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Investor's Eye
[August 31, 2007] Please see the attachment for details


Indian Hotels Company  
Cluster: Apple Green
Recommendation: Buy
Price target: Rs180
Current market price: Rs128

Room rate hikes to boost earnings

Key points

  • Indian Hotels Company's (Indian Hotels) stock has underperformed after Q1FY2008 results and the stock has corrected by 9% in the last two months. We believe that the quarter's subdued performance was more due to the rupee appreciation than any significant change in the inherent characteristics of the industry.
  • To address the issue of the strong rupee, Indian Hotels has already announced that they would be shifting to a single tariff structure (rupee tariff) across all its properties in India from September this year. We have already mentioned in our Q4FY2007 update that the first half of FY2008 would get affected due to the rupee appreciation till the contracts are revised in September-October 2007.
  • As per the industry trends, the hotel players are going for a new tariff, which would be effective from September 2007. Our channel check reveals that apart from Bangalore and Hyderabad, the tariff hike for most of the cities is above 25%. The increase in the average room rate (ARR) for the four properties of Indian Hotels is 23% and in our projections we have assumed a conservative 15% growth in the ARR for FY2008. The ARR increase would significantly add to the earnings as even an assumed 20% growth in ARR boosts our earning estimates by 7% and 5% in FY2008 and FY2009 respectively.
  • We continue to maintain our Buy recommendation on Indian Hotels as it has multi location advantage, with which it can absorb the vagaries of the industry better than its peers. At the current market price of Rs128 the stock is quoting at a price earnings ratio (PER) of 17.7x FY2008E consolidated earnings per share (EPS) of Rs7.2 and 14.1x FY2009E consolidated EPS of Rs9.1. We maintain our Buy recommendation on the stock with price target of Rs180.

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