Indian Hotels –Buy- Sharekhan
The Q1FY2010 (stand-alone) performance of Indian Hotels Company Ltd (IHCL) and the other hotel companies was adversely affected by a bleak macro environment and the outbreak of swine flu in India.
However, things had improved significantly in the subsequent quarters with an improvement in the global macro environment. Hotel companies (including IHCL) had posted a strong improvement in their occupancies in the third and fourth quarters of FY2010. This was on the back of the revival in the Foreign Tourist Arrivals (FTA) and increased domestic tourism.
With the sustenance of the strong growth in the FTAs (which increased by 8.0% year-on-year [y-o-y] in April-May 2010) and the likely improvement in the corporate and domestic leisure travel, we expect IHCL’s occupancy ratio to stand at approximately 69.0% in Q1FY2011 as against 52% in Q1FY2010. Also, we expect an increase of about 11% y-o-y in the average room rates (ARRs) during the quarter.
The improvement in the occupancies and the higher ARRs would result in a strong improvement in the operating profit margin (OPM) due to the operating leverage. Thus, we expect the OPM of IHCL to stand at 22.5% in Q1FY2011 as against 12.1% in Q1FY2010. Consequently, we expect the company to report an adjusted profit after tax (PAT) of Rs16.5 crore in Q1FY2010 as against a loss of Rs17.6 crore in Q1FY2010.
As occupancies are coming back on track, one needs to watch out for the improvement in the ARRs and the IHCL management’s outlook on the business environment in the coming quarters. Also, the completion of projects as per schedule and the re-opening of the Palace wing of Taj Mahal Palace Hotel are the key monitorables in the near term. The international properties posted a subdued performance in FY2010 on account of the weak global macro environment.
Thus, an improvement in the business performance of these international properties is also one of the key things to watch out for in the medium to long term. At the current market price the stock trades at 19.1x its FY2012E (consolidated) earnings per share (EPS) of Rs5.4. We maintain our BUY recommendation on the stock with a price target of Rs111.
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