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Stock Analysis: Indian Hotels

SI Reporter/Mumbai 02 Jul 12 | 08:42 AM
Related to : Indian Hotels Co Ltd
 Indian Hotels Co Ltd

BSE   20 Jun 18 | 12:00 AM

133.05  -0.15 (-0.11%)

NSE   20 Jun 18 | 12:00 AM

133.40  0 (0%)

Should you still stay invested in this counter? Read this analysis before making a decision.

Warrant conversion @ Rs103.64: Tata Sons has exercised the option to convert 4.8 crore warrants into ordinary shares of Indian Hotels Company Ltd (IHCL) at the conversion price of Rs 103.64 per share.

This resulted in the mobilisation of Rs497.5 crore (out of which Tata Sons had already paid 25% at the time of the allotment of the warrants). After the warrant conversion Tata Sons’ share in IHCL has gone up to 24.4% from 19.6% earlier.

To reduce debt on consolidated books: Currently IHCL has around Rs 3,805 crore of debt on its consolidated books. The balance amount through the conversion of shares of Rs 373.1 crore would largely be utilised to reduce the debt on the books.

The funding of the on-going projects would be done through internal accruals and there is no new major capital expenditure (capex) lined up on IHCL’s balance sheet in the coming years. Hence, the incremental cash generated through the improvement in the operating performance will be utilised to further repay debt on the books. We, therefore, expect IHCL’s consolidated debt : equity ratio to come down to 0.8x in FY2014 from 1.05x currently.

Ginger Hotels—a successful budget hotel brand: Ginger Hotels is one of the successful budget hotel brands in India with the average occupancy standing in the range of 70-75%. IHCL’s budget hotel brand has already broken even at the profit before tax (PBT) level. IHCL is focusing on enhancing its presence in tier-II and tier-III cities through this brand.

To effectively cater to the growth needs of the brand, IHCL’s subsidiary, Roots Corporation, is planning to invest over Rs600 crore in the next four years to open 55 new properties across the country. These properties will be built under various models including management contract, joint venture and acquisition.

Singapore-based private equity firm Omega TC Holdings will be investing around Rs150 crore in the project in multiple tranches by acquiring a minority stake in Roots Corporation. This will be utilised for Ginger Hotels’ future capex programme.

Outlook and valuation: With a strong room inventory and sustained focus on improving the consolidated balance sheet, IHCL is a better hospitality company compared with its peers who are currently reeling under the pressure of debt.

The business fundamentals of the company’s international properties have improved. Any improvement in the profitability of these properties would act as a key trigger for the stock.

At the current market price the stock is trading at 23.3x its FY2014E consolidated earnings per share of Rs2.7 and an enterprise value/room of Rs0.67 crore. We maintain our Buy recommendation on the stock with the price target of Rs 82.

Source: Sharekhan

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