Indian Hotels: Room with a view

Indian Hotels has gained from room scarcity, higher tariffs

With a shortage of hotel rooms across cities and average room rates at new levels, it's no surprise that Indian Hotels turned in splendid numbers for FY06.

Consolidated sales were up nearly 40 per cent y-o-y at Rs 1,837.31 crore, while operating profit has grown a stunning 53 per cent to Rs 509 crore.

As a result, operating margins improved by 240 basis points to 27.6 per cent. The stock might have been down 9 per cent in Thursday's trading but that had more to do with weak sentiment and less to do with results.

Indian Hotels has been trying to pursue an asset light strategy adding rooms through management contracts wherever possible.

It is expanding its presence both in the international and domestic markets so revenues should grow by about 15-20 per cent over the next few years.

The increased foreign presence""it bought two overseas hotels in FY06""also helps reduce geographical risks since till recently, the company earned most of its revenues from the domestic market.

It has also started operating in the budget segment through its Ginger chain and plans to have ten hotels by the end of FY07.

This would allow it to tap a completely different set of customers and the revenue stream would be less vulnerable to fluctuations than the luxury segment.

At the current price of Rs 885, the stock trades at 17 times estimated FY07 earnings and is attractively valued given the strong growth in the economy and India poised to be an attractive business and tourist destination.

Berger Paints: Crude shock

Berger Paints has seen a healthy 19 per cent top line growth in both the March 2006 quarter as well as in FY06. The ongoing boom in the real estate market and increased consumption have helped in higher sales.

But at the operating level, the performance in fourth quarter deteriorated as the operating margin growth was just 3.4 per cent against the full year consolidated operating profit growth of 27.7 per cent.

Raw material costs as a percentage of sales increased by 300 basis points y-o-y in Q4 FY06, though they reduced marginally for FY06.

Higher crude prices have affected margins to some extent, though a reduction in Q4 staff costs owing to the VRS have helped. Consolidated operating profit margin in FY06 went up 72 basis points to 11.15 per cent.

Berger is investing Rs 40 crore in FY07 to set up an automotive paints plant and Rs 15 crore for capacity expansion at our other plants.

The company expects to maintain the same growth rate in its top line, effect a 2 per cent price hike in some paints and introduce new products, all of which should result in the company being able to maintain margins.

The Berger stock, at the current price of Rs 70 trades at 18.7 times trailing earnings, and appears expensive compared with Goodlass Nerolac, which trades at 13.7 times trailing earnings.

Gateway Distriparks: Back on rails

Though Gateway Distriparks doubled its net profit in FY06 over the previous year, the numbers are a little below what the market was expecting.

The logistics sector, in which Gateway operates, had caught market fancy, with the stock going up from its issue price of Rs 72 in March 2005 to Rs 300 in November 2005.

The company saw its top line increase by 45 per cent and operating profit rise by 59 per cent in FY06.

In the March 2006 quarter, along with other private sector players, Gateway was allowed to run container trains, which it started last month on a Concor train from its rail siding in Gurgaon.

It has an agreement with Concor to jointly develop the business and facilitate trade by providing inland container depot services and rail connectivity.

The container rail business has been lacking in infrastructure thus far, but analysts expect traffic to move from road, which is more expensive, to rail once private players start plying their own trains only in FY08 or FY09.

Gateway has presence in Mumbai's JNPT where it is understood to be one of the largest players in handling import traffic, as well as Chennai.

JNPT and Chennai accounted for almost 70 per cent of the import-export traffic in FY06. Going forward, containerisation will only increase as a percentage of total cargo from the current 15 per cent.

The company is also eyeing acquisitions of freight stations. The 27 per cent decline in its stock price over the last two days has brought the trailing P/E multiple down to 16 times and an estimated 2007 P/E of 12.8 times.