Stock Recos: Buy Kamat Hotels, target Rs 255: ICICI Direct

ICICI Direct is bullish on Kamat Hotels and had maintained outperformer rating on the stock with target price of Rs 255.

ICICI Direct research report on Kamat Hotels

Kamat Hotels plans to almost double its owned room count, from current 467 to 907, by FY10. Its advent into management of 1045 rooms by FY09 would catapult it in the league of the front runners in hospitality business with a diversified portfolio covering locations in metro as well as tier II cities. This expansion would lend a growth of 22% to its revenues and at current valuations make the stock a compelling BUY.

Room base to quadruple by FY09

Kamat Hotel has plans to expand its chain to tier II cities which are on growth path with favourable government policies and private sector focus. The current room base of 467 is expected to increase to 777 by FY09 effecting a 22% surge in revenues. Kamat Hotels plans to foray into management contracts of hotels; this step would help it to remain asset light along with better visibility of its brands. We expect pre-tax revenues arising from management contracts at Rs 3.86 crore in FY09 contributing directly to the bottom line.

Locational benefit

The Orchid & Lotus Suites, Kamat Hotel’s two money spinners are strategically located near the Mumbai domestic and international airports respectively. The prime locations result in envious occupancy rates across the year for both the properties.

Business strategy

Kamat Hotel follows the business strategy of charging average room rates (ARR) a tad lower to its competition, while capitalising on the occupancy rates throughout the year. This strategy augurs well for the company as they record operating margins at 46.7% in FY07, one of the highest in the sector. We expect Kamat Hotels to follow the same trajectory of high occupancies and higher margins in future.

Valuations

Given the robust growth in the tourist inflows to India and the investment interest being high in cities where Kamat Hotel has expansion plans, we expect it to improve its margins and return ratios. At the current price of Rs 175, the stock trades at a P/E of 11.66x FY08E EPS of Rs15.13 and 9.22x FY09E EPS of Rs 18.95. We arrive at a DCF valuation of 232 on a base case scenario. We rate the stock an OUTPERFORMER with a price target of Rs 225 at 12x FY09E.