Recommendation: Buy
CMP = Rs 150
Price target: Rs 180
Result highlights:
- Indian Hotels Company Ltd's (IHCL) Q2FY2008 revenues grew by 15.7% year on year (yoy) to Rs 341.4 crore. Room revenues continued to grow robustly and grew at 19% yoy for H1FY2008, as the average room rate (ARR) grew by 17.7% yoy to Rs 8,581. The growth in room revenues appears strong considering the fact that a fair proportion of room inventory was under renovation in H1 (off season) and the fact that weak dollar adversely impacted the revenues.
- Stringent cost controls and operating leverage due to higher ARR's improved the operating profit margin (OPM) by 420 basis points yoy to 29%. The net interest charge was up by a hefty 64.4% yoy to Rs 25.7 crore as proceeds from foreign currency convertible bond (FCCB) were fully deployed for recent international acquisitions. Incremental debt raised during the quarter also contributed to a rise in interest cost.
- Profit before tax (PBT) increased by 25.7% yoy to Rs 77.7 crore, however a higher tax incidence at 31.5% in Q2FY2008 against 25.7% in Q2FY2007 led the net profit rise by 16% to Rs 53.2 crore.
- IHCL acquired an 11.01% stake in Orient Express Hotels Ltd during the quarter and has further raised its stake to 11.5%. IHCL seeks a strategic alliance with the later, however Orient Express has rejected IHCL's offer for such a strategic alliance.
- We believe IHCL's strategy of expansion both in domestic and overseas markets and better profitability of its international operations would ensure that IHCL maintain the growth momentum. At the current market price of Rs 150, IHCL trades at 20.9x its consolidated earnings per share (EPS) of Rs 7.2 (post dilution on account of the rights issues) for FY2009E.
- I maintain Buy recommendation on the stock with a price target of Rs 180.
