Recommendation: Buy
CMP: Rs 175
Target price : Rs 225
Key points:
· Kamat Hotels plans to almost double its owned room count, from current 467 to 907, by FY10. Its advent into management of 1045 rooms by FY09 would catapult it in the league of the front runners in hospitality business with a diversified portfolio covering locations in metro as well as tier II cities. This expansion would lend a growth of 22% to its revenues and at current valuations make the stock a compelling BUY.
· Room base to quadruple by FY09:
Kamat Hotel has plans to expand its chain to tier II cities which are on growth path with favourable government policies and private sector focus. The current room base of 467 is expected to increase to 777 by FY09 effecting a 22% surge in revenues. Kamat Hotels plans to foray into management contracts of hotels; this step would help it to remain asset light along with better visibility of its brands. I expect pre-tax revenues arising from management contracts at Rs 3.86 crore in FY09 contributing directly to the bottom line.
· Locational benefit:
The Orchid & Lotus Suites, Kamat Hotel’s two money spinners are strategically located near the Mumbai domestic and international airports respectively. The prime locations result in envious occupancy rates across the year for both the properties.
· Business strategy:
Kamat Hotel follows the business strategy of charging average room rates (ARR) a tad lower to its competition, while capitalising on the occupancy rates throughout the year. This strategy augurs well for the company as they record operating margins at 46.7% in FY07, one of the highest in the sector. We expect Kamat Hotels to follow the same trajectory of high occupancies and higher margins in future.
· Time Frame: 12-15 months, with a price target of Rs 225.
