120 mw, respectively. In FY09, Tata Power will have merchant capacity of 200 mw, which should contribute 6.5% of the standalone net profit in FY09 and 18.6% in FY10. Motilal Oswal expects Tata Power to report a consolidated net profit of Rs 1,410 crore in FY09 and Rs 1,610 crore in FY10.

EDELWEISS SECURITIES on BOMBAY RAYON

EDELWEISS Securities has downgraded Bombay Rayon’s stock to ‘accumulate’ from ‘buy’. Garment sales are estimated to contribute 66% to Bombay Rayon Fashions’ (BRFL) consolidated revenues in FY09. The company exports 100% of its garments to the US and Europe. With both these key geographies witnessing economic turmoil, same store sales of BRFL’s clients have dropped almost 3% to 15%. BRFL reported robust numbers in Q2 FY09 with net sales up 28% y-o-y at Rs 290 crore and EBITDA up 39% yo-y at Rs 68.7 crore. Even though the management seems confident of delivering 50% topline growth in FY10, Edelweiss has revised down its estimates of revenues from garment sales by 24% in FY10 to Rs 1,097 crore. At CMP, the stock is trading at a P/E of 5.4x FY09E EPS of Rs 19.9 and 4.9x FY10E EPS of Rs 21.9. The stock has corrected 60% since July 1, ’08, factoring in most of the risks of a slowdown in its garment business. But Edelweiss believes the overhang of negative news flow from its key markets and customers, as well as downside risks to topline due to cancellation of orders or defaults on payments, will hinder any major outperformance of the stock.

Stock Views on Indian Hotels, Tata Motors, Praj Industries, Infosys

INDIA Infoline on Indian Hotels - TARGET PRICE: RS 85

INDIA Infoline has maintained its ‘market performer’ rating on Indian Hotels Co with a reduced price target of Rs 85. The brokerage house expects the company’s volume expansion to come from its new properties and a stable revenue growth over the medium-term with the commissioning of its Ginger brand. “Since the company now operates in all major price points, it is cushioned against an adverse affect of a weakness in luxury market room rentals or any localised downturn,” the India Infoline note to clients said. “We expect the company to witness sales and earnings CAGR (compounded annual growth rate) of 15.1% and 26.6% respectively over the next two years. Valuations appear reasonable, with price to earning of 10.8 times and EV(enterprise value)/EBIDTA of 6.8 on FY10 (estimated) earnings,” it added.

HDFC Securities on Tata Motors - TARGET PRICE: RS 454

HDFC Securities has maintained its ‘sell’ rating on the stock with a revised target price of Rs.454 (from Rs.431 earlier). The brokerage believes due to uncertainties looming over the company’s Nano project at Singur and 24-35% equity dilution would cap the upside in the stock. Also the Jaguar-Land Rover (JLR) acquisition would continue to be an overhang on Tata Motors’ stock, the note added. “We are revising our earnings per share estimate upwards by 9% (Rs.29.9 earlier) mainly on account of lower equity dilution by reducing the amount of funds raised through the equity route. We value the company on an SOTP basis with the core business valued at Rs 293 per share and subsidiaries at Rs 161 per share,” the note to clients said

ULJK Group on Praj Industries - TARGET PRICE: RS 277

ULJK Group has assigned an ‘accumulate’ rating to Praj Industries as it expects the company to benefit from its operational presence in all major ethanol-producing countries. The firm believes that fuel ethanol production is seeing an uptrend on the back of the increase in crude oil prices and the company possesses process technology for the different types of feedstock for ethanol production. “We expect the order book to grow at a CAGR of approximately 37%, backed by the increase in demand for fuel ethanol, the note said. “The revenue of the company is expected to grow at a CAGR of approximately 31% during the period FY08-FY10 (estimated). The company is expected to deliver a net profit of Rs 1,694 million in FY09(estimated) and Rs 2268 million in FY10 (estimated), a CAGR of approximately 22%,” the note added.

Edelweiss Securities on Infosys - Rating: Accumulate

Broking firm Edelweiss Securities has maintained its ‘accumulate’ rating on the stock as it believes that the company’s recent acquisition of the Axon group would bolster the company’s presence in the consulting space. “The deal is earnings per share (EPS) neutral on standalone basis in FY09 (estimated), but EPS accretion in FY10 (estimated) depends on Axon’s growth and margin trajectory. Incorporating the financial impact of this acquisition, the stock trades at 16.5 times and 13.9 times FY09 and FY10 earnings respectively,” the note said. However, according to the brokerage firm, slowdown in US, significant increase in the salary hikes and attrition rate, reduction in the number of H1B visas granted by US, and incremental appreciation of rupee against US dollar, euro and GBP remain key concerns for the company.