Thursday, 2 November 2017

Oriental Hotels ltd and Asian Hotels (East) Ltd: Right time to Check in

For me, hotels means PRS Oberoi, the owner of world renowned Oberoi hotels (listed as EIH). He is a man of passion, extreme focus on details, energy; he is the one who has absorbed hotels into his soul. I have shared enough details about the man in this Blog (Click here for the post) and holding EIH ltd from 56/- levels since 2013 and no plans to sell it ever. Global hotels giants could not muster the courage to enter India for decades only due to the presence of PRS Oberoi in India as nobody can match the premiumness, customer care and experience of Oberoi.

Last year, PRS Oberoi decided to shut down its New Delhi property for 2 years for up-gradation and renovation. No sane businessman has the courage to do this; shut down a property for 2-3 years instead they do the renovation in patches in order to preserve the business. But PRS Oberoi doesn’t like distractions, even minor ones. After witnessing the growing competition in New Delhi market, he has planned his master strategy to re-create the magic in its property by spending some 300 cr and to bring the splendor into his hotel he has hired Adam Tihany, a New York-based designer and architect known for his work on the Four Seasons in Dubai and the Mandarin Oriental in Las Vegas.

Market saw this as big risk and stock price fell by almost 20% to 100-110 levels. New Delhi hotel was generating 200 cr topline and almost 25% of the total profits of the premium hotel chain. So I was hoping that after the results of sep-16 quarter, which I was thinking to be bad, stock price might fall to 90 levels and that would be great entry price for a devotee like me. But EIH smacked my plans with high growth in other hotels and crossed 150 recently. I am also holding Indian hotels from 50 levels and applied for the recent right issue at 75.

Indian Hotel Industry to grow at brisk pace and visible signs

So after paying homage to Mr. Oberoi, I think time has come for us to check into other hotels. Hotel industry in India has seen some very tough time off late but I think signs of revival are now here. But nothing could have stopped the stunning growth story of Indian hotel sector from happening which at present is very small compared to the size, growing income levels and changing taste of young Indian travelers. To put the perspective into figures; India currently has less than 1.2 lakh hotel rooms although even New York is having room inventory much bigger than this!!! For a population of around 1/4th of India, USA has around 36 lac hotel rooms!!! So there is no doubt that India is going to be the global hot bed for growth.

India is going to see its per capita Income growing from some Rs. 50000-60000 at present to Rs. 130000 by 2020. India is going to be the youngest country of the world and as seen in recent times, current young population love traveling and exploring big time and this will pave for the high growth of Hotel industry just like the same has happened in USA, Singapore, China etc.

The lure of travel and tourism is visible from young Indians if we look at the figures of outbound travel; every year some 60 lac Indians go abroad and this figure is growing 25% each year!! Plus Indians are big spender also…the average Indian traveler spends $1,200 per visit as compared with Americans who spend about $700, and Brits who spend $500. So India and Indians are changing fast. Better hotels, air connectivity and awareness will divert and create the demand for local tourism big way in India.

Indian Government has started the facility of e-Visa on arrival to 16 airports to 161 countries as compared to 113 countries earlier which has resulted in the high growth in foreign tourists visiting India like from Jan-16 to Apr-16 the figure of e-visa tourists grew from 1 lac to 4 lac. Even during demonetization period in Dec-16 the figure rose from 1 lac to 1.6 lac!!!

Still, Indian hotel industry is marred by high taxes wherein hotels and tourism sector is taxed at around 30% in India as compared to low 8% in other Asian countries like China the impact of this neglect by Indian Government has been reflected in low foreign exchange earnings wherein China picks somewhere around$150 billion from tourism while India languishes at $30 billion. Still the sector attracts the most FDI (Foreign Direct Investment) inflow and is one of the biggest foreign exchange earners and accounts for 7.5 per cent of the country's GDP. If our Government can think wisely then the potential of growth in foreign exchange and employment generation is immense mainly due to India being one of the best tourist destination due to its geographical diversity, big number of world heritage sites and global yoga and spiritual destination.

So due to above factors and initiatives along with economic revival has resulted in the strong growth in hotel sector in India. Around 65% of hotels in India are currently at their highest level of occupancy since 2007, according to a report from consultancy HVS. The average room rate (ARR) is also at a four-year high, currently near Rs.5700. The rise has come after consecutive years of decline in the ARR.

Some analysts doubt over the growth and revival of hotel industry due to high capital costs and low returns. But there is always a "First time" for everything, transformation and structural shift. Just the one we are witnessing in the Airline stocks which were always considered bad for being capital intensive and low return. But recently, even the likes of Warren Buffet have realized the transformation of globe into a village courtesy better and cheap air connectivity...and Even WB invested in airline stocks although he was against them for whole his life.Hotels are just like 50% occupancy they are bad business...65% good, 75% is super and above 75% all calculations disappear.

High costs also keep competition lower. India is also witnessing high consolidation in the sector where weaker hands are selling the hotels.

