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AN investment can be considered in the stock of Indian Hotels that owns the Taj group of hotels. The company has been the major beneficiary of the boom in tourist arrivals over the past year and higher occupancy levels and room rates in key destinations such as Mumbai and Bangalore. Even adjusted for the lower-base effect, its earnings growth has been impressive, especially in the October-December quarter.

With India fast emerging as a top tourist and business destination, tourist arrivals are likely to remain robust. While Indian Hotels may well be able to sustain its double-digit growth numbers, it may, however, not remain at the high levels in excess of 30 per cent. As a leading player in the luxury segment, it is likely to enjoy better occupancy rates and room tariffs than most of its peers.

It is its foray into the mid-price or budget segment, however, that is likely to give a kicker to its revenue growth over the long term. IndiOne, its hotel chain in the budget segment, has met with early success. The first hotel in Bangalore boasts of occupancy rates in excess of 85 per cent. The company recently announced its plans to add 10 more hotels in the segment, within the next 10 months at an outlay of about Rs 100 crore.

A presence in this segment would augur well for the hotel at a time when domestic leisure travel is picking up. IndiOne hotels would, as opposed to luxury segment, cater to the domestic leisure traveller who is looking for functional benefits at an affordable price.

The hotel industry is vulnerable to extraneous events that may adversely affect tourism and this remains the key risk to our recommendation. Hotels in the mid-priced segment tend to perform better during a sluggish phase than luxury hotels. In such an eventuality, the diversification across segments is likely to cushion Indian Hotels's revenues and profitability. Buy with a one-to-two year perspective.

Shanthi Venkataraman

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