Monday, 3 March, 2008

Multibaggers - Indian Hotel Company

With high land and commodity prices, the asset creation currently is happening at much higher prices, which will benefit existing players like Indian Hotels since it would make their business more competitive.

The Indian Hotels Company Ltd. (Indian Hotels) is the largest operator and manager of hotels, palaces and resorts primarily in India in the Luxury, Business, and Leisure segments and owns the ‘TAJ’ brand.

The Taj Group operates a total of 84 hotels with over 10,000 rooms. The Taj Group has a significant geographical spread of hotels in India, having properties in the major cities and large towns in India as well as in some of the key leisure destinations in South Asia. In the recent past the Company, through its wholly owned subsidiaries, has acquired hotels in New York, Sydney, Boston and San Francisco. The Company has majority ownership interests through subsidiaries in 16 hotels and resorts with 2,105 rooms and has minority interests in 29 hotels (amounting to 3,157 rooms). In addition, the Taj Group manages a total of 15 hotels, palaces and resorts in India and internationally pursuant to management contracts for third party owners (amounting to 1,481 rooms).

The Taj Group classifies its business divisions by the quality of the property, the range of services, and the guests it targets. Accordingly, the Taj Group has classified its hotel properties under various divisions as Luxury India, Luxury International, Business, Leisure and Ginger, which account for 27.16%, 13.62%, 29.97%, 20.35% and 8.90% of total rooms of the Taj Group, respectively. The Company derives the majority of its revenue from the Luxury India division. The Company is focused on the high end (five-star deluxe) Luxury India and Luxury International divisions of the hotel market while maintaining a significant presence in the Business and Leisure divisions.

In order to pursue opportunities in the “value-for-money” segment, the Company, through its wholly owned subsidiary, has launched “Ginger” brand of hotels catering to budget travelers. Currently, nine Ginger hotels are operational at various locations. The Company has also entered into a joint venture agreement with CC Africa and Cigen Corporation to promote wild life tourism in India and has two resorts, one each in Bandhavgarh and Pench in the state of Madhya Pradesh.

Key Risks

The major risks include a) Slowdown in economic activity leading to reduced demand for Hotel rooms b) Unrest or event risks and c) Oversupply of rooms in the future, which can adversely impact the operations of the company.


India has been witnessing an increase in International Tourist Arrivals as well as growth in domestic tourism. The various global campaigns launched by the government like “Incredible India”, “Atithi Devo Bhav”, “Colors of India” and “Wellness Campaign”, to promote inbound tourism is a pointer to the fact that the Indian Government realizes the tourism is not only a significant revenue earner but also a core employment generator.

The domestic tourism in India is also on a rise. India’s strong economic development and the growth in its services industry has led to increased corporate spending on business travel. Moreover, with higher disposable incomes, leisure travel is also on an upswing. There is a huge shortage of quality hotel rooms across the country as supply has not been able to keep pace with demand.

The potential of the sector is evident from the fact that many International Hotel chains and real estate developers want to be a part of the Indian Hotel sector. For instance - Hilton, Marriott, Starwood, Shangri-La, Carlson, InterContinental, Accor, Hyatt and Choice have all charted out extensive expansion plans in India. Some of these hotel chains such as Hilton and Marriott have formed alliances with large Indian real estate developers such as DLF and Unitech, respectively. However, with high land and commodity prices, the asset creation currently is happening at much higher prices, which will benefit existing players like Indian Hotels since it would make their business more competitive.

The company has a multi-pronged strategy for growth. This includes- a) Foray into budget segment with ‘Ginger’ to target economy and mid-market segment; b) Asset-Light strategy with focus on franchise arrangements and management contracts, rather than property owner and manager; and c) Other service offerings like Air Catering business, food and beverages outlets, SPAs and service apartments, by leveraging the “TAJ” brand.

The Hotel sector has been a laggard relative to the sensex, we believe the sector could see a Re-rating in view of the potential of the sector and earnings growth visibility.

We believe Indian Hotels is poised for rapid growth due to increasing business and leisure travel in India and the demand outpacing the supply of rooms. Moreover, a conducive macroeconomic environment, coupled with higher ARR and occupancy levels augur well for the company. With India attracting increasing foreign interest in terms of trade and investment, international business travel into India is also on a steady rise. We believe Indian Hotels is well poised to make the most of the demand explosion which the Hotel sector is set to witness in the coming years.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a trading position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queriesat

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