Tourism Finance Corp India - Initiating coverage - A hospitable option :: Centrum

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Rating: Buy; Target Price: Rs120; CMP: Rs79.5; Upside: 50.9%



A hospitable option



We initiate coverage on Tourism Finance Corporation of India (TFCI), a
specialist financier of hospitality, with a Buy and target price of
Rs120. Efforts on reviving tourism, anticipated spurt in the hotel
industry which is approaching a cyclical trough and accelerating
mid-market/budget hotel segment dovetail well into TFCI’s growth
strategy. TFCI thus stands at an enviable cusp of rapid demand growth,
coupled with cyclical stability of credit quality and most notably, a
hefty capital position, leading to a steady rise in leverage towards
an RoE of ~19% by FY17E. Our blue-sky scenario offers a potential TP
of Rs160 (106% upside).

$ Efforts underway to revive tourism, mid-market/budget segment the
key focus area: Recent measures such as electronic travel
authorisation, Visa on Arrival and growth of new Tier II cities, are
set to encourage tourism in India. Rating agencies expect 8-13% yoy
growth in tourist arrivals over the next three-to-five years.
Industry-wide occupancy rates have improved over FY13 levels. 60%+ of
incremental room supply over FY14-19E is targeted at the fast emerging
mid-market/budget class. This synchronizes well with TFCI’s growth
strategy in its next phase of transformation.

$ TFCI in a sweet spot: Better understanding of the hospitality sector
and strong due diligence process remains key strength for TFCI
enabling it to leverage on growth opportunity in the hotel sector.
While growth was subdued in the past two years due to oversupply and
credit quality issues, management has guided for growth acceleration,
partly driven by selective loan buyouts from banks. We are building in
a 31% CAGR in loan portfolio over FY14-17E. This will translate into a
23% / 25% CAGR in NII/net profit over FY14-17E.

$ Limited asset quality risk and expanding RoE: Strong margin profile,
lean cost structure, steady fee income growth and limited asset
quality risk have translated into superior RoA profile for TFCI.
Cautious strategy on growth and lower dividend payout saw retention of
capital (overall CAR is at 39.9%, including tier-I at 32.1%) and
consequently lower leverage. However, with growth revival we expect
effective utilisation of capital. This, coupled with increased
dividends (management has hinted at higher pay-out), will enable
better leverage.  We expect RoEs to inch up to 19% levels by
end–FY17E.

$ Valuation, view and recommendation: Given its core competency, TFCI
is geared to leverage on the growth opportunity in the tourism sector.
We believe current valuations at 1x FY17E ABV in the context of growth
acceleration, superior returns profile and improved management
visibility merit re-rating. Also, specialist financiers receive
greater investor attention in times of cyclical upturn of their
underlying assets. We have valued TFCI at 1.5x FY17E ABV to arrive at
a TP of Rs120. Our blue-sky scenario (2x 1-yr forward PB multiple)
implies a potential target price of Rs160. Key risks - Concentration
risk can impact asset quality. Reduction in lending rates can hurt
margins and consequently RoAs. Lower than expected growth can delay
the leveraging and impact RoEs.



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