Hotel sector - has the time come to get in ? - Views on News from Equitymaster

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Hotel sector - has the time come to get in ?

Apr 5, 2000

Hotel stocks have got battered over the last few years as a result of a slowdown in the economic scenario and the political instability which took its toll on foreign travel and the overall business scenario. Indian Hotels has underperformed the market by 85% in the last two years and EIH by 78%. In the last one week Indian Hotels Co. Ltd (IHCL) has fallen by 5% and EIH Ltd has risen marginally by 3% due to poor sentiment in the stock markets. As can be seen from the table given below even in the last three months these stocks have been underperforming the market. The main reason for this decline over the past three months is the announcement of withdrawal of tax incentives for hotel companies in a phased manner in the budget. The reason being there are no signs of a pick up in occupancy rates and an improvement in average room rates.

Share price performance in absolute and relative terms

However over the next six months the prospects for these companies are expected to improve as the economic recovery is underway and the political situation is more stable now than it has been over the last couple of years. The government is keen to promote foreign direct investment into India especially in sectors like power, infrastructure, software and insurance. Hence there would be many companies in these sectors looking to set up their base in India and this in turn would lead to higher foreign business travel. Also as many of these companies may not have office spaces they could book rooms in the five star hotels in Mumbai and Delhi to carry on their operations. Hence the future prospects do not look as gloomy as they are currently.

The key question is that when would it be the correct time for investors to get into hotel stocks. The right time may be when occupancy rates start to pick up and this trend continues for atleast a couple of months. The more bold investors could look to pick up these stocks now itself before these stocks run up. Also as the investor interest for stocks in the software sector is diminishing and investors are looking for value in economy stocks, the hotel stocks which are a play on the economy should generate buying interest in future.

Indian Hotels is currently trading at 9.3xFY99 earnings and EIH Ltd at 7.8xFY99 earnings, valuations are definitely very attractive considering that four years back these stocks traded at 25-30x past earnings. The attractive dividend yields of these companies is also an incentive to get in at these levels.

Though valuations are not expected to reach such high levels in this sector again due to higher room supply, a substantial improvement from current levels is likely. Though room supply is not such a big issue for Mumbai and Delhi hotels currently (these two cities contribute to over 80% of the profits of the listed hotel companies), as many projects are delayed this could become an important issue four to five years later.

The economic scenario is expected to improve over the next one year and hotel companies should enjoy the benefits of this. Hence we feel that in the medium term these stocks look attractive. However the trigger to look out for is a rise in occupancy rates and to monitor this closely over the next few months till such time that it happens.

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