41393161 Hotel and Tourism

Edelweiss Securities LimitedManoj Bahety, CFA+91 22 6623 [email protected]

Manav Vijay+91 22 4063 [email protected]

Executive Summary

Demand-supply economics favourable in India World Travel & Tourism Council (WTTC) expects travel and tourism (T&T) demand in

India to grow at 8.2% annually till 2019, the highest growth after China in the big

countries league. Owing to various supply bottlenecks, the 13% CAGR growth till FY12E

in demand of premium category rooms is expected to outpace the 10% CAGR growth in

supply; HVS estimates ongoing construction work on only 60% of the 1,00,000

announced rooms. Demand is expected to remain robust as the Indian economy gathers

pace and with many sporting events lined up in the next 12-18 months.

ARRs to rise and ORs to stay firm till FY12 Owing to the increasing demand across many categories/locations, we expect occupancy

rates (ORs) to firm up to 65% and further to 70% in FY11E and FY12E, respectively.

After a difficult H1FY10, when average room rates (ARRs) declined as much as 35-40%

in many locations, marked improvement witnessed by hotel companies in Q3FY10 instills

confidence to estimate an increase of 10% each in FY11E and FY12E. By 2012, we

estimate addition of 9,000-10,000 rooms in the five star and above category. We expect

above 85% of the incremental capacity to be utilised due to better demand.

International hotel chains eye Indian hospitality

According to WTTC, India’s T&T market is expected to grow more than 100% by 2018 to

USD 61 bn against USD 28 bn in 2008. To tap this opportunity, ~25 major international

hotel companies like Accor, Marriott, Claridges, Shangri-la, and Carlson Hospitality are

looking to enter India, either independently or in collaboration with a local party. Also,

GoI’s conscious efforts towards promoting India as a leading leisure destination are likely

to increase the country’s share in the foreign tourist arrivals (FTAs).

Outlook: Good long-term opportunity Considering that the US offers 40x and China 10x hotel rooms as compared to the

110,000 hotel rooms in India, the Indian hospitality industry has huge potential to grow

structurally. However, high land prices, low FSI, plethora of taxes, and low incentive

from government are some key hurdles for hotel companies in India.

In this report, we have discussed listed hospitality companies. We initiate coverage on

Cox & Kings and EIH with ‘HOLD’ recommendations, and on Hotel Leela with ‘REDUCE’

recommendation. Also featured in this report are Indian Hotels (BUY), Mahindra

Holidays & Resorts India (REDUCE), Asian Hotels (NOT RATED), and TAJ GVK (NOT

RATED).

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Hotels & Tourism

2 Edelweiss Securities Limited

Hotels & Tourism

Contents

At a glance ................................................................................................................. 3

Indian Travel & Tourism Industry: Overview ................................................................... 4

Demand-Supply Economics Favourable .......................................................................... 5

Improving ARRs and ORs during 2010-12 ..................................................................... 20

Global Player’s Indian Venture .................................................................................... 22

Vacation Ownership ................................................................................................... 23

Global Travel & Tourism ............................................................................................. 26

Key Trends ............................................................................................................... 28

Business Analysis ...................................................................................................... 30

Valuation Methodology ............................................................................................... 33

Key Risks ................................................................................................................. 35

Challenges ............................................................................................................... 36

Annexure I ............................................................................................................... 37

Annexure II .............................................................................................................. 38

Annexure III ............................................................................................................. 39

Companies

Cox & Kings ............................................................................................................ 41

EIH .......................................................................................................................... 53

Hotel Leelaventure .................................................................................................... 67

Indian Hotels Company .............................................................................................. 81

Mahindra Holidays & Resorts India ............................................................................... 87

Asian Hotels ............................................................................................................. 95

Taj GVK Hotels & Resorts ........................................................................................... 99

Edelweiss Securities Limited 3

Hotels & Tourism

At a Glance

Pric

eShar

es O

/SM

kt c

apRec

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rR

even

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EBIT

DA

Net

pro

fit

EPS

Rev

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pro

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EV/E

BIT

DA

PE

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pan

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NR)

(mn n

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(I

NR

mn)

