Indian Hotels Company - Multibagger (India Infoline)

Indian Hotels Company : Reco Price Rs. 135.90 (India Infoline Picks)
We expect higher volume growth on the back of increased room inventory, moderate average room rate and expansions in key subsidiaries to be main drivers for Indian Hotel over FY07-FY09E.

Indian Hotels CMP Rs 135.90

Valuations and Recommendation

We expect higher volume growth on the back of increased room inventory, moderate average room rate and expansions in key subsidiaries to be main drivers for Indian Hotel (IHCL) over FY07-FY09E. The company, along with its subsidiaries, has aggressive capex plans to the tune of Rs1,500cr over the next two to three years which implies addition of around 3,810 owned rooms and 2,439 under management contract. With a pan-India presence, international acquisitions and moderate Average Room Rate (ARR) increase in domestic market, we expect earnings CAGR of 19.7% over FY07-FY09E. We recommend BUY with a target price of Rs164, providing upside of 21.5% from current levels.

Company background

IHCL is the largest hotel chain in the country and owner of the "Taj" brand with a portfolio of 81 hotels in India and abroad, and room inventory of about 9,900 rooms. It has presence across major price segments of the industry with the launch of "Ginger" brand of budget hotels in FY07. The domestic hotel industry has enjoyed robust ARR growth with stable occupancies which has helped the company post sales and earnings CAGR of 38.1% and 54.9% respectively over the FY05-07 period.

Shareholding Pattern:

Holding	No. of Shares
As on 30 June 2007	(%)	(in crs)
Promoters	29.2	17.6
Foreign & institutions	47.1	28.4
Non-promoter corp. holding	4.1	2.5
Public & others	20.2	11.9

Business outlook
Room inventory to increase 33% in parent company
IHCL has plans to expand its room inventory to an estimated 4,302 rooms, an increase of 33.1%, over the next two to three years at a capex of about Rs800cr. These expansions are likely to add about 12% to total room revenues (standalone) in FY09 and even higher in FY10 which would be their first full year of operation.

Expansion plans:

Owned Hotels	Rooms
In IHCL	1157
In group company, of which
Domestic	2257
International	396
Management contracts
Domestic	1855
International	584

	FY06	FY07	FY08E	FY09E
Revenues	1837	2506	2923	3518
Growth (%)		36.4	16.6	20.3
EBITDA	546	807	885	1061
EBITDA margin (%)	29.7	32.2	30.3	30.2
PAT	249	370	411	530
Growth (%)		48.9	11.1	28.7
EPS (Rs)	4.3	6.1	6.8	8.8
P/E (x)	32.8	22.7	20.5	15.9
P/BV (x)	4.2	4	3.6	3.1
EV/EBITDA (x)	17	12.8	12.1	9.9
ROE (%)	12.9	17.7	17.4	19.4
ROCE (%)	12.2	15.6	14.6	17.3

Source: Company, India Infoline Research

Subsidiaries also in expansion mode
Along with IHCL, its subsidiaries also plan to aggressively increase room inventory through a mix of owned assets and management contracts. About 2,653 rooms would be owned through various subsidiaries and JVs both in India and abroad while another 2,439 rooms would be under management contract.

Going international through acquisitions
In January 2007, IHCL had acquired the erstwhile Ritz Carlton Boston (now Taj Boston) and the Campton Place Hotel in San Francisco in April 2007. Additionally, it is expected to commission hotels in South Africa, Malaysia and Thailand. This international expansion is likely to provide some hedge against the anticipated downturn in ARRs beyond FY09. Moreover, the company intends to own assets only in key global cities like New York (The Pierre), London (St.James), and Sydney (The Blue) amongst others. In line with this strategy, it has exited from properties in Seychelles, Oman and Saa'na last year.