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India's hotels: Asian Laggards - Views on News from Equitymaster
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  • Dec 20, 2000

    India's hotels: Asian Laggards

    The last few months have brought hotel investors a lot of cheer. These stocks have risen on the news of higher occupancy rates in metro cities. The driver to these higher occupancy rates are higher tourist arrivals. For the period April-October 2000, tourist arrivals have grown at a buoyant 8.9% YoY.

    This has led to better prospects for the Indian hotel industry. Inspite of this India lacks behind largely in terms of visitor arrivals when compared to say its Asian counterparts. India receives around 2.4 m visitors per annum. Indian tourism accounts for just 0.6% of the world tourist tourism.

    In the current year investors, hoteliers and the industry in general are gung-ho about the fact that this figure is growing at over 8% YoY. In comparison lets see our Asian counterparts. Hong Kong and Singapore are among the top tourism cities in Asia in terms of arrivals. For 1999 Singapore received 6.9 m visitors and Hong Kong received 11.3 m visitors. We here in India feel elated with our 2.4 m visitors.

    India lags behind as tourism as an industry is not taken seriously by the government and industry associations. Efforts towards improving infrastructure facilities and safety measures are inadequate. This keeps potential visitors away from India. Considering our vast and diverse culture, and what the country can offer, this is a shame.

    Another angle that develops from this is that in terms of room supply India has a total of 66,000 rooms and of this 28% are in the five star category. The five star metro hotels account for around 90% of the total five star capacity. These hotels are doing well in the current year as tourist arrivals have been strong. Hotels in Mumbai are enjoying occupancy rates of 75%-85% currently. Hence, our room supply base is so small that even an average growth in arrivals fills up the five star hotels across cities.

    If we took our tourism seriously our hotels would always be full, average room rates high and we would not have to worry about the additional 3,300 rooms coming up in Mumbai or an additional 1,400 rooms coming up in Delhi.

    If we aim to double our tourist arrivals in the next 5-6 years, the hotel industry will not be faced with oversupply. In India it takes at best 3 years to open a hotel, right from conception to date of commencement of business. Hence any room capacity increase will easily absorb the higher number of tourist arrivals. Only if policy makers were to take notice of this.

    In the meantime hotel stocks like Indian Hotels Company Ltd (IHCL) and EIH continue to enjoy the good times in the current financial year in the hope that things only improve from here.

    In terms of valuations though these stocks have run up recently, we continue to believe that these stocks still have value as occupancy rates continue to be strong and room supply in metros is coming up very slowly. Also the fact that these two hotel chains enjoy a capital cost advantage as compared to newer players will hold them in good stead. When room supply increases they will be in a better position to lower tariffs as compared to the newer hotels.

    We feel that these chains will be winners in the longer term. Their advantages include prime hotels in excellent locations, capital cost advantage in metro cities, widespread hotel network and well established brand image. Their aggressive expansion plans both domestically and internationally will keep them moving ahead.

    On valuations, IHCL is trading at a 55% discount to its NAV of Rs 541 per share and EIH is trading at a 45% discount to its NAV of Rs 353 per share.

    On a price to earnings multiple IHCL looks more attractive as compared to EIH. On the current price of Rs 246, IHCL is trading at 7.9x FY02E EPS of Rs 31.1, while EIH on the current price of Rs 195 is trading at 9.0x FY02E EPS of Rs 21.7.



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