HDFC Sec - Royal Orchid Hotels

HDFC Securities report on Royal Orchid Hotels:

Royal Orchid Hotels, ROHL reported a turnover of Rs 811 million in FY07 and a PAT of Rs 339 million, which were 37% and 58% higher yoy. The healthy topline growth was led by 27% rise in ARRs (Rs 9060) and marginal dip in occupancies.

For the quarter ended March 07, the turnover of Rs 240 million and PAT of Rs 106 million were higher by 25% and 35% yoy, respectively. The topline growth was aided by 25% rise in ARRs (Rs 10,000) without a dip in occupancy.

The consolidated top line rose by 36.2% to Rs. 1137 million, against our estimate of Rs 1101 million, a gap of 3.3%. The net profit stood at Rs 352.57 million, a growth of 53.2% against our estimate of Rs 305 million. Against our EPS estimate of Rs 11.21, the actual EPS stood at Rs 12.95.

ROHL would be managing close to 1000 rooms by Q1FY08 (existing room inventory is 700 rooms) across segments and cities except for Bangalore, thus de-risking the revenue profile. Its asset light approach has helped it attain faster growth and maximize ROE in the industry, which we expect to continue. A balanced capex, strategically positioned “Business Hotels” in growth markets and the strategy of reining in costs (OPMs maintained for 2 years at ~ 50% are the best in the industry) will help it earn rich dividends going forward.

For the reasons discussed below and attractive valuations of - 13.7x & 12.3x FY08E & FY09E, 3% dividend yield and 2.3x P/BV, we re-iterate our OUTPERFORMER rating and value its target price at Rs 245, offering 18% upside from current levels.