Indian Hotels

Research: Morgan Stanley

Rating: Overweight CMP: Rs 137

Morgan Stanley has maintained its ‘overweight’ rating on Indian Hotels. It believes that trends in the hospitality industry remain strong, with increase in average room rate (ARR) leading growth in revenue per available room (RevPAR). Further, room supply from other industry players seems to have been pushed into FY10/11, and hence, the demand-supply mismatch may continue for at least the next 18 months. While Citigroup forecast a 29% a compound annual growth rate (CAGR) in earnings for FY07-09, earnings per share (EPS) will be diluted due to the planned rights offering. Subsidiary companies constituted about 36% of consolidated revenue in FY07, but recorded very low profitability, largely due to international properties. Any improvement in the financial performance of these properties can boost the overall profitability. For instance, a turnaround in Pierre Hotel alone can push up overall net margins by more than 180 basis points. The company intends to raise Rs 1,440 crore through a rights issue of equity shares and non-convertible debentures. Further, it will issue warrants that will be convertible into equity 12 months after the rights offering. This should raise an additional Rs 780-90 crore. However, these rights offerings will dilute earnings by 30%. The stock has underperformed by 35% year-to-date (YTD) and in the past 12 months, largely due to acquisitions of international properties. IHCL’s valuations are cheaper than that of its Asian peers on most metrics.

Tata Motors

Research: CLSA

Rating: Buy

CMP: Rs 715

CLSA has maintained its ‘buy’ rating on Tata Motors. However, near-term risk for the stock continues to be the potential acquisition of Jaguar and Land Rover. Freight rates witnessed an improvement in October. CLSA’s Index of Freight Rates went up 2% in October on a month-on-month basis. The index tracks freight rates across 25 major routes across India. While part of the improvement can be attributed to the pick-up in construction and industrial activity after the rainy season, CLSA also believes that demand-supply in the commercial vehicle (CV) industry is returning to normal after the lacklustre volume growth in the first half (H1) of FY08. Improving freight rates typically act as an incentive for truck operators as the latter start buying trucks and the rates also point toward an improvement in the CV cycle. Historically, CLSA’s Index of Freight Operator Profitability has acted as a good leading indicator of the CV cycle. Truck finance rates have dropped ~ 300 bps in the past 2-3 months to about 11% from a peak of 14% in April. Large truck operators are even getting deals at 10%. The conducive factors for CV industry recovery are now in place. CLSA maintains its view that the current weakness in medium and heavy CV (M&HCV) sales will be limited to the current fiscal and that the industry will return to growth in FY09.

Rico Auto

Research: Merrill Lynch

Rating: Buy

CMP: Rs 33

Merrill Lynch has reiterated its bullish stance on Rico Auto, albeit it has lowered its price target to Rs 60 from Rs 66. Negatives related to high input costs (aluminium, power, labour), exchange fluctuations and low capacity utilisation will be largely reflected in this fiscal performance.