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Indian Hotels Co. Ltd: Valuations beckon - Views on News from Equitymaster
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  • Sep 29, 2000

    Indian Hotels Co. Ltd: Valuations beckon

    Indian Hotels Co. Ltd (IHCL) is currently trading at 9.5x FY00 earnings, this is low as compared to its nearest competitor EIH Ltd which is trading at 13.1x FY00 earnings. The market seems to have discounted the improved occupancy rates in metro city hotels for EIH, but has not used the same principle for IHCL.

    The main reason we feel for this is that even though IHCL has seen a substantial increase in occupancy rates in its major hotels in the past few months however its net profit has failed to show an improvement. On a brighter note the operating profits grew by 25% in the 1QFY01, however due to higher interest and depreciation costs the net failed to grow commensurately.

    Keeping in mind that IHCL is gearing up to meet future competition in metro cities, its undergoing a major renovation and refurbishment drive at its hotels. Hence the higher interest and depreciation charges. This strategy of the company will pay off in the long term.

    (FY00) IHCL EIH
    Gross Margins 26.5% 19.8%
    Net Margins 19.2% 17.2%
    EPS (Rs) 25.1 13.8
    CFPS (Rs) 33.5 18.6
    DPS (Rs) 8.5 5
    P/E (x) 9.5 13.1
    IHCL has always been a forward looking company and was the first in many areas. It was the first hotel chain to open hotels in leisure destinations like Goa and Jaipur, and the first to introduce the concept of 'business hotels' a rung lower than luxury metro based hotels.

    When comparing EIH and IHCL it is also important to note that the consolidated earnings for IHCL would be much higher. This being due to the fact that IHCL has many affiliate companies like Oriental Hotels and Indian Resort Hotels which are profit making and have been operating for many years. On the other hand EIH Ltd's affiliates companies are fairly new and will take sometime to add substantially to EIH's earnings. Hence on this basis too the company is ahead of its nearest competitor.

    Another positive in favour of IHCL is the fact that it has two land banks in Mumbai which it had bought many years ago. As Mumbai continues to be the most profitable hotel market, this strategy too accounts to forward thinking. IHCL has plans of opening a hotel in South Mumbai, while its plans to sell off the land it owns in North Mumbai. As competition in North Mumbai is going to go up in the next five years, IHCL does not see any benefit for it here, as oversupply is bound to play a key role.

    EIH on the other hand has invested in land in North Mumbai a couple of years back and the total project cost for the 500 room hotel is estimated at Rs 5 bn. This will be a drain on the company's cash flows over the next few years.



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