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Shanthi Venkataraman

INVESTORS can hold on to the stock of Indian Hotels, owners of the Taj group of hotels. The current situation in the industry appears positive, with occupancy rates and room tariff rates on the rise. Indian Hotels, as a dominant player, is set to gain from the increasing demand from foreign tourists and business travellers. However, at a price-earnings multiple of 24, the stock appears stiffly valued.

Moreover, hotel stocks are, in general, riskier as the industry is among the first to be affected by global events such as terrorist attacks, outbreak of SARS, and so on.

Financial performance

The company put up a strong performance in the last quarter as well as for 2003-04. Net sales in 2004 grew 17 per cent over that of the previous year, owing to a growth in occupancy and average room rates. The revenue from the food and beverages segment also rose by 15 per cent. The sale of a couple of hotel properties and gains from foreign exchange transactions contributed to a strong growth in `other income'.

However, operating margins came under pressure, due to increase in staff, renovationand maintenance costs.Profits rose 50 per cent. Although this growth is on a lower base, the company is set to post strong growth in the coming quarters.

Higher occupancy and room rates

Growth in occupancy and average room rates, the key to valuation.

Occupancy and room rates are the key determinants of a hotel's performance. Now, the demand for rooms is growing steadily and the occupancy rates of Indian Hotels is now at 69 per cent, up 13 per cent over the previous year. Average revenue rates (ARR) grew at a slower rate but increased by 7 per cent over the previous year.

Many hotels are now adding rooms to meet the growing demand. Once the supply increases, the ARR would flatten. However, in the near term, the ARR is likely to remain on the high side.

Expansion plans

To meet the growing demand for rooms, Indian Hotels is adding rooms to Taj Lands End in Mumbai and Taj West End in Bangalore. It has already begun work on luxury apartments coming up under the Taj Wellington Mews banner in Mumbai. The 80 apartments and are meant to cater to the booming BPO market.

The company is also looking to expanding its international presence. It is actively exploring markets in North America, Asia and China. It recently acquired a hotel property in the US.

Even as the company expands its presence, it appears to be cutting back on direct investments in property and property development. Instead, it is focussing on gaining market share indirectly through management contracts. The company plans to have management contracts for a luxury resort in Mauritius and an up-market resort in Kovalam.

Increasing presence across segments

Traditionally, the luxury segment contributed about 75 per cent of Indian Hotels' revenue, the rest coming from the business, leisure and corporate segments.

However, the company is now trying to spread its risk across various segments and is attempting to cater to multiple price segments. In pursuit of this strategy, Indian Hotels is setting up `value' hotels across the country, under a different brand name.

The first is being set up in Bangalore. These are budget hotels to cater to corporate travellers, tourists, pilgrims and others, who look for functional comforts as opposed to luxury hotels. The hotel is also exploring other avenues such as setting up spas and eco hotels.

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