Indian Hotels – at the beginning of an up-cycle
In August 2017, Stewart & Mackertich recommended a “strong buy” of Royal Orchid Hotels with the assurance that the stock is “on the cusp of graduation”.
The timing was brilliant because the stock has surged like a rocket from Rs. 109 to the CMP of Rs. 168, putting hefty gains of 54% into the pockets of its shareholders in just three months.
Thereafter, we saw that NAMO and Arun Jaitley have introduced radical changes into the GST Act which has made hotel stocks irresistible.
According to the joint opinion of Porinju Veliyath and Ashish Chugh, the hotel industry is “emerging out of a down cycle” and is in a “sweet spot”.
Industry has seen a down cycle followed by multi year consolidation – leading to a a leaner structure & cost rationalisation. Case of operating leverage with higher occupancy. https://t.co/4pjbmrkSOW
— Ashish Chugh (@hiddengemsindia) November 11, 2017
The duo has recommended an aggressive buy of hotel stocks.
The wizards at Stewarts & Mackertich are of the same view with regard to the prospects for hotel stocks.
After Royal Orchid, they have recommended a “strong buy” of Indian Hotels.
As expected, the rationale is fool-proof:
“Undisputed Leadership: Over the past couple of years, multiple international hotel brands have entered the Indian hospitality industry, yet Indian Hotels still remains the undisputed leader in terms of geographical presence and room inventory. Over the years, the company has built a vibrant portfolio catering to different hotel categories including premium hotels, mid-market hotels and budget hotels. Its share from contract management continues to increase, raising possibilities for better margins.
Beginning of an up-cycle: The five-year period marked by oversupply in the Indian hospitality sector is coming to an end and the market is witnessing an up-cycle with expectations of a robust revival in demand. The company’s revenue per available rooms is expected to witness impressive improvements over the next two years. The company in its latest presentation has clearly depicted improved occupancy and ARR’s which are the signals of better days are ahead for the hospitality industry and for IHCL in particular.
Valuation: Several macro and micro factors compel us to believe a good visibility of growth in the hospitality sector. Indian Hotels is likely to reward investors. We value the Company at an EV/EBITDA of 22x for FY19E driven mainly by increase in their top line and arrive at a target price of INR169.”
If the target price of Rs. 169 is achieved, we will be able to bask in hefty gains of 40%.
Jindal Saw – major turnaround expected
Jindal Saw was recommended by Mudar Patherya a few days ago as part of his “Christmas Gift” to us (Mudar recommended five stocks).
Mudar gave solid logic in support of his buy recommendation, including that the stock will be re-rated.
Jindal Saw is also a favourite of DD Sharma, the veteran stock picker.
The veteran explained that there is an insatiable demand for Ductile Iron pipes and that Jindal Saw is in pole position to capitalize on the demand.
Stewart & Mackertich have recommended a “strong buy” on the following logic:
“Growing turnaround story of Internal Operations: The Company has been doing steady business over last few quarters and has improved their margins considerably. Improved margins will add to the earlier sunk bottom line of the company.
Global surge in Oil and Gas Prices: As the self-imposed cuts by OPEC is said to extend till end 2018, we expect a stable crude prices to stabilize around 60-65 USD/barrel, generating optimum environment for major stalled investments in the GCC and Scandinavian region to restart investment for more oil. Since, Jindal Saw has a 37% order book for exports as of Q2 FY18, the orders are expected to plummet further.
Valuation: We foresee a major turnaround story for Jindal Saw Limited over next couple of years. We estimate the topline to grow more robust in next fiscal on the back of ongoing reforms in the economy and growth revival in the global economic engine. Hence, on the back of the improving ROCE, we have assigned an EV/EBITDA (x) of 5.4 for FY19E with a Target Price of INR160.”
Bharat Forge – EPS growth of 25.6% CAGR coupled with positive outlook for M&HCV and PV makes it a strong buy
Bharat Forge is the blue-chip flagship of the venerable Kalyani group.
The logic for recommending a “strong buy” with a target price of Rs. 859 is as follows:
“Setting up new Greenfield Project: Bharat Forge to set up state of the art large mega site called Centre for “Light Weight Technology “(LWT) in Andhra Pradesh. In phase-I they are going to invest around INR200 crores and aims to start its operation within 2 years. This site is going to develop components, subsystems of aluminum and future carbon fiber which are light weighted and which finds application in automobiles, industrial, marines, aerospace etc. and looking forward especially in BS VI norms vehicles and upcoming arena of EV’s.
Positive Outlook for M&HCV and PV: Domestic commercial vehicle (CV) sale is back on track since July 2017, driven by the demand post GST. As per the Industry Domestic M&HCV segment is expected to register an increasing growth of 15-18% over next one and half years on the back of government’s focus on infrastructure coupled with stricter implementation of overloading ban, implementing BS VI norms by skipping BS V and pick-up in the overall economy.
Valuation: Considering the positive opportunities for the company coupled with greenfield expansion and US truck sales picking up, we expect the EPS of the company to grow at CAGR of 25.6% for the next 2 years. Also, due to improving ROCE, we assign a PE multiple of 36 to FY19E EPS , to arrive at a price target of INR859.”