Thursday, November 19, 2009

[Investors] Indian Hotels : Buy Price target: Rs100 CMP: Rs85

Indian Hotels Company

Price target revised to Rs100

Key points

  • Hotel occupancies across the key domestic markets including Mumbai, Delhi and Bangalore went up in Q2FY2010 as compared with Q1FY2010, which is quite surprising because the second quarter is normally dull for the hotel industry in India. Indian Hotels Company Ltd (IHCL)?s occupancies stood at 60% in Q2FY2010 as against the low of about 52% in Q1FY2010. 
  • The third quarter of FY2010 began with a fair amount of sturdiness, as the occupancies in the key markets (where IHCL has strong presence) hovered at 80%. This gives us an indication of the normalisation of the business, as historical facts and figures suggest that the average occupancy rate during the second half of the year stands at around 79%. 
  • With the improvement in the occupancy rates (on a sequential basis), IHCL?s priority is to bring the occupancies back to the historical level and then increase the average room rates (ARRs).
  • The foreign tourist arrivals (FTA) during October 2009 stood at 4.5 lakh, indicating a year-on-year (y-o-y) decline of 1% (which is much better as compared to the decline of 4.2% year on year [yoy] in September 2009). On the back of the improvement in the macro environment globally and the government?s thrust on improving the tourism sector in India, we expect FTAs to improve further in the coming months (especially with advent of the festive season next month).
  • The improvement in the economy bodes well for the corporate travel. Also, domestic tourism, which was the savior of the hotel industry during the economic downturn in FY2009, is likely to remain good in the coming quarters. 
  • With the pick-up in occupancies in Q2FY2010 and Q3FY2010 the business outlook has improved in a big way. However, we believe the increase in the ARRs will take some time (likely H2FY2011) as occupancies need to stabilise at the normal levels first. Thus, the better outlook and IHCL?s focus on deleveraging the balance sheet (it has a net debt/equity of 1.2x currently) augur well for the company. Apart from the domestic business, the long awaited turn-around in profitability of international properties is the key monitorables that would act as the key trigger for the stock.
  • At the current market price the stock trades at 31.1X and 18.5x its FY2010E and FY2011E consolidated earnings per share (EPS) respectively. However, considering the sharp operating leverage in the business, the earnings based valuations do not reflect the true potential of the earnings post-normalisation. Thus, we value the stock on enterprise value (EV)/room (indicative replacement cost). Historically, IHCL has traded at an average one-year forward EV/room of 0.9x. Valuing the company on this parameter we derive a price target of Rs100 over a one-year time frame. We maintain our Buy recommendation on the stock.

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