Indian Hotel Industry

Cyclical Revival
The Indian travel and tourism industry was hit hard during the past one year by the
global economic slowdown which resulted in decline in foreign tourist inflows. The
Mumbai terror attacks and most recently the Swine Flu scare magnified the extent of
leakage in revenue. The cut in corporate travel, both domestic and international travel resulted in drop in occupancy and revenue per available room (RevPAR) in most cities in India. Interestingly, the Indian Hotel Industry has gone through all possible risks and concerns namely economic slowdown, terrorist acts and health scare in past one year. Most listed companies reported 50-100% fall in net profit in the September’09 quarter while the top line fell by 10-30 %. Things cannot get worse from here with stocks of most listed hotel companies trading at their cheapest levels. As per the management of leading companies, the outlook seems to have improved and there is a feel good factor in the market. The occupancy levels have seen a pick up across cities. Most hotel stocks are trading below the lowest band except Indian Hotel which is trading between 1-2x and EIH hotel which is trading above 3x. As we forecast cyclical recovery in the hotel sector over the next three years and beyond, hotel stocks will see a re-rating, whilst earnings to be the key driver of the stock returns going forward. At the current valuations any minor positive news may trigger a rally in these stocks. We prefer Indian Hotel among the listed hotel companies. One can BUY ON DIPS with a one year target appreciation of 40%+.

Key triggers for revival
FTA showing signs of revival
The FTA during Q1FY10 declined significantly to 13.8% as compared to that in 2008,
but during Q2FY10, the situation improved markedly (a decline of only 1.8%) with the
FTA close to that of last year's. Considering that the second quarter was the
traditionally weaker period in terms of season, we can attribute this improvement to
the growing positive business sentiments in India. Commonwealth Games 2010 to aid recovery of the hotel industry The Commonwealth Games are scheduled to be held from October 3 to October 14, 2010. According to Assocham, India's foreign exchange earnings from the tourism sector is likely to grow by 20% to $16.91 billion dollars in the next two years, primarily due to huge tourists inflow expected during the Commonwealth Games. Around two million foreign tourists and 3.5 million tourists from different part of India are likely to arrive in Delhi for Common Wealth Games 2010. The event will have a bigger impact on the country's tourism industry. There will be a high rise in the number of international passengers from 25 million last year to 45 million by 2010 and the number of foreign tourists is also expected to rise from 4.43% to 10%. As per industry estimates, currently, there is a requirement of around 30,000 rooms in Delhi and the NCR for the 2010 Commonwealth Games. IHCL, being the largest player in this segment, would be a key beneficiary of the same. Overall, this will have a positive effect on the tourism and hotel industry over the longer term. Demand supply mismatch likely to continue During the period before the economic downturn (FY07), many hotel companies had announced expansion plans. During this period, Crisil had estimated an addition of 14,890 rooms between FY10-FY11. The after effects of economic downturn namely lack of credit availability, delay in construction, high realty prices have resulted in
many companies pushing their planned expansion by 1-2 years. Crisil now estimates an
addition of 6,214 room addition between FY10-FY11 which have more than halved than
their earlier estimates. The industry is highly capital intensive in nature and has a long gestation period. India is reportedly facing a shortage of good quality hotels for both international as well as domestic tourists. No longer classified as ‘commercial real estate’ The Reserve Bank of India has recently removed hotels from the 'commercial real estate' classification. This will make larger credit available to the capital-intensive and credit starved hospitality industry at lower rates of interest, thus bringing down the high cost of the hotel projects.

Key Risks
􀂃 The hotel sector remains vulnerable to extraneous events such as natural disasters
and terrorist acts. Business travel tends to be less sensitive to such factors.
􀂃 Slower than expected pick in the economy is another risk as it is likely to adversely
affect business.




