>ROYAL ORCHID HOTELS (ICICI DIRECT)

Value play…
Royal Orchid Hotels, a mid-sized player with more than half of its total rooms based in Bangalore, is poised to benefit from the improving outlook for the IT/BFSI segment and long-term growth oriented focus. The company is almost doubling its room base from 989 in FY09 to 1,750 rooms by FY12E, representing a CAGR of 21%. Hence, we are initiating coverage on the stock with Strong Buy rating and a price target of Rs 105.

■ Strong expansion plans
Royal Orchid Hotels (ROHL) has plans to double its room base to 2,000 rooms over the next three to four years. During our forecast period of FY09-12E, we expect ROHL to add 761 rooms representing CAGR of 21%. This would entail a total capex of Rs 370 crore. We also expect average occupancy levels to increase from 53% (till September 2009) to 59% in FY11E and 62% for FY12E, respectively, led by an improving scenario for IT/BFSI. Taking both these factors into our revenue assumptions, we expect revenues to grow by 24.5% to Rs 145.8 crore for FY11E and further by 43.3% to Rs 208.9 crore for FY12E.

■ Low debt to equity provides enough room to expand: To finance the growth, the company seems to have enough space to leverage and raise further long-term loan. This is evident from the low debt to equity of the company as ROHL has one of the lowest debt/equity ratios of less than 0.6x among its peer companies.

■ IT revival, lower-than-expected room supply to support faster growth: Due to the global financial meltdown, there has been a sharp cutback of over 40% in expected room availability from 6,595 to 3,725 rooms in the premium segment by FY12E. Along with revival in the IT/BFSI segment this has significantly improved the outlook for established hotel players like Royal Orchid Hotels in Bengaluru.

■ Valuation
At the CMP of Rs 76.3, the stock is available at 11.2x and 9.1x its FY11E and FY12E EV/EBITDA, respectively. Considering ROHL’s competitive efficiency, we value the stock in line with average valuations of its peer matrix (i.e. at13.5x its FY11E EV/EBITDA and 10.0x FY12E EV/EBITDA) and arrive at a target price of Rs 105 per share. We initiate coverage on the stock with STRONG BUY recommendation, potential 38% upside.

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