X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Hotels: 4QFY06 and beyond - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Apr 24, 2006

    Hotels: 4QFY06 and beyond

    With the March quarter results around the corner, in this article, we highlight factors that investors should watch out for in the case of hotel companies and how are they likely to pan out going forward. While hotel stocks are in the limelight for the right reasons i.e. India gaining significant global attention, there are questions raised about the valuations.

    Tourist's are coming and spending: India is on a roll. In the first two months of the calendar year 2006, the country witnessed a 12.6% YoY jump in foreign tourist arrivals (0.9 m or 20.5% of foreign tourist arrivals in FY06). We expect international tourist arrivals to grow at a CAGR of 8%. With the ‘India Story' gaining significant attention among the global media and business community, outperformance cannot be ruled out!

    Foreign exchange earnings from tourist spending were pegged at around Rs 54 bn in the first two months of 2006, registering a growth of 14.7% over the same period in 2005. This means that the average foreign tourist spent Rs 60,000. This, we believe, is higher than the previous year, largely on account of higher room rates (during this period air travel has become cheaper and exchange rate has remained more or less the same). Given the robust inflow of traffic, there is a mismatch between demand and supply of rooms in India (though the degree of mismatch varies city-to-city). This is helping hotel companies to hike prices and therefore, is reflected in higher average room rates (ARRs). According to estimates, India needs about 80,000 rooms in all categories over the next two to three years at an estimated cost of about US $8 bn to US $9 bn (of which, 20% is required in the premium segment). Though new capacities are expected to be operational in the next three to five years, demand will continue to outpace supply in the short to medium term.

    Stronger margins: We anticipate margins to be stronger for most of the hotel companies. This is due higher ARRs and occupancy rates. With demand outpacing supply in the short to medium term, and ARRs are expected to increase by 13% to 14% annually over the next two years. Higher room revenues will directly flow to the bottom line.

    As far as individual companies are concerned, we expect Taj GVK and Hotel Leela to maintain superior margins as compared to the industry. Indian Hotel's operating margin, which trails the industry average, will witness expansion, considering the fact that the one-time employee-related expenses that the company incurred last fiscal year are done with. To that extent, the expansion will be more apparent in this quarter (like in 3QFY06). Looking beyond IHCL, EIH should post robust growth in the bottomline in light of the margin expansion and lower interest charges.

    What to expect?
    Over the next two to three years, assuming that the geo-political situation remains favorable, we expect the net profit to outpace topline growth for hotel companies. Since majority of the new projects are likely to commence operation by the second half of the calendar year 2007, till then, growth will be value-led (higher room rates). We also believe that operating margins of hotel companies will be substantially higher than what we witnessed in the mid-1990s.

    While we have a positive view on the sector, the current valuations of hotel stocks are a matter of concern. We value hotel stocks on the NAV basis. This is because, by this method, we can arrive at the actual value of the hotel properties (in terms of cost per room). Based on this, NAV per share can be calculated, which reflects the actual value of the stock and a fair value for the shareholder at which to acquire the shares of the company. However, currently with real estate prices sky-rocketing, the current NAV is very high with cost per room valued at around Rs 20 m to Rs 30 m. This will look attractive as long as real estate prices remain high. But with a downturn, the scenario would reverse. Hence, we would advise utmost caution at the current juncture.

     

     

    Equitymaster requests your view! Post a comment on "Hotels: 4QFY06 and beyond". Click here!

      
     

    More Views on News

    Indian Hotels: Domestic Operations Performs Well (Quarterly Results Update - Detailed)

    Oct 17, 2016

    Indian Hotels has reported a 5.6% YoY increase in the consolidated topline and a consolidated loss of Rs 1,695 m for 1QFY17.

    Indian Hotels: Recovery Still Far Away (Quarterly Results Update - Detailed)

    Mar 28, 2016

    Indian Hotels has reported a 13.2% YoY increase in the consolidated topline and a standalone net profit of Rs 1.2 m for the quarter ended December 2015.

    Indian Hotels: A good operating performance (Quarterly Results Update - Detailed)

    Nov 24, 2015

    Indian Hotels has reported a 13.2% YoY increase in the standalone topline and a standalone net profit of Rs 1.2 m for the quarter ended September 2015.

    Indian Hotels: Exceptional gain boosts bottomline (Quarterly Results Update - Detailed)

    Aug 28, 2015

    Indian Hotels has reported a 10.2% YoY increase in the consolidated topline and a consolidated net profit of Rs 348 m for the quarter ended June 2015.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    COMPARE COMPANY

    MARKET STATS