Hotel and tourism related stocks have been in the limelight off late on the stock market. After a record inflow of 2.9 m international tourists into the country, the long-term prospects continue to remain promising. In this backdrop, we decided to compare one of India’s major hotel chains i.e. Indian Hotels, with one of the major international hotel chains i.e. Hilton.
Hilton – In brief
Hilton, as on December 2003, had a portfolio of 2,173 properties spread across the world with 348,483 rooms. While owned rooms accounted for just 9%, managed hotels accounted for as high as 83% of rooms for Hilton. Managed properties are a less asset intensive business as compared to the owned ones (the hotel gets a license fee based on the agreement with the owner of the property). The compounded growth in revenues over the last three years is 12%.
Indian Hotels – In brief
Indian Hotels, as per the latest information available, has a portfolio of 64 properties (largely in India) with an estimated 8,077 rooms. Whiled owned rooms accounted for 35% of total rooms, managed properties accounted for around 14%. The company hopes to expand significantly through the managed properties route, as this will result in ‘asset light’ growth. Its compounded growth in revenues over the last three years on a consolidated basis stands at 12%.
Where is Indian Hotels headed in relation to Hilton?
We have taken the average growth over the last three years because one-year scenario may distort the picture (the sector has been on a recovery path over the last one year). As is evident from the table below, Hilton, despite its global presence, has managed to grow profitably in the last three years. Margins, both at the operating and at the net level, are higher than the domestic major.
Vis-à-vis: 3-year average
No. of rooms
Avg. room rate (US$)
Revenues (US$ bn)
Debt to equity (times)
Return on equity
Return on assets
Valuations (3-year average)
*based on FY04 actuals
More importantly, the return on assets is much higher than Indian Hotels primarily on account of the large contribution from managed properties. We believe that the low return on assets of Indian Hotels will recover from the current level for reasons like sharp rise in tourist inflows, India’s contribution in the global economic development, focus of the management in increasing the managed property size and restructuring (this could involve disposal of unprofitable properties). Though working capital to sales ratio of Indian Hotels is much higher than Hilton, in FY04, it stood at 4% (excluding the cash proceeds from the FCCB issue).
As far as occupancy and average room rates are concerned, there has been a sharp rise in the recent past (in FY04, occupancy rate for Indian Hotels stood at 69%). While we do not expect domestic average room rates to reach Hilton’s level (rates are much higher in US and UK), it is likely to catch with the regional average of around US$ 110 over a period of time from the current US$ 93.
Indian Hotels is currently trading at a price to earnings multiple of 28.0 times FY04 earnings. Though valuations may look expensive on a P/E basis, we believe that the hotel and tourism industry is coming out of its lows post the September 11 attacks and therefore, earnings are depressed.
The more useful ratio to evaluate a hotel stock, from a retail investor’s perspective, is the price to book value ratio. Though the book value of the company may not adequately reflect the actual value of its properties, it nevertheless highlights the underlying value. Based on the same, Indian Hotels is trading at 1.6 times (table above). Having said that, it has to be borne in mind that the sector is highly influenced by geo-political events (SARS, Middle East crisis, September 11 and so on) and to that extent, the risk profile of the stock and the sector is very high.
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