We rate “Indian Hotels Company Ltd” a “STRONG BUY”. Indian Hotels Company Limited (IHCL) and its subsidiaries
collectively known as Taj Hotels Resorts and Palaces is one of Asia's largest and finest hotel company, with an
inventory of 13629 rooms and 115 hotels across India and internationally. It has presence across different chain
segments like Luxury, Upper Upscale, upper scale and Budget segment with various brands named Taj, Vivanta,
Gateway and Ginger Hotels. With its active capacity addition in rooms and hotels, solid entry barriers in Luxury
segment, improved occupancy rates, amplifying hotel tariffs and focus on boosting up the cash flows, we see Indian
Hotels Company to grow at a CAGR of 10.28% in terms of revenue and margins improving substantially by ~160bps for
the next five years.
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Investment Rationale
Valuation
Indian Hotels Company Limited
STRONG BUY Sector‐Hotels
High capacity of expansion in hotel and Rooms: IHCL came up with total 27 hotels and 3042 rooms in last five
years, both in its domestic and international portfolio. It came up with 7 hotels and 971 rooms in FY12. There are 18
hotels and 2040 rooms in pipeline in FY13 and 20 hotels and 2573 rooms in FY14. The company is planning to double
its hotels under its brand named ‐‘Vivanta’ by Taj’ to 50 from the current 23 hotels in the next 4 years. It is also going
to add another 22 hotels under the brand named‐“Gateway” and new 55 hotels under “Ginger” in next four years.
Company’s focus on Cash Flows: The company is on verge of improving its Cash flows by focusing on interest
expenses, employee costs, total debt and cash balances. It has strong average cash earnings per share of INR3.49 per
share for last five years and is poised to achieve the historical level by giving a next 5‐year average of ~INR5.46 per
share.
Rise in occupancy rates, room tariffs and ARR s to drive top line growth: The gradual rise in occupancy rates,
hotel tariffs and average room rates (ARRs) is likely to drive the topline growth and also increase the margins. The
company expects the occupancy rates to reach ~78% with improved domestic tourism and weak rupee. The marginal
hikes in hotel tariff would benefit the ARRs and turnover of IHCL in coming years. There was a marginal rise in hotel
tariffs of 2% in FY12 in India and 4% globally.
Strong entry barrier in Luxury segment: The company is expected to outperform in the Luxury segment space on
account of strong entry barrier in its Luxury segment. The reason is escalating land prices, high establishing costs in the
current scenario as a core factor for the upcoming hotels.
Valuation
We followed Discounted Cash Flow (DCF) approach to value Indian Hotels Company Limited (IHCL). A description of the valuation is as follows:
Discounted Cash Flow (DCF)
We utilized Weighted Average Cost of Capital (WACC) of 7.98% to discount the future earnings of Indian hotels Company Ltd (IHCL). In
addition, we applied a terminal growth rate of 2.50% for the earnings beyond FY2016E. We arrived at the WACC with a Cost of Equity of
11.69%, post tax Cost of Debt of 4.45%, and Debt‐to‐Equity of 1.05x. By adopting Capital Asset Pricing Model (CAPM), we arrive at Cost to
Equity based on Market Return of 12.28%, Risk Free Rate of 8.06% and Beta of 0.86x. Furthermore, the Cost of Debt represents expected
interest cost after deducting the tax impact. With this, our DCF valuation reflects a target price of `80.62 for the stock with a period of 1 year,
which reflects an upside of 35.15% from the CMP of `59.65.
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