Indian Hotels: Hold/Buy on declines

Recommendation: Hold/Buy on declines

Anup Menon

AFTER touching a high of Rs 338 in early January 2000, the stock of Indian Hotels fell to the present levels of around Rs 210 and trades at a discount of 13 times its latest annualised earnings per share.

The company's performance has been in line with the trends in the industry. The fortunes of the industry have shown some signs of improvement, which augurs well for the company.

Financial performance: The company's earnings performance for the quarter-ended September 2000 was fairly impressive. Operating revenues rose 18 per cent to Rs 142.94 crore compared to the corresponding previous period. In the same time-frame, operating margins rose from 18 per cent to 21 per cent and post-tax earnings marginally by 4 per cent to Rs 18.58 crore.

This can be partially attributed to the higher interest costs incurred this quarter. The company's debt burden has increased significantly, as of March 2000. Hence, the interest outgo is likely to be higher in the near future. On an equity base of Rs 45.12 crore, the annualised per share earnings of the company works out to 16.47. The per share earnings registered a gain by around Rs 1.47 over the previous quarter. Overall, the company's financial performance has improved. This trend is likely to continue in the near future.

Business profile: Indian Hotels Corporation is among the largest players in the domestic hospitality industry. For the year-ended March 2000, the company stands first in terms of total revenues generated, followed by EIH. It operates a chain of hotels under various brands, which includes the Taj, among others, and caters to a wide range of consumers with properties ranging from the luxury-class hotels to medium-riced ones.

Prospects: The company's prospects look brighter than the past. However, it may still be early days to lock into the counter from a long-term perspective. Hotel companies are, by nature, sensitive to the developments in the broad economy. Why is this so?

IHCL derives a significant chunk of its revenues from business travelers. This is evident from the fact that most of the major properties of the company are located in business centres such as Mumbai and Delhi. A slowdown in the broad economy has a negative impact on business travel. The pinch is felt more on the higher end -- five-star deluxe and five-star category.

Such a situation prevailed in 1997-99. However, after some early signs of improvement in the economy, there were some hiccups. If business travel comes down, it might have a negative impact on the company's performance.

From the point of view of tourist traffic, there are some signs of improvement. For instance, the foreign tourist arrivals into the country for the first nine months of the calendar year 2000 rose 6.4 per cent over the corresponding previous period, around 1.6 per cent higher than the growth rates registered in 1998-99.

From the earnings' point of view, if the inflow continues to improve, realisations are likely to be high. For instance, the average five-star room rate in August 2000 was around $140, next only to Hong Kong, where the room rates were close to $170. This apart, the rupee has been losing value vis-a-vis the dollar. This should have a positive impact on the earnings.

A cause for worry would be the increasing competition in the industry. May international hotel chains are setting up shop in the country. But given the strong brand equity enjoyed by the company, the impact on the market share may not be immediate. In the light of the economic conditions, the company's performance will have to be kept in mind. Existing investors can stay invested.