Indian Hotels: Buy

An investment can be considered in the stock of Indian Hotels, trading at a price earnings multiple of 26 times its trailing per-share earnings (on a stand-alone basis). The valuation is more attractive on a consolidated basis (22 times 2006- 07 earnings). While we expect some moderation in average room rates over the next year, volume growth from room additions is likely to contribute to strong revenues, helping sustain profit growth. Indian Hotels has reported another strong set of numbers for the June quarter, with a performance that is vastly superior to its peers. The diversified presence of the Taj chain has helped it counter the impact of declining occupancy rates and flat average room rates in cities such as Hyderabad and Bangalore. The good earnings numbers are despite an appreciating rupee; a substantial portion of the company’s earnings are in forex.

Indian Hotels has now decided to adopt a universal “rupee” tariff across its properties in India, in line with the global practice of charging a uniform rate to domestic and foreign customers. This shift to rupee tariffs will stem the impact of an appreciating rupee on earnings, though it may reduce the premium charged to foreign guests. In our view, a single tariff may find favour with foreign tourists and stimulate demand. Competitors too are seriously considering the shift to a single tariff structure. With rooms continuing to be in short supply over the next one year, room rates could thus remain firm (although the growth is likely to moderate considerably from the 30 per cent recorded in 2006-07).

Over the longer term, fresh supply of rooms is expected to moderate room rates. However, Indian Hotels is leading the supply growth in the business and luxury hotels segment, as it continues on a heavy capex phase. This makes it better placed than its peers to counter the decline in average room rates expected in 2009.

Indian Hotels has been aggressive with its overseas acquisitions. Its international properties contributed 25 per cent to its overall revenues in 2006-07, up from 11 per cent in the previous year.

Having completed the first phase of its foray into the US, it is now setting its sights in the Asian hotel market, which appears more promising from a growth perspective. A rights offer proposal is under consideration for funding growth, this may present a good opportunity to accumulate the stock.