Cox &

Kin

gs

488

62.9

30,7

05

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FY07

970

402

297

4.7

53

98

95

175

25.8

89.5

FY08

1,8

21

730

426

6.8

88

82

115

43

10.6

72.1

FY09

2,8

69

1,2

14

628

10.0

58

66

41

47

12.8

48.9

FY10E

3,6

84

1,5

45

1,1

12

13.3

28

27

33

33

18.0

36.8

FY11E

4,7

08

1,9

95

1,3

12

20.9

28

29

55

57

13.6

23.7

FY12E

5,6

05

2,3

81

1,6

49

26.2

19

19

26

26

10.7

19.1

East

In

dia

Ho

tels

124

392.9

48,8

57

Hold

FY07

10,6

15

3,7

50

1,9

99

4.0

31

44

64

65

14.5

30.9

FY08

12,6

66

4,9

47

2,2

45

5.7

19

32

48

43

11.1

21.6

FY09

11,7

69

4,1

43

1,7

01

4.3

(7)

(16)

(25)

(24)

13.7

28.6

FY10E

9,6

20

2,4

17

371

0.9

(18)

(42)

(78)

(78)

25.2

131.3

FY11E

13,8

77

4,4

63

1,4

79

3.8

44

85

(299)

299

13.4

32.9

FY12E

15,2

35

5,1

96

1,9

56

5.0

10

16

32

32

11.3

24.9

Hote

l Leela

ven

ture

50

377.8

18,7

77

Red

uce

FY07

4,1

56

1,9

30

1,2

60

2.3

21

20

20

19

15.9

22.4

FY08

5,1

46

2,2

97

1,4

85

3.9

24

19

76

72

16.6

14.6

FY09

4,5

22

1,5

57

1,4

50

2.4

(12)

(32)

(39)

(39)

28.9

22.9

FY10E

4,0

41

1,2

03

600

1.1

(11)

(23)

(54)

(54)

38.1

50.1

FY11E

6,2

23

2,2

05

381

1.0

54

83

(8)

(8)

22.6

54.6

FY12E

8,5

71

3,0

38

348

0.9

38

38

(9)

(9)

16.7

59.9

Ind

ian

Ho

tels

103

723.4

74,1

85

Buy

FY07

25,0

63

7,2

05

3,7

07

6.1

36

41

50

44

9.6

15.0

FY08

29,2

00

8,9

20

3,5

93

6.9

17

24

11

12

8.3

13.9

FY09

26,8

00

5,0

56

148

0.2

(8)

(43)

(99)

(97)

17.4

462.8

FY10E

24,7

28

5,0

51

415

0.6

(8)

(0)

520

180

18.6

165.4

FY11E

31,7

69

8,5

47

2,2

52

3.1

28

69

577

442

11.5

30.5

FY12E

39,5

74

12,5

49

4,7

45

6.6

25

47

116

111

7.5

14.5

Mah

ind

ra H

olid

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540

84

45,4

26

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uce

FY07

2,4

13

796

425

5.4

54

81

112

112

52.1

97.6

FY08

3,7

72

1,4

42

840

10.7

56

81

98

98

28.9

49.4

FY09

4,4

21

1,5

22

798

10.2

17

6(5

)(5

)27.2

52.0

FY10E

5,7

62

2,0

97

1,2

09

14.4

30

38

52

41

20.3

36.9

FY11E

8,1

68

3,0

66

1,8

55

22.0

42

46

53

53

13.5

24.1

FY12E

10,9

75

4,3

20

2,6

62

31.6

34

41

43

43

9.1

16.8

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560

22.8

12,7

77

Not

rate

dFY

07

4,1

34

1,8

30

915

40.1

26

45

61

61

7.6

13.5

FY08

5,1

35

2,2

75

1,3

26

58.1

24

24

45

45

5.7

9.3

FY09

6,4

15

2,1

73

942

27.5

25

(4)

(29)

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6.4

19.7

Taj

GV

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62.7

9,8

38

Not

rate

dFY

07

2,4

42

1,1

52

643

10.3

29

36

39

39

8.6

14.6

FY08

2,5

84

1,2

21

704

11.2

66

99

8.2

13.4

FY09

2,3

82

1,0

26

528

8.4

(8)

(16)

(25)

(25)

10.5

17.8

Finan

cial

s (I

NR m

n)

Gro

wth

(%

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uat

ions

(X)


Hotels & Tourism

Indian Travel & Tourism Industry: Overview In 2010, India’s T&T industry is expected to generate INR 5,533 bn (USD 118 bn) of economic activity, according to the World Travel & Tourism Council (WTTC). This will include INR 1,970 bn (USD 42 bn), equivalent to 3.1% of total GDP, as the direct industry contribution. Chart 1: Indian T&T industry size

