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Buy – Indian / Taj Hotels from Citigroup

June 21, 2007

Citigroup Research Analyst Ashish Jagnani in a research report released just a while ago has put a BUY recommendation on Tata group controlled Indian Hotels Company Ltd. Indian Hotels reported an excellent FY2006-07.

Indian Hotels plans to add five hotels to its portfolio in FY08 – two new hotels at Bangalore (ITPL) and Chennai (Mount Road) and three management contracts for hotels in Vijayawada, Trivandrum and Langkawi Malaysia). In addition, the company plans to increase the number of ‘Ginger’ Hotels [Budget Hotel Chain from Taj Group] to 30 by March 2009, up from eight at present.

Citi projects strong earnings growth of 21% for FY08E and consider valuations of 17x FY08 P/E, at par with sector, as attractive with a 12-month target price of Rs187 is based on 22x FY08E P/E, a premium to average sector valuations of 18x.

The stock is currently trading at 17x FY08E P/E, toward the median of its three-year historical range of 15-22x P/E, largely on par with domestic peers, which Citi believe is unwarranted given: 1) IHC’s market leadership and advantage of large room inventory; 2) The company’s premium brand positioning with ‘Taj’; 3) Expectation of strong earnings

Historically, Hotel Stocks have been valued on their earnings potential However, one should also consider the value of the properties they own which most analysts don’t. A Re-rating in this stock is due for a long time now. Punters Target for the Stock is Rs 200.

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