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Hotels to benefit, room tariffs up - Views on News from Equitymaster
 
 
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  • Oct 10, 2000

    Hotels to benefit, room tariffs up

    The major hotel chains have increased their room tariffs from October'2000. The tariff increases are in the range of 10%-15% across the metro city hotels. This increase in room tariffs is a result of higher occupancy rates in metro city hotels. For the first time in four years, hotels have actually geared up the courage to increase their room tariffs.

    The recent rupee depreciation and higher occupancy rates have helped the hotel companies to shore up their bottomlines. The Indian rupee has depreciated by 6% since the beginning of this financial year to Rs/US$ 46.08 currently. As tourist arrivals are looking up and business travel too has picked up in the current financial year, this is good news for the hotel industry.

    The average room rates of hotel companies which till now have been stagnant, are likely to go up in the second half of the year. Companies like Indian Hotels Company Ltd (IHCL) and EIH Ltd saw a vast improvement in their 1QFY01 results. This has got reflected in their share price performance too over the past couple of months.

    Gross margins (%) 1QFY01 1QFY00
    EIH 20.6% 18.9%
    IHCL 24.2% 22.3%
    There have been concerns regarding the growing room supply in metro cities among investors and analysts. Though these fears are not totally unfounded however we feel these are longer term concerns.

    Currently in Mumbai in the five star segment there have been only two new hotels to come up in the past two years. The Regent, Mumbai (100 rooms) and the recently opened Le Meridien (300 rooms) are the two additions. However as these hotels are located in North Mumbai, they do not pose a threat to the South Mumbai hotels. Majority of the business activity is still continuing in South Mumbai's Nariman Point district.

    In Delhi the only addition currently is the 100 room Nikko hotel. The other hotel to come up in the current financial year is the Grand Hyatt (400 rooms). However keeping in mind that this hotel has been delayed in the past, it is likely to get postponed again.

    Hence after two-three years, future room supply will be an issue, but not for the short term.

    On valuation terms, Indian Hotels Company Ltd is trading at a price to earnings multiple of 8.6x and EIH Ltd is trading at 11.6x (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 are factored in the price.

     

     

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