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Royal Orchid Hotels – BUY

December 24, 2007

Royal Orchid Hotels Ltd, ROHL acquired Multi Hotels, Tanzania, which owns 30 acres of prime beachfront land worth $2 Mn. The company would further spend $25 Mn (to be funded 60% thru equity) to build a 200-room resort (EV/room ~ Rs 5Mn). The project is expected to commence work in next 4 months and then require 20 months for completion. The debt/equity is a meager 0.16 (FY07) and hence the expansion would impact debt equity only marginally.

ROHL through its subsidiary M/s Icon Hospitality Pvt Ltd, acquired Royal Orchid Central (earlier only managed) for a consideration of Rs 820 Mn (EV/Room ~ Rs 6.3Mn). The hotel is in the heart of Bangalore and is clocking ARRs of Rs 5,500.

ROHL reported 48% growth in topline to Rs 380 Mn, mainly led by a strong growth in Q2FY08. The operating margins slid 1150bps to 34.2%, mainly due to a rise in other overheads. The company is expected to report a strong EPS of Rs 11.8 and Rs 14.2 in FY08 and Fy09 respectively. Buy with a target price of Rs 185.

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