The Hindu Business Line : Indian Hotels: Buy

The Taj Mahal Hotel in Mumbai... Impressive performance and higher revenue base make Indian Hotels among the top picks in the hotel sector. — Shashi Ashiwal

SEVENTY-three properties and still expanding, Indian Hotels, owner of the Taj Group of Hotels, remains India's leading hotelier. That it is an industry frontrunner, with aggressive plans for the mass market and a slowly expanding global footprint is reason why you could consider including its stock in your portfolio.

At Rs 760, the stock trades at about 35 times its trailing four-quarter earnings per share; Hotel Leelaventure, a third of its size in terms of revenues, trades at about 30 times. Indian Hotels is likely to enjoy this premium valuation as a market leader. The addition of rooms on the back of strong tourist inflows would also ensure substantial growth on the earnings front.

While tourism is on the upswing, it remains susceptible to extraneous events, from natural disasters to terrorist attacks. In addition, in the case of Indian Hotels, the outcome of its plans for expansion at the global level is uncertain, as it is yet to make a significant mark in the international hotel industry. The risks as well as the payoffs of its overseas ventures are high. This, however, is not likely to be a cause for concern over the medium term.

Earnings outlook: India, slated to be the biggest tourist destination after China and Montenegro, is witnessing record tourist arrivals. Indian Hotels is best placed to benefit from this boom in tourism, with its presence in the metros and leisure destinations.

Over the past couple of quarters, smaller chains such as Hotel Leelaventure and Taj GVK have turned in an impressive performance; their dominant presence in cities such as Bangalore and Hyderabad, which have witnessed the highest growth in occupancy and room rates, has helped them outperform the rest. Recognising this, the stocks of these chains have been marked up significantly. The stock of Indian Hotels, however, despite posting a gain of 40 per cent, has been an under-performer this year.

Indian Hotels continues to be among our top picks in the hotel sector. Its performance has been impressive, given its significantly higher revenue base. In the forthcoming quarters, the company is likely to record double-digit growth rates.

Present in cities where other hotel chains are only just coming up, it would be well placed to capitalise on the demand-supply mismatch over the next year or two.

Rapid expansion plans in the budget segment as well as luxury properties would feed the strong demand and add to revenues. A steady expansion in equity base is likely, as a $150-million foreign currency convertible bond offering has been raised to fund expansions in overseas. Strong operating margins and a reduction in interest cost from conversion of debt to equity would ensure that earnings growth remains strong.

Tapping the mass market: Given the strong demand for mid-priced and low-cost hotels, Indian Hotels' entry into this segment is likely to be a strong driver of revenue growth. Priced at less than Rs 1,000 per night, the first indiOne hotel was launched near Bangalore last year and has reported strong occupancy rates. Seven indiOne properties are under construction and are expected to open in 2006. The company plans to open properties at prominent pilgrimage centres, such as Tirupati and Amritsar. This augurs well for revenue growth, as there is plenty of pent-up demand for quality, low-cost hotels in these cities. Indian Hotels plans to open 40 indiOne hotels in smaller cities and towns over the next two to three years.

Its expansion plans in the luxury segment also continues by way of management contracts. It recently announced that it would manage a property in Coimbatore for a business hotel, expected to be operational in October 2007. It is also adding rooms in Bangalore and Mumbai. About Rs 500 crore has been earmarked for expansion in FY06, which the company should be able to comfortably bankroll through a combination of equity and debt.

Gaining a global profile: Indian Hotels recently bagged the rights to manage "The Pierre" — a property in the heart of New York. Taking over from The Four Seasons; the company would shell out an annual lease fee of $5 million and invest $35 million to refurbish the property. The Pierre has just begun to make profits. But the strong demand for rooms in New York is beginning to show up in the occupancy and room rates of the hotel.

Indian Hotels is scouting for properties in Beijing and Shanghai in a bid to cater to demand during the 2008 Olympics. If it manages to secure a property in China, it would be a coup for the company. It is also looking for properties in California and the UK to woo travellers in the IT and BPO businesses.

Indian Hotels has bagged four management contracts in foreign destinations in 2005 alone, an indication of its seriousness in gaining a presence in the overseas market. The management expects overseas revenues to contribute a third of the total over the long term.

These plans involve considerable investments and gaining a foothold in international gateways could prove to be a challenge. From a near - term perspective, its presence in overseas markets could, however, help in diverting tourist traffic towards its properties. Buy with a one-to-two year perspective.

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