Personal travel & tourism

55%

Business travel9%

Government expenditures

1%

Capital investments

24%

Visitor exports8%

Other exports3%

Source: WTTC, Edelweiss research

Personal T&T is expected to contribute 55% to the total industry, followed by capital investments at 24%. Some related sectors include hotels, airlines, surface transport, basic infrastructure, and facilitation systems environemnt. Hotels (INR 600 bn in 2007), airlines (INR 350 bn in 2008), and car rental (INR 10 bn in 2007) are some of the biggest direct contributors to the industry. WTTC estimates direct industry GDP in 2020 to increase to INR 6,211 bn, a CAGR of 12%. Personal T&T, the biggest contributor, is expected to grow 13% over the same period. The unorganised sector dominates Indian T&T; only hotels, airlines and tour operators are part of the organised sector. In this report, we have discussed the Indian hotel industry, vacation ownership industry, and tours and travels industry in detail.

Fig.1 : Major players in the Indian T&T industry

Indian T& T industry(INR 1970 bn)

Hotels (INR 650 bn)- Indian Hotels- ITC- East India Hotels- Hotel Leela- Bharat Hotels- Asian Hotels- Mahindra Holidays

Airlines (INR 400 bn)- Air India & Indian Airlines- Jet Airways- Kingfisher Airlines- Spicejet- Indigo- GoAir- Paramount Airways

Tour operators (INR 150 bn)- Kouni- Thomas Cook- Cox & Kings

Source: WTTC, CRISIL, Industry, Edelweiss research

USD 42 bn is the

estimated size of direct

Indian tourism sector


Hotels & Tourism

Demand-Supply Economics Favourable

Tourism demand on the rise in India Till 2019, WTTC estimates India’s T&T demand to post 8.2% CAGR, one of the highest in the world. The Ministry of Tourism (MoT) aims to achieve 10 mn (versus 5.1 mn in 2009) foreign tourist arrivals (FTAs) and 675 mn (versus 563 mn in 2008) domestic tourists in 2010. Provisional estimates of December 2009 for FTA is 0.65 mn, the highest in the past three years, guides to above 6 mn FTAs in 2010. We estimate India’s contribution to the worldwide T&T growth to rise to 1.9% in 2018 (1.27% in 2009) when global T&T is projected to grow at 4% according to WTCC. Continuous tourist growth in India is attributable to factors like media campaigns ‘Incredible India’ organised by GoI, high level of service standards in the country and great regional diversity. Foreign exchange earning from T&T has posted 13% CAGR in 1996-2008. Robust GDP growth will aid the business and leisure travel, implying a positive outlook for the Indian hospitality industry. Recent jump in ORs across major cities, followed by increased ARRs, gives us confidence that the industry is set for a major business upturn. Chart 2: Rise in FTAs to aid growth in organised hospitality

(8.0)

0.0

8.0

16.0

24.0

32.0

0

240

480

720

960

1200

1999-0

0

2000-0

1

2001-0

2

2002-0

3

2003-0

4

2004-0

5

2005-0

6

2006-0

7

2007-0

8

2008-0

9

2009-1

0E

2010-1

1E

2011-1

2E

(%)

Revenue

(IN

R b

n)

Hospitality sector size FTAs growth

Source: CRISIL, Ministry of Tourism, Edelweiss research

Within T&T, the hotels segment is likely to grow the fastest. With an expected 10% jump in ARRs in FY11 and FY12, we expect the share of hotel industry to increase to 22% in FY12 against 19% in FY09. Limited supply of rooms, along with healthy demand, is expected to help hotels to post better performance. Healthy growth in both international and domestic tourists, along with India’s emergence as one of the fastest economies, is likely to drive its business tourist traffic substantially.