My Pick:Indian Hotel Company - Best placed for cyclical revival

Reco price:88
Target price: 125
Expected upside:42%
Nifty Code: INDHOTEL

Strong Brand: IHCL is a Tata Group company, one of India’s largest
conglomerates, with a worldwide presence and about 220,000 staff. The group
has interests in telecoms, automotives, IT/ITES, chemicals, engineering, energy
and consumer products. Association with the Tata Group lends credibility to the
IHCL management and corporate governance standards.
Largest Player in the Industry: IHCL is the largest player in the country with
11,546 rooms (owned or managed) spread across several cities in India and
overseas. While IHCL is the largest player in India it also has properties in
overseas locations such as Maldives, Mauritius, the US, the UK and Australia,
which increases brand visibility and helps to improve service standards within
the group. IHCL operates under the ‘Taj’ brand, which has a strong image for
service excellence and high business standards.
Acquisition of Sea Rock hotel: IHCL is planning to demolish Sea Rock and erect
a new hotel complex, which will also house a convention centre, besides
commercial and retail outlets. The company plans to integrate the site with Taj
Lands End in Bandra within three years. The funds for the acquisition would
come from the Rs 1400 crores rights issue and internal accruals. Sea Rock hotel
is located right opposite to Taj Land’s end. The hotel has location advantage as
compared to Taj Lands End as it has a better view as it is right on the seashore.
With this acquisition, IHCL has five prime hotel properties in Mumbai.
Revenue per room (RevPAR) to recover marginally: RevPAR declined by 37%
and 29% on YoY basis respectively during Q1FY10 and Q2FY10, while the
Occupancy rate improved on a sequential basis during Q2FY10. Though, the
trend in RevPAR is likely to remain muted for the rest for the financial year, we
expect an improvement in FY11 led by improvement in occupancy levels. We
expect FTA to improve gradually in the coming quarter led by improved
economic scenario and positive impact of the Commonwealth Games.
Opening up of Taj Heritage wing and Pierre: IHCL will re-introduce rooms in
Taj Palace which were affected by the terror attack in phases during Q4FY10. It
had closed down 287 rooms in the Palace Wing of Taj Palace due to renovation.
All the rooms, restaurants and banqueting space should re-open by April next
year. IHCL had completely shut down its New York property ‘The Pierre’ for
renovation in January 1, 2008. Rooms in the Pierre were launched on October
19, 2009. The total capex will be amortized over the lease period of 40 years.
According to the management, ARRs at the Pierre can be as high as
US$700/night.
Investment Argument: With improvement in macro economic outlook and up
tick in tourism trends, we are positive on the prospects of the Indian hotel
industry. Hotel industry stocks and IHCL in particular, have consistently enjoyed
premium valuations compared to its global peers given the strong growth
potential of the industry. As we forecast cyclical recovery in the hotel sector
over the next three years and beyond, hotel stocks will see a re-rating, whilst
earnings to be the key driver of the stock returns going forward. At the CMP of
Rs 88, the stock quotes at P/BV of 1.9x and EV/EBITDA of 18.9% its FY11E
financials. One can BUY ON DIPS with a one year target appreciation of 40%+.

The Indian Hotels Company Limited (IHCL) along with its subsidiaries, associates and
joint venture companies, operates under the Taj Hotels Resorts and Palaces brand.
IHCL runs hotels under the brands Taj, Taj Residency, VIVANTA by Taj, Gateway and
Ginger hotels. It has hotels, among other locations, in the United States, Australia,
Maldives, the United Kingdom, Sri Lanka, Africa and the Middle East. IHCL’s joint
venture operates four wildlife lodges in India. IHCL also operates the Taj Spa and air
catering business.
During FY09, 12 hotels were opened with an inventory of 1,167 rooms. As of March 31,
2009, the Taj Group operated 99 hotels with 11,754 rooms, and over 281 food and
beverage outlets. FY09, it commenced operations at the VIVANTA by Taj in Bangalore,
Karnataka; opened TAJ Mount Road hotel in Chennai, and Nadesar Palace in Varanasi.
Taj group has introduced a chain of budget hotels in June 2004 by launching 'Smart
Basics' concept, indiOne, at Bangalore through its wholly owned subsidiary, Roots
Corporation Ltd. Later the company renamed the budget hotel brand to ‘Ginger’ with
currently around 1,709 rooms. It plans to have around 3,500 rooms across 25 locations
under this brand. The company has also launched its exclusively developed 'Jiva Spa'.
This is based on traditional Indian ayurvedic and yogic systems, set in an
internationally contemporary ambience. This is currently operational in five hotels.
Further rollouts are in progress.
IHCL recently acquired Sea Rock Hotel in Mumbai for Rs 680 crore. It has picked up 85% stake in ELEL, which holds a long-term lease of the land on which Sea Rock is built.


Highlights of Q2FY10 results
As expected, IHCL reported weak results for Q2FY10. On YoY basis, its net sales degrew by 22.3% to Rs 285.9 crores, operating margins halved to 10.4% and the reported PAT declined by 76.6% to Rs 11.9 crores. The results include Rs 21.3 crores of claims for business interruptions because of the terror attacks in Mumbai. However, Q2FY10 has clearly shown some symptoms of a turnaround. As can be seen in
the table below, the occupancies in Q2 have witnessed an improvement on QoQ basis.
Also, occupancies in all the key markets have grown on QoQ basis in a typically the
weakest quarter of the year. From a low of about 52% in Q1FY10, occupancies grew to
about 60% in Q2FY10. Occupancies are set to improve in the coming two quarters in
the peak seasons between November and March which is when most of the businesses
are generated and the occupancies are at an all time high.

Courtesy: WAY2WEALTH