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Promoters of hotel stocks have been investing in their stocks… over
the last six to 10 months. Tata sons have infused money into IHCL via
warrants and the stock at Rs103.64/share, EIH did a rights issue of
Rs12B in Feb-11. Leela has shown insider buying activity of late as well
(US$1.3M purchase).
…Add to this, most foreign players are looking to step up their India
expansion: Mariott plans to reach 100 properties in India by 2015 (vs.
14 currently). Starwood (whose entire top management was in India for
a month) aims to achieve 100 properties (vs. 35 currently) by 2015.
Hilton, starting off of a low base aims to reach 19 properties over the
next five years (vs. six operational currently). We note that most of this
expansion is happening via management contract route and in general
liquidity conditions for developers are tight; hence, from a competitive
perspective the supply line will be delayed.
And Domestic business outlook is still healthy: Tourist arrivals are up
by 11% YTD as per the latest data released by the ministry of tourism.
This compares to 8.9% growth that was seen during the same period last
year. In general, while we are in a seasonally weak (1H) period currently,
business improvement in 2H should tie in nicely with a macro rebound
expected during the same time.
… Yet equity investors are still not interested, as seen by the sharp
YTD underperformance of most hotel stocks (esp. IHCL, IHTL,
Rs81.60, OW). While some underperformance may be warranted, given
overall macro conditions, a sharp 20% YTD fall, in our view, now places
some of these stocks in a value zone. On our numbers, IHCL is currently
trading markedly below replacement cost levels (adj. EV/room
=Rs13MM) and offers near-term growth with potential for debt
deleveraging and an optionality on international business turnaround.
Retain OW.
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