Indian tourism set for

major growth


Hotels & Tourism

Chart 3: Increased ARRs and tourist influx to aid hotel industry

0.0

5.0

10.0

15.0

20.0

25.0

0

60

120

180

240

300

2000-0

1

2001-0

2

2002-0

3

2003-0

4

2004-0

5

2005-0

6

2006-0

7

2007-0

8

2008-0

9

2009-1

0E

2010-1

1E

2011-1

2E

(%)

Revenue

(IN

R)

Total mkt size Hotel industry as a % of total T&T demand

Source: CRISIL, Ministry of Tourism, Edelweiss research

FTAs on the rise; past 0.6 mn in December 2009 India has had positive FTA growth in 11 out of the past 14 years. After a -3.4% growth in 2009, 2010 should be a healthy year for the industry if FTA growth for December 2009 is any indicator. Arrivals crossed 0.6 mn in December 2009, a record high in the past 36 months. Though MoT target of achieving 10 mn foreign tourists in 2010 looks unlikely (in view of the current trends; target was set in 2008), probability of a substantial jump over 2009 is certainly not ruled out. Events like 26/11, swine flu and travel warnings are certainly cause for certain. However, GoI’s sincere efforts at promoting India as a leading travel destination are likely to grow FTAs, going forward. Also, upcoming events like Commonwealth Games, ICC World Cup Cricket, World Cup Hockey and Formula 1 are certain to attract a lot of sports fans from across the world to India. Chart 4: FTAs to rise substantially

(8.0)

0.0

8.0

16.0

24.0

32.0

0.0

1.2

2.4

3.6

4.8

6.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008P

2009P

(%)

(FTA

, m

n)

Foreign tourists % Growth

Source: Ministry of Tourism, Edelweiss research

We estimate FTAs in India to grow 15% during 2011 and 2012, similar to the 2003-07 levels. We also expect foreign exchange earnings to grow much faster than the overall FTAs growth as overall fee from tourism earned in 2003-08 grew 25% every year.

Upcoming sports events

to aid FTA growth


Hotels & Tourism

Moreover, what has helped improve India’s image on the world tourism map is its improving infrastructure that has connected the remotest of the places within the country. Further, low-cost airlines, highway development and better power situation have buoyed India’s tourism prospects.

Domestic travel in 2008 at all time high With increasing purchasing power, rising job opportunities and comfortable GDP/saving ratio, more and more Indians are taking holidays. Domestic travellers in 2008 were at all time high of 563 mn - 12.3% CAGR since 1996. We expect the economy segment to register faster growth at 15-20% CAGR over 2010-12, driven by demographic and lifestyle changes in India. According to MoT, domestic tourism is expected to touch 675 mn by 2010. Chart 5: Domestic tourism is expected to do well

0.0

4.0

8.0

12.0

16.0

20.0

0

120

240

360

480

6001996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008P

(%)

(FTA

, m

n)

Domestic tourists % Growth

Source: Ministry of Tourism, Edelweiss research

Given the value proposition seeking habit of Indians, we believe there is likely to be considerable demand for the three star and four star category hotels. Explosive growth in the telecom industry and low-cost carriers has proved that at the right price, the burgeoning Indian middle class is ready to spend. Hence, we believe Indian Hotels’ (IHCL) ‘Ginger’ budget hotel is a step in the right direction which should yield good results in the long run.

Increased airline traffic, average length of stay yield more business During 1999 and 2008, the emergence of low-cost carriers expanded the overall airline traffic by 17% CAGR. In December 2009, domestic air traffic was 45 mn, the highest ever number achieved by the industry. After a decline of 11% during 2008-09, 15% Y-o-Y growth in the first three quarters of FY09-10 shows that demand is coming back with improved business confidence. Increasing ORs and better ARRs of Q3FY09-10 across major business and leisure destinations indicate that corporates are raising their travel budgets.

Expanding economy is

driving the growth of

domestic tourist

Increasing airlines traffic

translates into higher

hotel business


Hotels & Tourism

Chart 6: Increasing airline traffic to translate into more business for hotels

(14.0)

0.0

14.0

28.0

42.0

56.0

0

100

200

300

400

500

1999-0

0

2000-0

1

2001-0

2

2002-0

3

2003-0

4

2004-0

5

2005-0

6

2006-0

7

2007-0

8

2008-0

9

2009-1

0*

(%)

(Pass

enger

s, la

cs)

Passengers carried by domestic airlines % growth

Source: DGCA, Edelweiss research

Note: * 9mFY09-10 data annualised

Another positive trend is the increasing average length of stay of domestic and international tourists. The average stay of international tourists increased from 3.0 to 3.4 days during 2005-06, while that of domestic tourists stood at 2.6 days. Similarly, there was a marked increase in the length of stay of business guests from 2.4 days to 2.6 days, while leisure guests were seen staying around for 2.4 days.

