Indian Hotels: Aggressive

THE COMPASS

Indian Hotels' acquisition of a 10 per cent stake in Orient Express Hotels at $211 million, hasn't come cheap. But the company looks determined to become a worldwide chain. Orient Express has a presence at the top end of the market through its chain of 39 hotels, trains and river cruises. With revenues of $511 million and earnings of $46 million in CY06, the transaction has been valued at just over four times sales. IHCL already has a presence in the US market, through Pierre in New York, the Ritz Carlton in Boston and Campton Place in San Francisco.

The strategy of IHCL is to hedge against a downturn in the booming domestic market. The long term aim is to earn a third of revenues from international operations. Three-fourths of the company's revenues accrue from domestic operations. Unlike the domestic market where IHCL is attempting to straddle all segments, its subsidiary Roots Corporation runs a chain of budget hotels in the overseas market. The brand is positioned as a top-end luxury brand.

In markets where IHCL cannot find partners or make acquisitions, it has decided to build properties. Two greenfield projects, one in Cape Town and the other in Phuket, have been initiated. At home, the company will more than double capacity across all segments, taking its inventory from 9,000 rooms to around 19,000 rooms in three years. The Average Room Rates (ARRs) should remain firm for about a year, but they could taper off due to higher supply. At the current price of Rs 129, the stock trades at just under 16 times FY08 estimated earnings and about 13.7 times FY09 earnings and seems reasonably valued.

Pantaloon Retail: Exhibiting strength

Pantaloon Retail reported a strong growth in August 2007, on a y-o-y basis, thanks to its promotional offer in the same month. As a result, the company's low-margin same-store value retail segment grew by 20.94 per cent y-o-y, while sales in the lifestyle segment grew y-o-y to 10.78 per cent.

Pantaloon launched the Big Bazaar Maha Bachat promotional offer across 66 stores in August. This offered savings across product categories such as fashion, general merchandise, food, electronics and furniture. In July 2007, when there was no such offer, the same-store value retail segment had grown by a mere 2.28 per cent y-o-y, while the lifestyle segment expanded by 19.21 per cent. The same-store value retail sales growth is still dependent on promotion offers.

Indo Asian Fusegear: New forays

The stock of Indo Asian Fusegear gained by more than 5 per cent following the company's announcement that it will enter the power distribution business. The company has set up a wholly owned subsidiary at an initial investment of Rs 25 crore, which is being funded through internal accruals. The foray is aimed at cashing in on the inefficiencies in power distribution by reducing the losses. This foray will also support the company's main business. The management estimates a return on investment of 25 per cent in the initial stages and 30 per cent later. Compared with its current business, which has a net margin of 7-8 per cent, the margins in this business could be better.

Indo Asian makes electric equipment such as compact fluorescent lamps, miniature circuit breakers, wires, junction boxes and power distribution boards. With this diversification, the company will undertake distribution projects on behalf of state electricity boards, corporations and utilities on franchise basis which will last for five to seven years. This move augurs well for Indo Asian as the distribution business is a natural extension to its electrical equipment business.

Since the company has relationships with state electricity boards and other power utilities, getting business may not be tough. The new subsidiary will start contributing from April 2008 and the company expects to generate around Rs 200-300 crore of revenues in the next three-four years.

The Indo Asian stock has been a major underperformer in the last one year, declining by 10 per cent against the Sensex gains of 30 per cent.

This can be attributed to slow net profit growth, despite the strong sales growth. In the June 2007 quarter, operating margins improved by 210 basis points y-o-y to 15.2 per cent, but net profit remained unchanged due to the high interest costs. The stock trades at a trailing P/E of 10 times and should be a market performer.