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Hotels (In a recovery stage, occupancy to drive growth)
Neutral
After witnessing a severe contraction in the past two years, the hotel sector
is set to witness an improvement in its revenues (FY10-12E CAGR of 21%)
on an improved GDP outlook and lower-than-expected growth in room
supplies. The growth in revenues would mainly come from a rise in
occupancy by 16% to 74% from 64% in CY10 while ARRs are expected to
rise by 6% to | 8,400 during the same period. We believe moderate hotel
room supply and compelling valuations of the hotel sector would draw
attention of investors into this sector in 2011.
⇒ Business destinations to outperform leisure destinations
For CY10, the majority of demand came in from domestic travellers on
faster economic growth while demand from international travellers
(FTAs) remained muted in H1CY10 due to lower pace of economic
recovery in developed nations like US and UK, both contributing over
30% of foreign tourist arrivals (FTAs) in India. With the improved
domestic business sentiment and higher consumer spending, we
believe business destinations would continue to witness higher
demand compared to leisure destinations in CY11. Of late, we have
also seen an improvement in FTAs data. We believe any improvement
in the environment of developed countries would provide a positive
surprise for leisure destinations in India.
⇒ Compelling valuations, moderate supply to draw attention to sector
We believe the moderate hotel room supply and compelling
valuations of the hotel sector (trading at average 2.0x one year
forward book value (BV) as against five years historical one year
forward average BV of 3.0x) would draw the attention of investors into
this sector. The overall hotel room supply in this segment is expected
to grow at ~11.7%. We believe this would easily be absorbed.
However, an oversupply situation scenario would be witnessed in
some regions like Hyderabad and Chennai. Our preferred pick in this
sector would be Indian Hotels, which has a balanced room portfolio
across various price points in both business and leisure destinations.
With an improved outlook for the industry and a strong brand image
of the company, we expect IHCL to remain an outperformer of the
sector in CY11. It is currently available at a 22% discounts to its peers.
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