Travel/Tourism is the fastest growing sector globally contributing 10% of global GDP and 1 out of 10 jobs. No wonder global giants like Hilton have picked India as a place for expansion for next 10 years and they are not investing for earning 3-4% return. For long Global investors kept on thinking that the likes Airbnb would stall the Hotel industry but still hotel Industry shown high growth. There are even talks of Airbnb to list hotel properties also which will help the both. Airbnb is also facing the issues of tax avoidance and lax safety measures in its rooms which enable it to compete with hotels.

The revival in the hotel sector has also been visible in the recent results of hotel stocks but still most of these stocks are lying cheap and yet to caught the fancy of investors. Actually due to inherent complexities, the hotel sector is one sector which is first to bear the brunt of an economic slowdown. This is due to the fact that most of the expenses (some 70%) of hotels are of fixed nature like rent/depreciation, Staff costs, repair and maintenance, furniture etc. So in an economic downturn people and businesses first of all cut the travelling and lodging costs which impact the hotel industry hard. 

But this fixed nature costs are the reason which brings the high growth during periods of growth, revival and consolidation in the industry. As most of the expenses are fixed, so in case of business revival and rise in the occupancy ratio most of the incremental revenues go to the bottom line. This is called Operating leverage. So during the periods of revival, hotel industry witnesses much higher growth than the GDP.

So I think it is the right time to invest in hotel stocks. Oriental Hotels and Asian Hotels (East) appear to be the great picks:

Oriental Hotels: It belongs to Tata group and operates around 9 properties in Chennai, Madurai, Coonoor, Mangalore, Kovalam, Visakhapatnam, Kochi and Thiruvananthapuram. Most of its hotels are at tourist attractions. The company is available at a market value of 700 cr when one of its prime property Taj Coromandel, Chennai is valued more than 700 cr!! It was having around 90 cr as freehold land in its books out of which it transferred some land parcels costing around 32 crore to stock as it is planning to sell these in order to cut debt. We can imagine the market value of these land parcels.

Also, it has invested Rs. 110 cr in the iconic St James Court hotel near the Buckingham Palace which was acquired by Indian Hotels in 1980. I am yet to confirm but Tata group is looking to exit most of its international hotel business and the value of share of Oriental in this property alone can be around 400-500 cr. So it can wipe out its not so big debt of 300 cr very easily.

Now coming to the signs of revival in the business. In sep-17 quarter results, I think market has missed something very important. It clocked the turnover of 87 cr vs 77 cr last year. Its profit before Interest and tax is at 6 cr vs 4 cr. But last year, there was other income of Rs. 3 cr so if we remove this then the last year figure of 4 cr will become 1 cr. So this quarter it has shown a jump of 6 times in its PBIT. And as we can see this is due to Operating leverage as most of the incremental turnover of 10 cr has gone to bottom line. But stock price is still languishing at pre-result levels and I think market has missed something here. But I grabbed the opportunity and picked good quantity around 38 levels. My entry price was at 34 earlier this month.

Even in its difficult times, it is still managing to distribute dividends and current yield is still at .5%. This quarter it has shown Rs. 3 cr profit at net levels from the loss of 1.5 cr last year. Any update on sale of land for debt repayment will spur the big re-rating. It has not much performed much this year as compared to not so good other hotel stocks. Not to be missed opportunity at CMP 38.

Asian Hotels (East) Ltd: More to follow….

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)


  1. In depth analysis with ample data to build conviction in the Hotel Industry

    1. Thanks Dear...when Investors/Businessmen are convinced with big investment plans...time is just right for us to be convinced even more.

  2. Hello Sir

    Good analysis

    A small doubt on the profitability . This qrtr profit is due to other Income , which may not be recurring in nature .


    1. Hi Dear...Good point raised. Actually the same thing also confused me earlier but then i found that they have changed the result presentation pattern this qtr as compared to last year Sep-16 results.Last year they have shown 2.82 cr as other income out of 80.4 cr turnover. This was against export of service incentives and after checking i found that these were not regular. So i can't presume that there are also similar type of incentives included in this year turnover of 87.35 cr. That's why i decided to compare to 87.35 this year vs 77.59 cr last year after excluding other income of export incentives unless something similar is provided by the management.

      Also my main focus is on PBIT of 6 cr not on the NP of 3 cr as it is always better to look at the figures of EBITDA for a reviving company.

      The link to original Sep-16 result:

      So you can take my data a bit subjective :)
      But thanks for raising a valid point. Also Please share your name


    2. Dear Sir

      Thanks for the details . My name is Raj and I am a small investor . I am always going through your analysis . As you are a CA it makes lot of difference while approaching the different aspects of the company . These analysis are a tool for small investors like us .

      Special regards for your analysis on KIRAN VYAPAR . It's great


    3. Thanks Dear Raj...especially for result issue as i forgot to mention the same in the log post. will do the same now.