Royal Orchid Hotels Ltd - Rs 45.00

Founded in 1973 by Chender K Baljee, the Baljee Group which has been re-branded as Royal Orchid group is soon becoming one of India’s most recognized names in hospitality with major presence in Bangalore. Royal Orchid Hotels Limited (ROHL) - the flagship company comprises of hotel assets, their management and the branding & marketing activities of these hotels. Apart from having ownership of hotels company also undertakes management contract with third party owners, so as to encourage the development of hotels and simultaneously provide with them with the benefit of professional management and a well recognized brand. From a modest beginning of owning single hotel in Bangalore, ROHL currently manages following twelve hotels.

Name Place No of rooms Category
Royal Orchid Banglore 195 5 star Business hotel
Royal Orchid Central Bangalore 130 4 star Business hotel
Royal Orchid Resort Bangalore 54 4 star Resort
Royal Orchid Suite Bangalore 92 4 star extended stay hotel
Hotel Ramada (Harsha) Bangalore 83 4 star Business hotel

Royal Orchid Metropole Mysore 30 4 star Heritage hotel
Royal Orchid Brindavan Garden Mysore 25 4 star Heritage hotel

Royal Orchid Golden Suites Pune 71 4 star extended stay hotel
Royal Orchid Central Pune 115 4 star Business hotel

Royal Orchid Central Jaipur 70 4 star Business hotel
Royal Orchid Galaxy Resort Goa 69 4 star Beach Resort
Hotel Peppermint Hyderabad 60 Budget hotel

Importantly, company follows a unique ‘asset light’ business model of taking properties on lease or entering into a contract for managing & operating the existing hotel instead of owning them outright. Majority of its properties are on long term lease, management contracts or in joint ventures which help the company in keeping its investments low. This has helped the company manage its funds efficiently, have lower payback period on its projects, earn attractive operating margins which eventually lead to higher ROCE. Moreover company is having presence mainly in the premium four / five star categories, where not only margins are lucrative but demand is also witnessing maximum growth. To de-risk its revenue model, company is expanding geographically and setting its foothold in other cities as well.

ROHL has entered into an agreement to acquire 100% stake of Satkar Realties Private Limited, in connection with acquiring a 104 room hotel at Ahmedabad. As per terms of the agreement, it has already acquired 26% stake as of date. It will refurnish and upgrade the hotel to four star category and launch it under ‘Central’ brand name. ROHL is also looking to operate a four star property in Mumbai which is expected to get ready by end of 2010 thru lease. However company’s biggest project is a 180 room five star hotel which it is constructing under joint development in Hyderabad. It has also signed a management contract to operate 90 suites property adjacent to its project. Further company has entered into a joint venture with few developers for putting up a 160 room five star hotel in Jaipur. Apart from all these, it has formed a 30:70 JV company with Parsvanath group to establish 10 hotels with an investment of about Rs.500 cr, in the next 5 years. Earlier ROHL has also signed an agreement with New Jersey based Wyndham Hotel group which operates Ramada hotels globally. Under this agreement company will develop and manage 10 hotels over five year under Ramada brand in India. Meanwhile, ROHL has recently completed the major renovation work at three of its properties ­- Goa Resort, Bangalore Resort & Hotel Ramada which will improve the occupancy rate as well ARR going forward.

Until last year, company’s management was very excited about setting up budget hotels across India as it had targeted to operate 50 budget hotels under the brand name ‘Peppermint’ in the next 5 years. It had even tied up with IRCTC for 11 locations. But now, it seems company has put the plan under back burner and is focusing on niche segment only. It is quite contended with single budget hotel in Hyderabad and has no expansion plan for Peppermint brand. Few months back company acquired Royal Orchid Central, Bangalore property at a consideration of Rs 82 cr which was being managed by itself. Besides, ROHL has made an international foray, by acquiring a Tanzania based company, Multi Hotels Limited, which owns 30 acres of prime beach front property in Dar-e-salaam, the economic centre of Tanzania, for a consideration of Rs. 8 cr. It plans to develop a beach resort in next 2 years with an investment of about Rs 100 cr.

India, with its diverse landscape, offers huge scope for various theme-based travels like medical tourism, adventure tourism, heritage tourism, wellness tourism, pilgrimage tourism, eco-tourism, wildlife tourism along with business travels. Besides, the domestic national tourism is also on a rise. As per unconfirmed reports the estimated number of required hotel rooms is around 240,000, whereas the current availability is just 90,000 rooms, leaving a shortfall of 150,000 rooms. Recognizing the untapped opportunity, government declared hotel and tourism industry as a high priority sector and with a provision for 100 % FDI offered an additional impetus in attracting investments into this industry. Although, the Indian hospitality industry is going thru a temporary slowdown due to various factors but over the longer run it is expected to record a healthy double digit growth. ROHL with constant expansion backed by asset light model and strong goodwill is slated to do well in coming years. Hence company along with eight of its subsidiaries is expected to end FY09 with total revenue of Rs 140 cr and NP of Rs 20 cr leading to an EPS of Rs 7 on equity of Rs 27.25 cr. Ironically, company had raised Rs 112 cr @ Rs 155 per share thru IPO route in Jan 2006 and the issue was oversubscribed 40x times. Today company is available at a market cap of Rs 125 cr with no buyer even at Rs 50. Since listing company has given handsome dividend @ 50%, 60% & 60% consecutively. But for FY09 it may have to cut down to 30% or less. Considering the company’s, operational capabilities, strong brand value and future growth plan investors are recommended to accumulate at declines for a price target of Rs 75 in 12~15 months.

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