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Indian Hotels: Targetting business hotels - Views on News from Equitymaster
 
 
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  • Apr 14, 2001

    Indian Hotels: Targetting business hotels

    The Indian Hotels Company Ltd (IHCL), India's largest hotel chain continues to see business hotels as its thrust area. Currently over 80% of its revenues still comes from its top five luxury hotels. However, as luxury hotels suffer more during the recession, due to their higher tariffs, the future growth for the sector lies in the business hotel segment.

    Being the industry leader IHCL, has years of experience and has realized that when the hotel sector is on an upswing the company benefits due to its strong presence in the luxury segment. However to leverage itself during tough times the company is now investing in the business hotel segment (a rung lower than luxury hotels) so as to cushion itself to some extent.

    Infact over the years the company is likely to increase its revenue mix from the business hotel segment. The company's recent decision to increase its stake in an affiliate company, Piem Hotels Ltd is a pointer to this strategy of the company. IHCL has recently acquired a 9% stake in Piem Hotels, now increasing its stake to 50% from the earlier 41%.

    Occupancy rates (%) 3QFY01 3QFY00
    Taj Luxury Hotels 70% 66%
    Taj Leisure Hotels 56% 54%
    Taj Business Hotels 57% 66%

    Piem Hotels, currently owns the Taj Residency in Nashik, Bangalore and Indore, and the Taj President at Mumbai. Besides increasing its presence in this company, IHCL has also decided to directly invest in this segment on its own. It has bought a 100 room property in Pune, and has also invested in three properties in Hyderabad.

    Though currently investors may be concerned that returns from business hotels are lower than for luxury properties, in the longer run this stance of the company is sure to fetch it good returns. With the upcoming competition in the luxury hotel segment in the major metro cities of Mumbai, Delhi, Chennai and Calcutta over the next three to four years, IHCL's occupancies and average room rates at its flagship properties are sure to feel the pressure.

    In the current financial year, IHCL's occupancies at its business hotels is depressed mainly due to the ongoing renovations at its properties Taj Connemara in Chennai and Blue Diamond Hotel in Pune.

    ARR (Rs) 3QFY01 3QFY00 % change
    Taj Luxury Hotels 6,337 6,118 4%
    Taj Leisure Hotels 3,424 3,000 14%
    Taj Business Hotels 3,030 2,233 36%

    Hence while other hotel chains will be vying for a share of the pie in the luxury hotel segment, companies like IHCL will benefit due their presence in the business as well as leisure hotel segment. The leisure hotel market too is enjoying higher demand now due to higher domestic demand as well as steady growth in tourist arrivals in the past year.

    On the current price of Rs 245, IHCL is trading at a 55% discount to its net asset value per share of Rs 541. It is trading at a price to earnings multiple of 9.3x FY01E EPS of Rs 26.4.

    Given its recent renovations and expansions, the company's interest and depreciation costs have risen in the current financial year. Hence we expect IHCL to clock in a net profit of Rs 1,190 m in FY01E, a growth of only 5% YoY, despite higher operating margins.

     

     

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