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Indian Hotels: Once bitten but not shy

Dec 1, 2000

Indian Hotels Company Ltd (IHCL), is once again keenly looking out to expand its hotel base globally. It has been on the look out for hotels in the US, Middle East and South East Asia. This may worry investors as its past experience especially in the US hotel market was a disaster. However, this time the company claims to have a better thought out strategy as compared to the last time. Some of the mistakes made by it the last time round was that it entered the three star market, which is not in sync with its five star brand image. Secondly the company did not use their own brand, the 'Taj' or tie-up with a well known international brand. This had a negative impact on occupancies as most guests did not associate these hotels with the luxurious Taj hotels in India. Thirdly, they invested in the hotels entirely on their own, and also took huge amounts of debt to keep the hotels going. This was a big risk taken by them as they had no experience in the US hotel market.

As the company's hotels in Chicago and New York did not perform well in terms of occupancy rates and average room rates, the interest burden took its toll on the profitability of these hotels. The Indian parent, IHCL, then went in for a GDR to bail out these hotels.

The company sold of its hotels in New York and Chicago. The only hotel that they kept was the St. James Court, London. Though recently this hotel is performing well in terms of occupancy rates, however its balance sheet is still in a precarious situation.

This time the company cannot afford to make the same mistakes. The domestic hotel industry has come out of a recession in the current financial year after four miserable years. Most investors over time have lost interest in the hotel sector. The 2Q results of IHCL were encouraging with operating profits up 38% YoY. Its operating margins have gone up from 17.8% in the 2QFY00 to 21.2% in the 2QFY01.

  Luxury hotels occupancies up  
Occupancy rates (%) 1QFY01 1QFY00 2QFY01 2QFY00
Taj Luxury Hotels 57% 49% 57% 54%
Taj Leisure Hotels 37% 48% 38% 38%
Taj Business Hotels 52% 59% 53% 63%

The market is yet to recognise the fact that IHCL's performance has improved tremendously over the past year. Occupancy rates in the five star segment in metro cities have gone up in the current year. IHCL has also revised its room tariffs in the current year by 5%-10% across its metro hotels. Investor fears of increasing room supply in Mumbai, is not a large worry currently. This being due to the fact that its main hotels are in South Mumbai, which currently continues to be the hub of business activity. In North Mumbai, though there are many hotels coming up, it is yet to develop in terms of a business district.

  EV/EBIDTA (x)    
  FY99 FY00 FY01E FY02E
EIH 11.3 15.3 11.6 9.0
Indian Hotels 6.4 8.8 7.5 6.0

On the international front the company will need to make well calculated and thought out moves, it cannot be a case of twice bitten but yet not shy. The company claims to be targeting the five star segment in the US hotel market this time round.

Also it does not plan to invest entirely by itself, but will rake in other partners too. It is also keen to use its 'Taj' brand, this will help it internationally as well as promote its domestic hotel properties. However, keeping in mind that internationally the competition will be much steeper than the domestic market where the 'Taj' brand is well established, the company will have to make a lot of effort to prove itself. Also, as location is very important for the success of a hotel, the company may have to pay a higher price for entering the developed US hotel market.

On valuation terms IHCL looks attractive. At the current price of Rs 217 it is trading at 60% discount to its Net Asset Value per share of Rs 541. On a EV/EBIDTA, it looks more attractive as compared to its peer EIH. On a EV/EBIDTA basis IHCL is trading at 6.0x FY02E. On a price to earnings multiple it is trading at 7.0x FY02E EPS of Rs 31.1.


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