Rupee depreciation provides cheer to hotel stocks - Views on News from Equitymaster

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Rupee depreciation provides cheer to hotel stocks

Aug 9, 2000

Since the beginning of this financial year the Indian rupee has depreciated by 5% from Rs 43.52 per USD to Rs 45.7 currently. Over 60% of hotel industry earnings are in foreign exchange due to their dollar earning capacity as majority of guests in metro hotels are foreigners. This has provided a good start for the current year for hotel stocks.As a ball park figure a 1% depreciation in the rupee, contributes to around 1% of hotel company profits before tax. The major hotel chains like Indian Hotels Co. (IHCL) and EIH derive respectively 53% and 65% (as of March'2000) of their earnings from foreign exchange, hence the above factor will definitely spruce up their bottomline in the current year.

FY2001, has started on a good note for the hotel sector as tourist arrivals have grown by 9% YoY for the 1QFY01. The rupee depreciation coupled with an improved domestic scenario and stable political condition augurs well for the hotel and tourism industry in the current financial year. Occupancy rates in the metro cities for the 1QFY01, have reported a positive trend.

On the concerns regarding increase in room capacity in metros of Mumbai and Delhi, majority of the expansions are going slow or are delayed. We do not expect any significant increases to capacity expansions over the next two years in these two cities.

Hence the scenario for metro based hotel chains looks exciting over this period as the macro environment is favourable. The share price performance of IHCL and EIH over the past two months, shows that the market has also start responding to the exciting times ahead for the hotel industry.

Share price performance in absolute and relative terms
 8th August
2000
2 weeks1mth2 mthsDividend yield
(%) FY2000
Indian Hotels Co. Ltd (Rs)2232042182133.8.0%
Absolute (%) 9.0%2.0%5.0% 
Relative to BSE Sensex (%) 6.0%14.0%14.0% 
EIH Ltd (Rs)1411241211183.5.0%
Absolute (%) 14.0%17.0%19.0% 
Relative to BSE Sensex (%) 11.0%29.0%28.0% 
BSE Sensex 4,317 4,188 4,885 4,729  
Absolute (%) 3.0%-12.0%-9.0% 

On valuation terms, Indian Hotels Company Ltd is trading at a price to earnings multiple of 8.9x and EIH Ltd is trading at 10.2x (both on FY2000 earnings). This is low as compared to multiples of 20x-25x they traded at few years ago and negativity's facing the hotel industry all seem to be in the price.


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