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IHCL: Holiday to continue...

Mar 4, 2004

With the domestic as well as international tourism industry gathering steam, the Indian hotel sector seems poised for a take off. In this backdrop, let us look at the performance and prospects of the leader in the domestic hotel industry, Indian Hotels. Indian Hotels Company Limited (IHCL) is India's largest hotel chain, which owns and manages 65 hotels across the country and the globe through its "Taj" brand. Overall the company has 8,155 rooms (owned and managed). It has a presence in all hotel segments through luxury hotels, business hotels, leisure hotels, palace hotels, beach resorts, garden retreats, wildlife lodges and service apartments.

If we look at the graph above, it gives us an indication as to how the company has fared in the last four years as far as occupancy rates are concerned. The graph indicates that occupancies that have languished in the last few years have improved significantly in FY04. As far as room rates are concerned, the graph below indicates that while room rates of leisure and business segments has remained more or less stable, those for the luxury segment have dipped in the last four years. This has been a cause of concern for the company as it derives a majority of its revenues from this segment. There can be various reasons attributed for the same. The September 11 attacks on the US followed by the Iraq war and SARS epidemic severely affected the flow of tourists as well as business travelers across the world. This in turn affected the occupancy rates and consequently the room rates of IHCL.

While the trend for the last four years has been disappointing, the first nine months of FY04 have been very encouraging considering the fact that the fall in room rates has been arrested. An improvement in the tourist as well as business traveler inflows in to the country has led to this improvement in room rates. The improvement in the inflows of tourists can be attributed to a host of factors. Improving health of the Indian economy as well as discovery of new tourist destinations in India has diverted a significant quantum of tourist arrivals towards the Indian shores. That apart, tourists are discovering that India can be an alternate leisure option in comparison to other South East Asian countries like Malaysia, Thailand and Singapore.

While this has been the performance of the company in FY04, what is in store for the same going forward? For one, the upturn in the economy and the acceptance of India as an attractive investment destination augurs well for the company. For years, high domestic airfares have been an impediment to international tourists. This is because Indian domestic airfares made up a significant part of the overall tourist spend. This meant that when the overall holiday package was compared with the likes of countries like Malaysia and Thailand, the high domestic airfares in India always led to the country being portrayed as a more expensive destination that its South East Asian counterparts. According to a survey by the World Tourism Organisation (WTO), the number of tourist arrivals is expected to increase from the present 2.5 m to 5.9 m by 2010 and to 9 m by the year 2020. As per these estimates the tourist influx is expected to grow at a healthy 6.5% CAGR. In 2003 alone, growth in tourist arrivals stood at 15%.

However in the last 4-5 years, with the opening up of the domestic airline sector and the rationalization of tariffs, domestic airfares have dropped significantly. This means that holiday packages to India are likely to become cheaper and hence is likely to attract more tourists in to the country. That apart, the increasing acceptance of destinations like Goa and Kerala are likely to further pull higher tourist number in to the country, thus benefiting IHCL, which is well entrenched in these two destinations.

At Rs 433, the stock is trading at a P/E multiple of 62x its annualised 3QFY04 earnings. While the current valuations of the company seem stretched, we would like to point out that the prospects of the hotel industry in the country seem very encouraging. We may be at the verge of a structural shift in the economy that will further aid the recovery of this sector. Our advice to the investors at this stage would be to take a long-term view of the stock, for only over the long-term would one see the full benefits of the structural shift in the economy benefiting the sector and IHCL, being the largest and the most profitable in the sector. Having said that, unprofitable subsidiary companies continue to be a drag on the company's financials. Hence it remains to be seen as to how the company manages these issues.


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