Initiate coverage on Tourism Finance Corporation of India (TFCI) with a ‘buy’ rating and target price of R120 valuing the stock at 1.5x FY17e ABV. Efforts on reviving tourism, anticipated spurt in the hotel industry which is approaching a cyclical trough and accelerating mid-market/budget hotel segment dovetail well into TFCI’s growth strategy. TFCI thus stands at an enviable cusp of rapid demand growth, coupled with cyclical stability of credit quality and most notably, a hefty capital position, leading to a steady rise in leverage towards an RoE of ~19% by FY17e. Our blue-sky scenario offers a potential target price of R160.
Given its core competency, TFCI is geared to leverage on the growth opportunity in the tourism sector. We believe current valuations at 1x FY17e ABV in the context of growth acceleration, superior returns profile and improved management visibility merit re-rating. Also, specialist financiers receive greater investor attention in times of cyclical upturn of their underlying assets.
Recent measures such as electronic travel authorisation, Visa on Arrival and growth of new Tier II cities, are set to encourage tourism in India. Rating agencies expect 8-13% y-o-y growth in tourist arrivals over the next three-to-five years. Industry-wide occupancy rates have improved over FY13 levels. 60%+ of incremental room supply over FY14-19e is targeted at the fast emerging mid-market/budget class. This synchronises well with TFCI’s growth strategy in its next phase of transformation.
Centrum