Indian Hotels – Wah Taj!

Indian Hotels the owner of the Taj group of hotels is transforming itself from a pure boarding and lodging company to a conglomerate of various businesses that can create tourist delight. Over the  past two years Indian Hotels has been significant improvement in its financials. The integration of India’s economy with the world and shortage of quality locations has facilitated the company to  see volume growth with tremendous pricing power. The salient features of the company’s improving operations are:

5/06 2004/05 2003/04

• During Fy 06 total revenues grew by 40% to Rs 1914.18 crores while net profit was up 94% to Rs 248.71 crores.
• The number of hotels has increased to 76 in 2005-06 from 63 in 2003-04. In the same period the rooms increased to 9182 from 7973 while revenues was up to Rs 2981 crores from Rs 1802 crores
• Improved occupancies in all cities except Delhi & Bangalore average room rent  grew across major metro cities in the range of 15% to 35% while revenue per average room grew at 30% to 45%
• The company brought down its debt to Rs 544 crores from Rs 1008 crores. As a result Interest cost was lower by Rs. 8.4 crores at Rs 43.7 crores
• The diluted EPS at Rs. 42.41 in the current year was higher compared to Rs.22.47 in the previous year.

A major part of this improvement was dependent upon the growth in foreign tourists. For the financial year 2006 there was an increase in tourist arrivals by 11% at 4.01 million as compared to 3.6 million. The year also saw an increase in tourist spending by 16% to US $5.97billion from US $5.16 billion.

The company holds excellent locations across all the major cities of India. During the previous year the company experienced improved occupancies in all cities except Delhi & Bangalore. Food and & Beverage sales with banquet bookings increased by 27%. The increase in other income and management fee was in line with the overall business buoyancy

Over the next 2 to 3 years Indian Hotels has planned out a very interesting expansion schedule into various related businesses. The outline for each of these businesses includes:

1) Expansion of their core business of hotels The Company plans to add 50 hotels during this period. The thrust of the expansion would be in middle level range hotels like Ginger and Gateway.

2) Carrying out renovation of existing properties

3) Aggressively getting into low cost budget hotels under the brand “Ginger” - Two hotels are currently in operation at Bangalore and Haridwar while the group intends to roll out 8 – 10 hotels over the next two years presently product and brand repositioning underway. Each of these hotels are budgeted at below Rs 12 crores for 100 rooms

4) The company intends to develop its new chain of Gateway Hotels. The management calls it a new full service hotel chain. This would be Rs 3000 a night stay hotel and should be a major driver for the Indian market.

5) Food & Beverages: In this space the company has entered into a  partnership with International Restauranteurs and also updated its offerings.

6) Luxury Residences: Indian Hotels is setting up a chain of high quality serviced apartments for the long staying visitors. In this connection the company commissioned complex titled “Wellington Mews” in South Mumbai. This will have 80 luxury apartments. The company also plans to set up spatiality Spas across various locations.

7) Wild Life Lodges. As India’s attraction as a tourist spot increases there would a be a flood of visitors for wild life sanctuaries. To provide a high-end wild life experience the company has entered into a joint venture with CC Africa. This alliance would tap the huge Indian wildlife reserves in an eco-friendly and unique experience. The company has already closed out sites at Bandhavgarh and Pench while three other sites are currently under negotiation.

As the new business initiatives develop scale and traction the earnings could significantly rise from these levels. The best part of Indian Hotels is its strong brand. Location is the most important aspect of a hospitality business and for the moment Indian Hotels seems to well entrenched in the right areas of all the major cities of India

Recommendation: Indian Hotels defines India’s changing landscape. This business will cater to both the tourist as well as the Business traveler needs. As the country develops foreigners would visit India both on holiday as well as on business. Even the local Indian traveler shall start commuting more. Moreover incidental revenues from food and banquets shall also rise. It is usual to value hotel companies at a replacement cost of Rs 1 crore per room and there also Indian Hotels fits the pie quite well. As the cost of real estate rise room rents can only go higher up.

The company should grow its bottom-line by at least 30% over the next couple of years. Investors should take position and buy this stock at declines. Their advent into low cost budget hotels will further expand their customer base while forays into wild life, luxury residence etc shall substantially diversify the revenue stream.

Source: Company feedback and media reports

Indian hotels should do a consolidate  EPS of Rs 55 in Fy 07 and about Rs 70 in Fy 08. It does not look cheap at current rates so an investor cannot buy his full quantity. Now buy on declines is  a ague term for me because it hides more then it reveals. Therefore if a person does not have exposure to this stock and wishes to buy 200 shares he should bid for 75 immediately and wait to see how events unfurl.