Supply overhang unfounded In 2009, WTTC had estimated the T&T demand in India to grow at 8.2% p.a. till 2019, which led many companies to announce their expansion/start up plans. In 2007, CRISIL estimated addition of almost 15,000 five star rooms in 2010 and 2011; it has, however, now reduced this to 6,200 rooms for the specified period. A large supply of rooms has been pushed back due to the global economic slowdown, regulatory and construction delays, high real estate prices and lack of easy bank credit. However, given the current demand-supply mismatch, we believe, new room additions will not be a cause for concern. Many projects announced by real estate developers are still on the drawing board due to the reasons mentioned above. As per a report by HVS, of the total 100,000 announced five star deluxe, five star and four star category rooms, only 60% is under active development with ~47% under the luxury and first class category. During the same period, demand for these rooms is expected to increase by 12.6% CAGR.

Supply concerns are

overdone


Hotels & Tourism

Table 1: Distribution of existing and proposed branded hotels by major cities

Existing supply

Proposed supply

Increase over five

years (%)

Active development of

supply (%) Luxury

(%) First

class (%)

Mid-market

(%) Budget

(%) Extended stay (%)

Agra 1,419 400 28.2 75.0 25.0 - 75.0 - -

Ahmedabad 800 3,058 382.3 71.0 8.2 39 35.2 10.3 7.2

Bengaluru 3,889 10,784 277.3 58.0 23.8 29 16.0 22.7 8.4

Chandigarh 351 1,459 415.7 55.0 11.3 34 25.1 29.2 -

Chennai 3,307 4,945 149.5 67.0 36.7 32 12.4 11.8 7.0

Delhi (NCR) 8,625 16,560 192.0 53.0 18.2 30 33.7 16.3 1.5

Goa 2,795 2,178 77.9 31.0 14.0 42 30.8 13.4 -

Hyderabad 2,761 5,884 213.1 73.0 42.1 21 17.8 19.1 -

Jaipur 1,683 3,357 199.5 53.0 16.1 27 40.5 16.1 -

Kolkata 1,373 4,025 293.2 62.0 24.2 28 36.3 11.1 -

Mumbai 7,948 13,386 168.4 73.0 29.9 26 24.8 15.2 4.4

Pune 1,518 8,054 530.6 52.0 22.3 29 29.6 19.2 -

Other cities 12,006 20,025 166.8 60.0 2.5 21 48.0 28.1 0.6

Total 48,475 94,115 194.2 60.0 20.2 27 31.2 19.0 2.9

Proposed supply

Source: HVS, Edelweiss research

Mumbai (9,771 rooms), Delhi (8,776 rooms) and Bengaluru (6,254 rooms) are expected to witness the largest absolute addition, whereas Pune (276%), Ahmadabad (271%) and Chandigarh (229%) could see the largest increase in percentage terms. CRISIL expects addition of ~32,000 rooms in the next five years. Limited supply of premium category rooms during FY04-08 had led to ~50% rise in ARRs during the period. ORs also improved during the period to ~70% from 63%. For business hotels, occupancies in excess of 70% are considered to be above normal as only five business days are used for calculations. Of the expected addition of almost 10,000 five star hotel rooms in FY10-12, more than 85% is likely to get filled which will push ORs to 65% in FY11E and 70% in FY12E. ORs of more than 70% witnessed by the hotel industry during FY05-08 is indicative of an even better number for the next few years as business activity in India is rising. Chart 7: Increased demand with limited supply to push ORs higher till FY12E

0.0

16.0

32.0

48.0

64.0

80.0

0

9,000

18,000

27,000

36,000

45,000

FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E

(%)

(Room

s)

Room availability Room demand ORs

Source: CRISIL, Edelweiss research

Mumbai, Delhi and

Bengaluru to witness the

largest addition of rooms


Hotels & Tourism

Supply scenario in major markets NCR: Commonwealth Games and ICC Cricket World Cup key triggers

To serve the anticipated demand of hotel rooms due to the upcoming Commonwealth Games in October 2010 and ICC World Cup in Q4FY11, during FY10-11, supply in the premium category is expected to rise 20% in the National Capital Region (NCR); we expect the existing room count to rise 60%, from 7,000 to ~11,000 rooms in the next five years. Including four star rooms, we expect total addition of 7000-8000 rooms in the period. We expect ORs to remain strong at 75% in FY11E and decline to 70% in FY12E post the Commonwealth Games. In our view, considering the supply of hotels in FY11E and FY12E, we believe the new supply post FY12E to come down for a while as the market will take time to expand. Chart 8: Strong ORs till FY12E – Limited supply and robust demand

