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Indian Hotels: Eyeing ITDC windfall - Views on News from Equitymaster
 
 
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  • Dec 6, 2000

    Indian Hotels: Eyeing ITDC windfall

    Indian Hotels Company Ltd (IHCL) share price flared by 7.4% on the BSE to close at Rs 234 and by 7.1% on the NSE to close at Rs 232. The main reasons for this are the fact that IHCL is a strong contender for the ITDC disinvestments. Apart from that occupancy rates in metro cities continue to surge up.

    Indian Hotels Company Ltd (IHCL), has stepped up its interest in ITDC's disinvestment process. Being a 10% equity stakeholder in ITDC provides it with a good chance of getting few of ITDC's hotels. This whole thing rests on the premise that ITDC's disinvestments are finally going to go through this time round.

    The government plans to disinvest the hotels by either outright sale or on a long-term lease basis. IHCL is keen to swap its 10% stake for 3 properties of ITDC. Most of the privately run hotel chains are keen on only 10 of ITDC's hotel properties, due to their prime locations. The ten hotels are ITDC's properties in Delhi, Calcutta, Mysore, Udaipur and Thiruvananthapuram. Of these, the 5 prime ones are located in the city of Delhi itself. These properties are huge in terms of size and are also well located. If IHCL manages to get their hands on any of these hotels, they would stand to benefit in the long term.

    Even if IHCL gets few properties on a long-term lease basis it would be beneficial for the company. For example if IHCL was to buy out a new hotel in Delhi, as a ballpark figure for a five star 300 room hotel the cost of construction works out to Rs 1.5 bn (Rs 5 m per room). This does not include the cost of land.

    If IHCL manages to get its hands on some of these properties without having to pay more for them, it would be excellent for it. IHCL had paid Rs 97 per share of ITDC and its total investment amounted to Rs 657 m for a 10% stake in ITDC. This deal was done during the hay days of the hotel industry a few years back.

    IHCL's strategy of foreseeing the future has always paid off. Hence we are not surprised this time around the company again stands to benefit. It enjoys the distinction of being the first to make its presence felt in many Indian business cities and leisure destinations and of having one of the lowest capital costs per room in metro cities, due to low historical land costs.

    Luxury hotels occupancies up
    Occupancy rates (%) 1QFY01 1QFY00 2QFY01 2QFY00
    Taj Luxury Hotels 57.0% 49.0% 57.0% 54.0%
    Taj Leisure Hotels 37.0% 48.0% 38.0% 38.0%
    Taj Business Hotels 52.0% 59.0% 53.0% 63.0%

    Besides the above news, IHCL is on the upswing as occupancy rates were up in November 2000 for all Mumbai hotels in the range of 80%-90%. This does spell good news for hotel chains like Indian Hotels and EIH, which derive respectively 38% and 52% of profits from their Mumbai hotels.

    These companies also revised their room tariffs in October 2000 by 5%-10% in their metro hotels. This is the first time in four years, that hotel companies were able to revise their tariffs upwards. In the past few years they have been resorting to discounts. Hence the market looks forward to excellent 3Q results by hotel sector.

    Luxury hotels ARRs looking up in 2Q
    ARR (Rs) 1QFY01 1QFY00 % change 2QFY01 2QFY00 % change
    Taj Luxury Hotels 5,612 6,199 -9.5% 5443 5301 2.7%
    Taj Leisure Hotels 2,030 1,841 10.3% 1703 1750 -2.7%
    Taj Business Hotels 2,840 2,500 13.6% 2808 2494 12.6%

    On valuation terms IHCL looks attractive. At the current price of Rs 240 it is trading at 56% discount to its Net Asset Value per share of Rs 541. On an EV/EBIDTA, it looks more attractive as compared to its peer EIH. On an EV/EBIDTA basis IHCL is trading at 6.5x FY02E. On a price to earnings multiple it is trading at 7.7x FY02E EPS of Rs 31.1.

     

     

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