Sunday, December 20, 2009

>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.

To read the full report: ROYAL ORCHID HOTELS

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