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Indian Hotels: Leader to benefit

Dec 23, 2003

With the Indian travel and tourism industry turning a corner, the hotel sector is going to be one of the key beneficiaries of the turnaround in the sector. Among the listed hotel majors in the country Indian Hotels (the 'Taj' brand) is the most prominent and is likely to be the foremost beneficiary of the expected revival in the sector. Let us take a look at the prospects of the company going forward. IHCL has been in the hospitality business for many years now and over the years the company has gathered the expertise the industry demands. This is coupled with the brand i.e. Taj that it has built over the years. Almost all properties of Indian Hotels are heritage sites, which give the company a competitive advantage when compared with the international peers that are predominantly focusing on the business and leisure hotels. As a result, room realisations for IHCL are on the higher end. Given the company's inherent strength in the hotel business, any upturn in the industry cycle is likely to benefit IHCL the most.

Lack of proper infrastructure has also been hampering growth of the tourism sector over the years. But the continuation of the thrust in improving road, railway, airport and port infrastructure augurs well for the industry. This would result in better connectivity and access to the heritage sites. As a result, the number of tourist arrivals into India in the long run is likely to be much higher than the present 2.5 m arrivals. According to the WTO (World Tourism Organisation), foreign tourist inflow in to India is expected to grow by over 6% between 2000 and 2010.

Source: Central Statistical Organisation (CSO)

While the prospects of the company seem encouraging there are concerns in the short term. Competition in key cities has affected in the performance of hotels. Like competition in North Mumbai is likely to have an impact on IHCL's hotel in South Mumbai. Also tourist traffic is growing by 20%-25% in North Mumbai as against only 5% in South Mumbai. This has had an impact on group bookings for its Mumbai hotel, the Taj Mahal. Also there would be a 100% capacity addition by the end of the next five years mainly in north Mumbai.

At Rs 437, the scrip is quoting on a multiple of 38x its FY04E earnings. The company has been on the look out for acquiring small hotels in the international arena, but it would be some time before that becomes a reality. On the domestic front, the next 2 quarters is the peak season time for the industry. IHCL will benefit from it being the industry leader. The expected opening of Wellington Mews by the year-end will give a further boost to the performance of the company. In the long term, if the spike in international tourist arrival continues, only then the relatively high valuations of Indian Hotels may be justified, till then investors need to be cautious. For more views regarding the company, read our detailed research report on Indian Hotels.

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