INVESTORS PLEASE LISTEN !: Occupancies, room rates dip significantly in January 2009

Friday, March 13, 2009

Occupancies, room rates dip significantly in January 2009

STOCK UPDATE

Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs82
Current market price: Rs35
Occupancies, room rates dip significantly in January 2009

Key points

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.
w Foreign tourist arrival has also weakened after 9/11 terror attacks on Mumbai in late November 2008. However, the rate of decline has eased in February 2009 (a month-on-month increase as compared to January 2009).
Hotel chains, airlines and travel agents along with the department of tourism of India have initiated a joint promotional campaign—Visit India 2009—to encourage tourism in India. The campaign entails offering enticing schemes to prospective customers during the period April-December 2009. Though such initiatives are welcome, the coming lean season is expected to remain tough due to a higher base effect and continued bleak macro environment.
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.
While the business faces several challenges in the medium term, we believe the current valuations of 7.2x and 5.8x consolidated earnings per share (EPS) for FY2009E and FY2010E are at historic low levels and provides a good entry point for long-term investment in the stock. We maintain our Buy recommendation on the stock with our price target of Rs82.

SECTOR UPDATE

Automobiles

Some respite in February
After four consecutive months of speed breakers, in February 2009 automobile companies experienced some respite as some effects of the various economic stimulus packages combined with the rebuilt inventory improved the volumes during the month. Further, interest rate cuts on automobile loans and the pay hikes based on the Sixth Pay Commission’s recommendations also boosted demand to some extent. Some of the automakers have lined up new and aggressive launches in the coming months, in an attempt to fight the slackening demand. In February 2009, the car segment outpaced the two-wheeler segment by recording a 21.8% growth in the domestic market. The two-wheeler sales grew by 16.2% in the domestic market. The overall automobile sales volume rose by 10% with the domestic sales rising by 12.7% and exports declining by 7%.

Cement

February dispatches up by 9.1%

Cement dispatches for February 2009 grew by 9.1% year on year (yoy) to 16.1 million metric tonne (MMT). The cumulative dispatches for the period April 2008-February 2009 grew by 8.3% to 162.9MMT. The growth for the month under review is mainly on the back of strong demand from governmental infrastructure projects and personal housing construction in rural and semi-urban areas.
The utilisation ratio for the month under review stood at 92.4% as against 100.8% a year ago. The drop in the utilisation is backed by a 19% year-on-year (y-o-y) addition in the capacity. On a month-on-month (m-o-m) basis, the utilisation ratio has come down by 101 basis points.
Among regions, North India emerged as the leading cement-consuming region with the consumption growing by a whopping 18.4%. Eastern region also registered an impressive growth of 13%, whereas the consumption in southern region improved by 8.2% yoy. However, western and central regions registered poor performance for the month.
Among the companies under our coverage, Orient Paper and Industries Ltd (OPIL) emerged as a pioneer with a robust volume growth of 21% yoy to 0.2MMT during the month. Shree Cement also registered an impressive volume growth of 14% yoy. Dispatches of top three players—ACC, Grasim Industries and Ambuja Cement—was a mixed bag with the volume growing by 2.8%, 11.9% and 13% yoy respectively.
Cement prices have moved up twice across the country in February 2009 and the average price hike is Rs8 to Rs9 per bag of 50 kg. Prices in the southern region remained unchanged on a m-o-m basis, as cement is already selling at a premium to that of other regions. Eastern region witnessed the highest price hike.
Though macro head wind, in terms of a slowdown in the urban real estate sector and the overall slowdown in the economy, remains the revival in the volumes from the last four consecutive months have created positive sentiment for the sector. Moreover, the recent price hike (Rs8 to Rs9 per bag) announced by the companies, coupled with moderation at cost front, in terms of softened crude, coal and packaging prices, may give positive surprises on the margin front in the coming two quarters. However, the anticipated slowdown in government projects after election, slowdown in the urban real estate sector and the upcoming capacity (54MMT by the end of FY2010) is likely to put pressure on the realisations by the end of FY2010. In such a situation, we prefer Shree Cement and UltraTech Cement due to relatively early commissioning of their capacities and investment in captive power plants.