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Indian Hotels: Mumbai property sale - Views on News from Equitymaster
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  • Jan 2, 2001

    Indian Hotels: Mumbai property sale

    The Indian Hotels Company Ltd (IHCL) stock price has been on an upswing in the last month. It has attracted larger buying interest as compared to its nearest competitor EIH. The news of higher occupancy and average room rates in the past few months has driven up the share price. Also the interest generated by India Tourism Development Corporation's (ITDC) disinvestment process has brought the focus on IHCL, which owns a 10% stake in the company.

    The company is bound to gain from their share of the sale proceeds that are realized from sale of ITDC's properties or is likely to get some of ITDC's properties to manage on ownership or long term lease basis.

    However, another very interesting possibility in the near future, which would benefit IHCL is the fact that the company is very keen to sell a part of its 17 acre plot of vacant land in North Mumbai. The company had purchased this property around 20 years back for a paltry sum of Rs 10 m. The gains from the sale of this property will definitely boost the company's cash flows and help the company pump in funds for future expansions.

    Earlier, IHCL had planned to open a hotel in North Mumbai. As many hotel chains are in the process of setting up shop here the company does not feel the need to have its presence in this part of the city. It will continue to concentrate on its forte, the South Mumbai hotel market. To this effect the company has recently completed renovation of restaurants and public areas at its hotel, the Taj Mahal, Mumbai.

    The company has indicated that this sale of property would boost its earnings in the current financial year. This is likely to take place in the last quarter of FY01E. The company is expecting to clock in gains in the range of Rs 400 - Rs 700 m from the part sale of its land in North Mumbai.

    IHCL's strategy of foreseeing into the future has always paid off. Though earlier the company purchased this land on the premise that it would build a hotel in North Mumbai, it was very correct in forecasting future demand in this part of the city and hence bought the land 20 years ago. However in the past five to six years many hotel chains have bought land at current market prices for building hotels, hence there is no need for IHCL to have presence here. The company will gain from capital appreciation if nothing else.

    Hence we are not surprised this time around that the company again stands to benefit. It enjoys the distinction of being the first to make its presence felt in many Indian business cities and leisure destinations. Further it has one of the lowest capital costs per room in metro cities, due to its low historical land costs as a result of its vision.

    Occupancy rates (%) 1QFY01 1QFY00 2QFY01 2QFY00
    Taj Luxury Hotels 57% 49% 57% 54%
    Taj Leisure Hotels 37% 48% 38% 38%
    Taj Business Hotels 52% 59% 53% 63%

    As IHCL gets 65% of its profits from its Mumbai and Delhi hotels its bottomline in the current financial year is expected to gain from higher occupancy rates in metro city hotels. The stock markets look forward to buoyant 3Q results continuing its rise from 2QFY01. In the 2QFY01, its average room rates (ARRs) at its luxury hotels (89% of room revenues) showed a positive trend.

    ARR (Rs) 1QFY01 1QFY00 % change 2QFY01 2QFY00 % change
    Taj Luxury Hotels 5,612 6,199 -9% 5443 5301 3%
    Taj Leisure Hotels 2,030 1,841 10% 1703 1750 -3%
    Taj Business Hotels 2,840 2,500 14% 2808 2494 13%

    On the current price of Rs 248.5 IHCL is trading at a 54% discount to its net asset value per share of Rs 541. On an EV/EBIDTA basis IHCL is trading at 6.6x FY02E and price to earnings multiple it is trading at 8.0x FY02E EPS of Rs 31.1.



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