Small Cap Stock To Buy - Royal Orchid Hotels

Royal Orchid Hotels is a leading mid-size hospitality company that began its operations in 1973 in Bangalore. It has four different brands Royal Orchid (five-star business hotel),Royal Orchid Central (four-star business hotel),Royal Orchid Suites (four-star extended stay hotel) and Royal Orchid Resorts.

The company,along with its subsidiaries,joint ventures and associate companies today operates 13 hotels with over 1,050 rooms across seven locations five in Bangalore,two each in Mysore and Pune and one each in Hyderabad,Jaipur,Goa and Ahmedabad.

Booming in the information technology (IT) sector in the 90s till early 2000 helped hotel players having presence in IT hubs,such as Bangalore,Hyderabad,make flourishing business due to increase in business travels. Among the few players,which have presence in Bangalore,Royal Orchid Hotels emerged as the chief beneficiary of the business travel to the IT city. The company came out with its initial public offering in 2006 and since then,it has expanded its base to Ahemdabad,Pune,Mumbai,and Goa. Though these cities are not specifically considered as IT hubs,the company wants to de-risk its dependence for growth on the IT sector. The company would explore into three more cities Jaipur,Hyderabad,and DelhiFY 11.The expansion has come at a time when occupancies at most destinations have shown an improvement. In the December quarter itself,the companys occupancy levels have bounced back to 50-70 % from lows of 30-40 % in the June 2009 quarter. In the December 09 quarter,occupancy rates in Bangalore increased from 52% to 55%,Pune from 70% to 74%,Mysore 58% to 68%,Jaipur from 65% to 75% and Goa from 35% to 59% on a quarter on quarter basis.It is reported that post-expansion the companys dependence on Bangalore would drop from the current 56% (of its revenues) to 31% the year ending March 2012.Most of these destinations the company has been associated with have been combinations of management contract,joint venture (with property owners,developers),lease and single ownership.

The company's revenues in the past four years have grown at a compounded annual growth rate (CAGR) of 24%.Its operating profit has grown at a CAGR of around 13% in the past four years.A factor that would continue to form an important part of its revenue is the foreign exchange earnings.Many expatriates,IT professionals provide the company with earnings in foreign exchange (especially dollar).In fact,as of FY09,earnings from foreign earnings (Rs 47 crore) for the company account for 50% of total sales (Rs 94 crore).

On the valuation front,currently, the company stock trades at price to earning multiple of around 26 times and almost at it book value. This is much cheaper than its peers Taj GVK Hotels,which is trading a P/E of 30x and nearly three times its book value. The company is on an expansion mode. It plans to invest around Rs 500 crore to double the number of hotels by FY12. The company may use the IPO proceedings to fund its expansion plans. It will take around two to three years for these investments to translate into good numbers for the company. With this expansion,the market is likely to re-rate the company as its fortunes will no longer be tied to the fate of Indian IT industry. Long term investors are advised to buy stocks of Royal orchid at current stock price level.
Source: ET Investor's Guide