Recommendation: Buy
Current price: Rs 35 (at the time of publishing this tip)
Target price: Rs 85
Key points:
- A significant slowdown in business and leisure travel has led the occupancies of the hotel industry to fall from 75% to 58% yoy and the average room rate declined by 17% yoy in January 2009. Foreign tourist arrival has also weakened after 9/11 terror attacks on Mumbai. However, the rate of decline has eased in February 2009 (a month-on-month increase as compared to January 2009).
- Hotel chains, airlines and travel agents along with the department of tourism of India have initiated a joint promotional campaign — Visit India 2009 — to encourage tourism in India. The campaign entails offering enticing schemes to prospective customers during the period April-December 2009. Though such initiatives are welcome, the coming lean season is expected to remain tough due to a higher base effect and continued bleak macro environment.
- As for the hotel industry, the occupancies and room rate of Indian Hotels Company will also remain under pressure in Q4FY2009 and FY2010, however the addition of new room inventory should help drive growth in FY2010. While the business faces several challenges in the medium term, the current valuations of 7.2x and 5.8x consolidated EPS for FY2009E and FY2010E are at historic low levels and provides a good entry point for long-term investment in the stock.
- I remain bullish about this stock and hence would recommend a Buy call with price target of Rs 85 over next 8-9 months.
