Oriental Hotels-A Defining Moment

BSE 500314; CMP Rs 390

(With a market cap of Rs 694 crore,  consistent Revenue and Earnings growth, the Tata Group's Oriental Hotel is a potential multi-bagger with highly under-valued properties in 7 locations across South India, ranging from Chennai to Madurai, Vizag, Conoor, Mangalore and Kochi)

 

With an imminent launch of Real Estate Investment Trusts (REITS) in India, the Hotel Industry will become a pseudo-play on the booming Real Estate segment in the country. The prime beneficiaries would be Hotel chains, as REITS go-in for a mix of earnings reflected by existing Hotel properties in addition to direct investments into Real Estate either through ownership of Real Estate Developers or Investment into unlisted land banks.

 

Oriental Hotels, which belongs to the Tata’s owned Taj Group may find favour with REITS. The corporate owns 7 properties spread over Chennai, Mangalore, Madurai, Kochi, Vizag and Conoor with approximately 600 rooms under its belt.

 

Foreign Institutional Investors led by Bear Stearns and Citigroup Global markets have read the winds correctly and have built up a sizeable 8 per cent stake in Oriental Hotels. Add to which another 2 per cent owned by Oriental Insurance and 54 per cent by Taj Group and the Reddy family and we have a stock with very diversely spread float of about 36 per cent.

 

Fabulous Earnings, Fabulous Destinations

 

Oriental Hotels has a fabulous, un-interrupted record of profitability with FY07 Revenues up 17 per cent at Rs 195 crore (Rs 168 crore), and after tax profits up 30 per cent at Rs 38 crore (Rs 29 crore). This works out into an EPS of Rs 21 for FY07 and Rs 16 for FY06.

 

66 Rooms at Taj Coromandel were taken up for renovation in FY07 and were not available for six months in the concluded fiscal. These are available in FY08 and will reflect the ARR and occupancy gains in the second half performance of the company.

 

Oriental Hotels pays high dividends of Rs 9.50 per share (Rs 7.5 per share) maintaining its record of high profit distribution to shareholders.

 

The corporate fetches a market capitalization of Rs 694 crore or about Rs 1 crore per room owned. The true replacement cost would place the market value of properties under Oriental Hotels at roughly Rs 2500 to Rs 3000 crore.

 

All seven properties owned by Oriental-Taj Coromandel (Luxury 5 Star Deluxe) Chennai, Taj Fisherman’s Cove (Leisure 5 Star Deluxe) Chennai, Taj Malabar (Leisure 5 Star Deluxe) Kochi, Taj Residency (5 Star Deluxe) Vizag, Taj Garden Retreat (Luxury 5 Star) Madurai, Taj Garden Retreat (Leisure 2 Star) Conoor, Hotel Manjarun (Business 4 Star) Mangalore cater to the upper end business and leisure segment and duly represent the fastest growing destinations in South India.

 

Average occupancy in 2007 was about 70 per cent with a ARR growth of 29 per cent across the properties owned by Oriental Hotels.  Occupancy should rise for Oriental Hotels in FY08, as the renovated rooms at Taj Coromandel become available and the income from Foods and Beverages rises in tune with increase in Hotel Occupancy and hosting international events.

 

India: A Favoured Destination

 

Over the last decade India has firmed up its position as one of the leading stars in the Hotel Industry, with the country becoming one of the top four “Must See” Destinations in the World.

 

International Arrivals in India rose 13 per cent to 4.4 mn in FY07, and are expected to maintain a growth rate of a minimum 8.3 per cent per annum over the next decade leading to 10 mn arrivals annually by 2020.

 

An yet there are only 100,000 graded rooms in the country under-scoring the low investment in the Sector. Manhattan and Beijing City alone boast in excess of 100,000 graded rooms.

 

This is leading to some of the highest ARRs in the World, with Delhi, Bombay, Bangalore, Calcutta and Chennai fetching highest annual ARR increases.

 

Why Chennai?

 

The City has donned the title “Detroit” of India, with a very large concenteration of US and Korean Automobile producers setting up shop around the City. Secondly, Chennai has been ranked as Number 1 among Indian Cities in terms of technology exposure and responsiveness leading to a new found love from IT and IT enabled services making the city as their main business hub.

 

Volume growth of international arrivals was about 10 per cent in 2007, placing Chennai as the 5^th largest business destination in the country after Delhi, Bombay, Bangalore, and Calcutta.

 

This will keep the prime properties of Taj maintaining very high occupancy levels in the coming years, while keeping their fingers intact in new IT and business destinations like Mangalore, Vizag, Madurai and Kochi.

 

The rest will be the Earnings, Real Estate and Reits story which will make Oriental Hotels a very valuable stock in the years to come.

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