Two shining hotel sector picks- Kamat Hotels, EIH

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Ashish Chugh, Invesment Analyst & Author of Hidden Gems gives his views on two stocks from the hotel sector, that he thinks are positive at this point.

Excerpts from CNBC-TV18's exclusive interview with Ashish Chugh:

Q: You have chosen the hotel sector today but tell us why you like Kamat Hotels?

A: There are few points about the hotel sector; I like the potential of the sector, which is evident from the fact that most international hotel chains want to have increased presence in the Indian markets. If you look at the demand supply scenario it certainly favours the foreigner. If you try looking for hotel space in bigger cities like Bombay and Delhi it's hard to locate a room and more over the asset creation which is happening now in the sector in view of the increased land prices and higher commodity prices, is happening at much higher valuations.

Thirdly, hotel as a sector has been an underperformer in the last 2 years, which makes most of the hotel stocks attractive, at the current valuations.

Coming to Kamat Hotels , it is a Bombay based company. This company owns Orchid Hotels which is right next to the Bombay Domestic Airport. They also own a hotel called Lotus Suites, which is now called Wits Hotel, which is a four-star business category hotel. This hotel is on way to Powai and very close to Bombay International Airport, so both these hotels are strategically located.

This company is undertaking an expansion wherein it is increasing the number of rooms in Orchid Hotel from about 245 to 375, which is going to be operational very soon. Besides this, they are also converting one fort in Pune into a 5-star property. Then besides this they are making 4-star business hotels under the brand name Wits at many places. Some of the places where projects are currently going on are- Baddi in Himachal Pradesh, Kokan district and Nasik.

If you take a look at the financials of the company for the last financial year which is 06-07, the company achieved a sales revenue of about Rs 112 crore and made operating profits of Rs 53 crore and PAT of about Rs 20 crore, which resulted in an EPS of about Rs 15. There has been a significant increase in both revenues and profitability in the first 9 months of the current financial year. Revenues and operating profits have gone up by about 35-36% each and PAT has jumped up by about 100%, PAT for the first 9 months is about Rs 22 crore for full year it is expected to be about Rs 34-35 crore which would result in an EPS of about Rs 25.

Kamat Hotel is currently available at the price of about Rs 175, which translates into the marketcap of about close to Rs 250 crore. So at the marketcap of  Rs 250 crore and the price to earning ratio of 7, the company owning two hotels at the most strategic location in Bombay is a very big positive and at the current valuations, it looks to be grossly undervalued.

Another good thing is that management holds about 73% stake in this company, which shows the confidence of the management in the company and also leaves very little to float in the market. Typically such stocks have a phase when the accumulation goes on, probably this stock is under going that phase and once the other hotels get operational, the revenues and profits rise significantly making such kind of stocks potential multipliers in the times to come.

Q: EIH Associated Hotel is the stock you like, why and what kind of earnings target do you have on it?

A: EIH Associated Hotels is a part of Oberoi Group. The entire group went under a re-organizing about 2.5 years back. Earlier they owned only 2 properties and after the re-organization they now own 8 hotel properties; Oberoi Raj Vilas located at Jaipur, Cecil in Shimla and they have 6 hotels under the Trident Hilton brand of which three are located in Northern India in Udaipur, Agra, Jaipur and three in the South at Chennai, Bhubaneshwar and Cochin.

After restructuring the inventory has gone up from 225 to 850 rooms. The premium property of this company, which is the Oberoi Raj Vilas has been consistently ranked as one of the world's best Hotels and a leading travel magazine has ranked it as world's 11th best hotel. The tariff of this hotel starts from Rs 25,000 to Rs 1.5 lakh per day.

The financials of the company have also seen a sea change after the restructuring. The company, which was making very little operating profit and a very high net profit till 2004, has seen its operating profit jump significantly. In 2005-06 and 2006-07 the operating profit was Rs 35 crore and Rs 52 crore respectively and the profit at net level was about Rs 9 crore and Rs 13.5 crore for the same period. So after a gap of  seven years the company has again come back into the list of dividend paying companies.

For the first nine months of the current financial years the revenues are up by 13% to Rs 117 crore and PAT is up by about 50% to about Rs 8.36 crore. At the current price of about Rs 140-145 this company has market cap of about Rs 270 crore. Given the good parentage which is the EIH Oberoi Group and the fact that this company has 8 hotel properties and with a market cap of Rs 270 crore even if you include the debt in the balance sheet the enterprise value comes to about Rs 400 crore. This looks significantly lower than the intrinsic value of their properties.

At the current price of Rs 140-150 levels this stock could be a good investment for the next 2-3 years.

Disclosure:

My family & I may have vested interest in these stocks.