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Royal Orchid Hotels

A right niche

The company is expanding to capitalise on business traffic in IT cities

Royal Orchid Hotels (ROHL) operates and manages a chain of four hotels with 436 rooms under the brand, Royal Orchid. These are Hotel Royal Orchid, Royal Orchid Central and Royal Orchid Harsha in Bangalore, and Royal Orchid Metropole in Mysore. The company has two subsidiaries: Icon Hospitality Pvt Ltd and Royal Orchid Hyderabad Pvt Ltd. The main promoter Chander Baljee also has a few private companies operating in the related fields.

ROHL proposes to utilise Rs 17.34 crore to take a long-term lease on a hotel in Pune and Rs 11.86 crore to take a long-term lease on a hotel in Hyderabad through Royal Orchid Hyderabad. Also, the company has proposed to spend Rs 16.34 crore to purchase a 51% stake in Maruti Comforts and Inn (MCI) and on renovating MCI’s property in Bangalore. Another Rs 29.68 crore will be invested on modernising and renovating existing properties in Bangalore

Strengths

• ROHL’s cost of putting up a hotel is very low compared to other players.
• The focus is on business tourists through different hotels to cater to various segments of the market.
• The growth in recent years has been phenomenal due to presence in Bangalore, which has a severe shortage of quality rooms. The proposed acquisition and investment in MCI will add 54 rooms in October 2006.
• Hotels in IT towns like Hyderabad and Pune with bring on stream another 172 rooms in October 2006.
• The in-house college of hospitality will be a source for its manpower.

Weakness

• ROHL is dependent on its Bangalore properties for a major chunk of its revenue. Any unforeseen happening in the city can affect operations.
• The lease on Royal Orchid Harsha in Bangalore has to be renewed every 11 months
• Except one, all the hotels in the portfolio are operated on long-term lease/management contracts.
• Only one of the properties is rated three-star. The other unrated properties cannot enjoy premium pricing.

Valuation

In FY 2005, ROHL reported a profit of Rs 12.99 crore with an EPS of Rs 4.8 on diluted equity. PE ratio stands 31 times at the lower end of the offer price (Rs 150) and 34 times at the higher end (Rs 165). Compared to it, EIH Associated Hotels, Taj GVK, Asian Hotels and Oriental Hotels, who manage premium hotels with strong brands, trade at a PE of 56, 51, 43 and 37 times their FY 2005 EPS. Multiples of all the hotels (including ROHL’s) will come down substantially as the expected sharp earnings growth in the current year (FY 2006) is factored in.

Considering the benefits of its new projects (leading to 50% expansion in total room capacity), scheduled to go on stream in October 2006 to capitalise on the next busy season, ROHL can continue to post sharp earning growth in FY 2007 as well.