Hotels: 4QFY06 and beyond - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Hotels: 4QFY06 and beyond

Apr 24, 2006

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

MAHINDRA HOLIDAYS Announces Quarterly Results (1QFY21); Net Profit Up 47.4% (Quarterly Result Update)

Aug 24, 2020 | Updated on Aug 24, 2020

For the quarter ended June 2020, MAHINDRA HOLIDAYS has posted a net profit of Rs 268 m (up 47.4% YoY). Sales on the other hand came in at Rs 2 bn (down 29.4% YoY). Read on for a complete analysis of MAHINDRA HOLIDAYS's quarterly results.

THE INDIAN HOTELS Announces Quarterly Results (4QFY20); Net Profit Down 42.9% (Quarterly Result Update)

Jun 11, 2020 | Updated on Jun 11, 2020

For the quarter ended March 2020, THE INDIAN HOTELS has posted a net profit of Rs 668 m (down 42.9% YoY). Sales on the other hand came in at Rs 11 bn (down 14.6% YoY). Read on for a complete analysis of THE INDIAN HOTELS's quarterly results.

MAHINDRA HOLIDAYS 2018-19 Annual Report Analysis (Annual Result Update)

Oct 18, 2019 | Updated on Oct 18, 2019

Here's an analysis of the annual report of MAHINDRA HOLIDAYS for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of MAHINDRA HOLIDAYS. Also includes updates on the valuation of MAHINDRA HOLIDAYS.

EIH 2018-19 Annual Report Analysis (Annual Result Update)

Jul 24, 2019 | Updated on Jul 24, 2019

Here's an analysis of the annual report of EIH for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of EIH. Also includes updates on the valuation of EIH.

Chalet Hotels IPO: Should You Bet on This High-End Hotel Chain Owner? (IPO)

Jan 29, 2019

Should you subscribe to the IPO of Chalet Hotels Ltd?

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms