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Hotel stocks at a discount to NAV - Views on News from Equitymaster
 
 
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  • Aug 21, 2000

    Hotel stocks at a discount to NAV

    Net Asset Value (NAV) is popularly used as a valuation parameter around the world for valuing real estate, shipping and hotel companies. This technique is important when an investor wants to invest in a company which has a large asset base and the usage of assets are critical to the company's earnings capacity.

    There are two basic methods used for calculating NAV, one is the replacement cost method and the other is the future cash flows method. Of these the former is more widely used as it takes into account the replacement cost of assets at current prices, and is hence more realistic and widely used by analysts. The future cash flow method takes into account a longer time frame and is more theoretical, hence is more uncertain from that angle.

    NAV attempts in unlocking the true value of a company's properties and brands. On a NAV basis both of India’s two largest hotel chains Indian Hotels and EIH, are currently trading at a huge discount. This is because in India, hotel stocks have been valued by the traditional valuation methods of earnings and revenues.

    It is interesting to note due to their widespread hotel network and low historical land costs, their replacement cost on current market prices unlocks their true value. Indian Hotels (IHCL) owns 17 hotels and has an equity interest and manages around 30 more. EIH on the other hand owns 10 hotels and manages 4 hotels across the country.

    (Rs) Current share
    price
    NAV per
    share
    Share price
    disc. / prem. to
    net asset value
    P/E (FY2000)
    Indian Hotels Co. Ltd 233 541 -56.9% 9.3
    EIH Ltd 195 353 -44.8% 14.1

    With occupancy rates in metros looking up and compelling valuations, these stocks look attractive especially on a NAV basis. The other factors which are favouring the hotel industry currently are the depreciating rupee and higher tourist arrivals.

     

     

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