Buy Indian Hotels Company Ltd (IHCL) (Q2 FY08)

CMP Rs144,

Target price Rs160, Upside 11.2%


‰ Sales growth of 15.7% yoy lower than our estimates due to lower room
availability; ARR growth remains healthy
‰ Reduction in staff costs and other expenditure lead to a 420bps yoy
improvement in operating margins
‰ Higher interest cost and tax outgo erode operational improvements; net profit
up 16% yoy


ARR growth remains healthy at 15-20% yoy
Indian Hotels reported a 15.7% increase yoy in sales although room rates
increased by about 15-20% in major business and leisure destinations along with
higher occupancies at 68%. Marginally lower sales growth was an account of lower
room availability, especially at its flagship Taj property in Mumbai where several
rooms were taken for refurbishment. However, these are now back into operations,
ahead of the busy second half.
All round reduction in costs lead to 420bps increase in margins
Operating margins for the quarter improved by 420bps to 29% as staff costs and
other expenditure declined. Better cost control in the first half augurs well for the
busy season ahead, as September quarter has been traditionally the lowest margin
quarter for the company.
Higher interest cost and tax outgo erode operational improvements
Interest cost for the quarter was higher on account of full deployment of FCCB
proceeds which were utilized for acquisition of Taj Boston and incremental debt
raised. Consequently, profit growth was at 16%, despite strong operating margin
improvement.
Earnings growth of 19.6% over FY07-FY09E; maintain BUY
Expansions in domestic and international markets to drive 19.6% earnings CAGR
over the next two years. Maintain BUY with a target price of Rs160, based on 18x
FY09E EPS of Rs8.8.