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Indian Hotels Company: The TATA Enterprise



Company Overview:

The Indian Hotels Company Limited (The TATA Enterprise), together with its subsidiaries, engages in the hoteliering and air catering businesses. The company operates luxury full-service hotels, resorts, and palaces under the Taj brand name; Taj Exotica, a resort and spa brand; wildlife lodges under the Taj Safaris brand; Upper Upscale Hotels, which are full-service hotels and resorts; upscale/mid-market full service hotels and resorts under the The Gateway Hotel brand; and economy hotels under the Ginger brand name. It also operates Jiva Spas that provide yoga and meditation, ayurveda, and treatments, including body therapies, rituals, ceremonies, and natural products treatments; Taj Air, a luxury private jet; Taj Yachts; and the Indian Institute of Hotel Management that offers a diploma course in Aurangabad, as well as provides travel agency services. In addition, the company involves in ready to eat/ready to cook foods business. It operates 67 hotels in 45 locations in India, as well as 16 international hotels in the Maldives, Malaysia, Australia, the United Kingdom, the United States, Bhutan, Sri Lanka, Africa, the Middle East, and South Africa. The company was incorporated in 1902 and is based in Mumbai, India.

Key points 
The third quarter of FY2011 began with a fair amount of sturdiness, with the occupancies in the key destinations in India (where Indian Hotels Company Ltd [IHCL] has strong presence) hovering in the range of 75-80% on account of strong room demand driven by a robust growth in foreign tourist arrivals (FTA) and an increase in domestic tourism. With strong room demand and occupancies higher on a year-on-year (Y-o-Y) basis, most of the hotel companies have hiked the average room rate (ARR) by around 15-20% (as indicated by the industry). 
We expect the occupancies to hover in the range of 75-80% and the ARRs to remain firm in Q4FY2011 on account of a major sporting event (the ICC Cricket World Cup 2011) in India. Hence, we expect a strong improvement in the profitability of the hotel companies in H2FY2011.
We believe IHCL--with a strong room inventory under its belt and catering to all segments of the hotel industry--is well poised to grab the opportunity in the current business environment. Hence, we expect the company’s stand-alone profitability to improve significantly in the second half of FY2011. Also, the improving business fundamentals of the international properties and the company’s thrust on improving its balance sheet (by reducing its debt on books) provides visibility of its future earnings at the consolidated level.
The IHCL stock is currently trading at 18.0x its FY012E earnings per share (EPS) of Rs5.2 and at Rs0.96 crore its FY2012E enterprise value (EV) per room. In view of the improved business fundamentals, the strong room inventory and the company’s thrust on improving its balance sheet, we maintain our penchant for IHCL in the hospitality space. Thus, we maintain our Buy recommendation on the stock with a price target of Rs111.