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Tourism statistics: Positive for hotels

Nov 16, 2000

As per the latest available statistics, tourist arrivals have reported a strong growth of 6.2% YoY to 1,296,773 tourists for the period of April-October 2000. Also the expenditure per tourist has grown by over 2.6% to US$1,238 for the same period. Overall tourism earnings are up 8.9% during the period April-October 2000. There is a strong correlation between tourist arrivals and hotel occupancy rates. Of the total tourist visitors to India, over 50% come here for business purposes. Of the remaining 50%, around 30% come here for tourism and the remaining 20% are basically NRI's visiting their country. Hence majority of them do stay in hotels.

As a result of higher arrivals in the current year, occupancy rates in the metro cities are up for the first six months as reported by many of the hotel companies. To add to this the depreciation in the rupee over the last couple of months too has added to their bottomlines.

Hotels across Asia are enjoying higher occupancy rates in the current year. Tourist arrivals in places like Hong Kong and Singapore are buoyant. In comparison to Indian hotel stocks, some of the Asian hotel stocks are trading at higher price to earnings multiples due to their global presence.

In India, despite better performance of the hotel sector in the current year, their low valuations do not reflect this. Many investors are concerned on the increasing room supply in metro cities. Though, their fears are not totally unfounded, the fact remains that room supply in cities like Mumbai and Delhi is actually growing very slowly.

This concern would assume importance in two-three years time when room supply rises substantially. In the meantime, hotel companies with dominant presence in the metros will continue to enjoy higher occupancy rates and better average room rates resulting in higher revenues.

Besides valuing hotel companies on price to earnings multiple, there are two other ways to value hotel companies. These are EV/EBIDTA and Price/NAV per share. On EV/EBIDTA, Indian Hotels Co. Ltd (IHCL) is trading at 7.1x FY01E, however EIH on this parameter at 11.4x FY01E is more expensive.

EV/EBIDTA (x)
  FY99 FY00 FY01E FY02E
EIH 10.8 14.7 11.4 8.9
Indian Hotels 6.1 8.5 7.1 5.8

In comparison to their net asset value (NAV) per share, Indian Hotels is trading at a 62% discount to its NAV of Rs 541 and EIH is trading at a 45% discount to its NAV of Rs 353 per share. On this valuation technique, both the companies look very attractive as they are asset plays.

On price to earnings multiples IHCL is trading at 7.9x and EIH is trading at 10.7x (on FY01E earnings). This is low as compared to multiples of 20x-25x they traded at some years ago.

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