The Hindu Business Line : Indian Hotels: Buy

An investment can be considered in the stock of Indian Hotels, which runs the Taj Group of Hotels and Resorts. At Rs 1,135, the stock trades at about 18 times its likely FY 07 consolidated per-share earnings. Valuation does not appear too demanding.

Further, with a stock split on the cards, an increase in liquidity could bolster investor interest.

Strong economic growth, increasing activity on the FDI front and buoyancy in the IT and BPO sector is likely to drive business travel, already up by about 15 per cent in the first half of the year.

Profits of the hotel chain more than doubled in the quarter-ended June, an impressive performance coming as it does on a high base. Strong occupancy levels and firm room rates are likely to ensure that the company reports a robust earnings card. The $150-million foreign convertible debt that it raised in 2004 stands almost fully converted; so further expansion of equity is likely to be minimal. Lower interest outgo and a depreciating rupee are likely to have a positive impact on earnings for Indian Hotels, as a significant portion of revenues is earned in foreign exchange.

The hotel chain has considerable resources at its disposal to fuel its is on an ambitious expansion path. It is foraying into smaller towns and cities with its budget chain, Ginger (formerly known as indiOne). Three of these hotels have been set up already and nine more are expected to come up by March 2007.

Indian Hotels hopes to increase the share of its international operations to a third of its revenues.

While it is still a way off from becoming a globally diversified player, we believe that its international exposure will place it on a more even footing with overseas players who are expanding their presence in India.

The hotel sector remains vulnerable to extraneous events such as natural disasters and terrorist acts. Business travel tends to be less sensitive to such factors.

We, therefore, view a slowdown in the economy as a more significant risk as it is likely to adversely affect business traffic.

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