>KAMAT HOTELS (ICICI DIRECT)

Revised AS-11 guidelines lead PAT growth…
Kamat Hotels came out with its Q4FY09 numbers that were marginally below our expectations. The net sales declined by 35.1% YoY and 2.5% QoQ, respectively. The margin continued to remain under pressure despite a reduction in operating costs. It declined 1690 bps YoY and 560 bps QoQ,
respectively. During the quarter, the company adopted revised AS-11 guidelines and reversed notional forex loss of Rs 14.48 crore. As a result, it reported net profit of Rs 9.7 crore against loss of Rs 1.5 crore in Q3FY09.

Highlight of the quarter
During Q4FY09, the company reported net sales of Rs 28.8 crore as against our expected net sales of Rs 31.0 crore. Net sales dropped 35% YoY. QoQ also, the company was unable to maintain growth due to heavy cut down in travel budgets by Indian companies, as its major clientele comprise Indian companies. Operating profit for the quarter was Rs 7.6 crore. It declined by
60.6% YoY and 10.3% QoQ. During the quarter, the company adopted revised AS-11 guidelines and reversed notional forex loss of Rs 14.48 crore. It also received luxury tax refund of Rs 1.7 crore for FY04-05. As a result, it reported net profit of Rs 9.7 crore against loss of Rs 1.5 crore in Q3FY09.

Valuations
Over a short-term perspective, we may continue to see sluggish performance as majority of the company’s clients are corporate clients which are currently cutting costs steeply. However, on the other hand, with leading macroeconomic data showing some signs of recovery, hotel players having majority ‘corporate clientele’ like Kamat Hotels would tend to benefit faster compared to those having a higher presence in the leisure segment over a longer term. Hence, we are revising our FY10E EPS estimates marginally upward to Rs 9.9 and introducing our FY11E EPS estimates at Rs 13.1. We value the stock at 6x its FY11E EPS estimates to arrive at a target price of Rs
78. We are changing our rating from UNDERPERFORMER to PERFORMER.

Result analysis

Sales continue to decline on cut down in corporate travel budgets
During the current quarter, Kamat Hotels again reported a sharp decline in its sales. Its net sales declined by 35.1% YoY to Rs 28.8 crore. One of the main reasons for such a sharp decline in sales was a heavy cut down in corporate travel budgets by Indian companies on account of the global slowdown. Since Kamat Hotels’ major clientele (i.e. ~80% of its clientele) comprise Indian companies, it has seen a sharp decline in sales on a yearly basis compared to other hotel companies like Viceroy Hotels.

Adoption of revised AS-11 guidelines results in robust PAT growth
During the quarter, the company adopted revised AS-11 guidelines. Accordingly, a notional forex loss of Rs 14.48 crore on its FCCB of US$18 million got reversed. As a result of this, the company reported net profit of Rs 9.7 crore and Rs 5.7 crore for Q4FY09 and FY09, respectively. A receipt of Rs 1.71 crore towards luxury tax refund for FY05 also aided the growth in net
profit.

Focusing on core business
In order to improve its performance and ease liquidity issues, the company sold its 60% stake in Concept Hospitality (non-core asset) for ~Rs 6 crore. The company is now focusing more on its core business expansions. Currently, it has three major projects underway, which include
commissioning of new hotel property at Nagpur, Bhubaneshwar and expansion of its Mumbai property ‘The Orchid’. These entail total capex of ~Rs 140 crore. A majority of these projects are expected to be complete by 2010 according to the guidance given by the management.

Valuations
Over a short-term perspective, we may continue to see a sluggish performance as majority of company’s clients are corporate clients that are currently cutting costs steeply. However, on the other hand, with leading macroeconomic data showing some signs of recovery, hotel players having a majority ‘corporate clientele’ like Kamat Hotels would tend to benefit faster compared to those having a higher presence in the leisure segment. Though the stock price has rallied sharply in the last one month, it still offers some further upside as liquidity concerns have eased. With the overall macro scenarios improving, we are also expecting an improvement in hotel occupancies and, thereby, rise in room rates by the end of FY10E. Hence, we have revised our FY10E EPS estimates upwards to Rs 9.9. We are introducing our FY11E EPS estimates at Rs 13.1. We value the stock at 6x its FY11E EPS estimates to arrive at a target price of Rs 78. We are changing our rating from UNDERPERFORMER to PERFORMER.

To see full report: KAMAT HOTELS