Indian Hotels: Star show

The sector continues to have pricing power reflected in the rise in average room rates (ARRs) across cities.

The demand for hotel rooms in the country still continues to outstrip supply though the gap between the two appears to be narrowing in some cities.

While the rooms sold per day by the industry were up 3 per cent at 13,255 in FY07, occupancies in cities like New Delhi, Hyderabad and Bangalore have been coming down in the past year thanks to addition of rooms.

However, the sector continues to have pricing power reflected in the rise in average room rates (ARRs) across cities. Given this backdrop, Indian Hotels, which runs the Taj chain of hotels and owned by the Tata group, has turned in fairly good numbers.

The top line, for the standalone entity, grew a smart 38 per cent in the year ended March 2007 to Rs 1,544.51 crore, while the operating profit margin rose an impressive 780 basis points to 36.4 per cent, thanks to expenditure remaining in check. The net profit has been boosted by higher other income.

Despite the fact that the company has taken over three new properties overseas in the last couple of years, which are still to operate at optimum levels, and added rooms in the country, the growth in consolidated revenues for FY07 was strong at 36.7 per cent to Rs 2,665.87 crore. Moreover, the operating margins have improved slightly to 28.5 per cent.

With foreign tourist arrivals on the increase at 4.6 million in 2006-07, up 15 per cent over the previous year, the demand for five-star hotel rooms is unlikely to slow down for the next few years.

Indian Hotels currently has an inventory of 9,901 rooms and is in the process of constructing five hotels. At Rs 145, the stock trades at just under 20 times estimated FY07 earnings and is attractively valued.

Rico Auto: Rough ride

Rico Auto Industries attempted to offset weak demand conditions from the two-wheeler industry in the March 2007 quarter, via enhanced sales of components to the four-wheeler segment and expanding exports.

However, higher raw materials like steel and non-ferrous metals affected its operating margins in Q4 FY07.

As a result, the company's operating profit fell 2.6 per cent y-o-y to Rs 22.3 crore in the last quarter, while its net sales grew 16.2 per cent to Rs 200.39 crore. Its operating profit margin also declined 220 basis points y-o-y to 11.1 per cent in the last quarter.

This pressure on operating margins in the last quarter was due to adjusted raw material costs as a percentage of net sales going up by 210 basis points y-o-y to 60.6 per cent in Q4 FY07. In contrast, other auto ancillary players like Omax Autos' operating profit margin improved 90 basis points y-o-y to 9 per cent in Q4 FY07.

The Street appears to have factored in the weaker performance of Rico Auto, as the stock declined 15.5 per cent during the past three months compared to an 18.5 per cent rise in the BSE Mid-Cap Index.

Rico Auto has recently formed a JV with Continental AG to manufacture hydraulic brake systems and this project is expected to come on-stream in the second half of 2008.

In addition, the company's ability to manage higher metals costs over the next few quarters, will be crucial. At its current price, the stock trades at 10 times estimated FY08 earnings.

Srei Infrastructure Finance: Work in progress

Asset finance company Srei Infrastructure Finance faced higher interest costs during FY07. Its consolidated operating income grew 77 per cent to Rs 418 crore.

However, interest expenses went up 103 per cent resulting in a profit before tax and depreciation of 60.6 per cent. Though depreciation and bad debt provisioning increased substantially, a lower tax outgo on a y-o-y basis helped the company report a 68 per cent increase in net profit.

For the finance company, which provides infrastructure equipment finance, infrastructure project finance and renewable energy product finance, its assets under management went up by 50 per cent to Rs 5,083 crore.

Last month, the company also announced that it would transfer its equipment finance business to a 50:50 JV with BNP Paribas' leasing arm. BNP will invest Rs 400 crore as its equity contribution and Rs 375 crore as consideration for the acquisition of the equipment finance business.

Besides BNP's global experience, this partnership should also provide the JV access to cheaper funds. The business potential in infrastructure finance is expected to double to over Rs 30,000 crore by 2010.

In its sum of parts valuation, analysts gave around Rs 60 to its stake in the project finance business, Rs 45 to the standalone company and around Rs 6 for its 16 per cent stake in the equipment rental business Quipo. With the stock trading at Rs 99, this works out to around 10 per cent discount to its sum of parts valuation.

With contributions from Shobhana Subramanian and Amriteshwar Mathur