0.0

20.0

40.0

60.0

80.0

100.0

0

2,000

4,000

6,000

8,000

10,000


(%)

(Room

s)

Supply Demand ORs

Source: CRISIL, Edelweiss research ARRs, after rising at 22% CAGR during FY04-09, are expected to fall 15% in FY10. Considering the expected demand, we anticipate a conservative 15% increase in ARRs during FY11 and FY12, though we believe the actual rise could be much higher. Chart 9: Strong ARRs till FY12

0.0

20.0

40.0

60.0

80.0

100.0

0

2,800

5,600

8,400

11,200

14,000


(%)

(IN

R)

ARRs RevPAR ORs


Upcoming international

sports events to hold the

demand high

ARRs to remain firm in

anticipation of high

demand


Hotels & Tourism

Delhi, being the political and cultural capital of India, attracts all kinds of travellers, Indian and foreign, business and leisure. In FY08, business and leisure travellers were almost 80% of the total travellers. We expect the percentage of leisure travellers to increase in the short term, considering the upcoming games. On the long-term basis, the current mix may hold. Chart 10: Business and leisure travellers form the majority

6.5 5.9 4.7 1.5

54.6 50.5 52 63.2

12.213.4 15.5

1614.2

12.4 10.35.6

12.5 17.8 17.5 13.7

0.0

20.0

40.0

60.0

80.0

100.0

FY05 FY06 FY07 FY08

(%)

Others Tour Group Leisure Traveller Business Traveller Airline crew


Mumbai: Strong economic revival to aid growth Supply in Mumbai is likely to rise 33% between FY10E and FY12E, taking the total number of rooms to 9,300 in the premium category. Nearly 5,500 premium category rooms are expected to become operational in the next five years (10,000, including four star rooms). High land cost is the primary cause behind lesser addition of lower category rooms in the city. We expect ORs of 60% in FY10E, followed by 70% in FY11E, and 70% in FY12E. In 9mFY10, the city achieved ORs of 59%. Considering ORs of above 70% between FY04 and FY08, we are confident of our FY11 and FY12 estimates. Chart 11: Limited supply favourable for ORs

0.0

20.0

40.0

60.0

80.0

100.0

0

2,000

4,000

6,000

8,000

10,000


(%)

(Room

s)

Supply Demand ORs


Strong economy revival to

boost the business

tourism


Hotels & Tourism

Till FY13, Shangrila (414 rooms) is the only addition expected in South Mumbai. Owing to shortage of large vacant land parcels in South Mumbai, North Mumbai is expected to witness the majority addition. Emergence of Bandra Kurla Complex (BKC) as an alternative business destination is expected to shift a lot of business traffic over a period of time to North Mumbai from South Mumbai. We expect ARRs to increase 15% in FY11 and FY12, after declining 20% in FY10E. Strong economic revival, along with better prospects of sectors like banking, financial services, IT/ITeS and diamond, gives us confidence to expect better ARRs in future. Owing to demand-supply mismatch, ARRs increased 20% CAGR during FY04-09. Chart 12: ARRs to firm FY10E onwards

0.0

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0

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(%)

(IN

R)

ARRs RevPAR ORs


In Mumbai, though business travellers constitute majority of the demand, demand is equally divided among domestic and foreign travellers. Going forward, we expect this mix to remain intact, but believe the proportion of business travellers will rise (considering India is expected to be one of the fastest growing economies in the world for many years). Chart 13: Business and political travellers drive demand in Mumbai

6.1 6.5 8.5 4.6

64.5 58.7 56.956.5

11.913.5 9.7

8.6

3.93.7 5.8

5.3

13.6 17.6 19.1 25

0

20

40

60

80

100

FY05 FY06 FY07 FY08

(%)



Limited supply in South

Mumbai to keep ARRs

firm


Hotels & Tourism

Chennai: IT and auto sectors to keep ARRs firm Chennai is expected to witness 25% rise in supply between FY10E and FY12E, taking the total number of rooms to 2,615 in the premium category. Further, 2,100 premium category rooms are expected to become operational in the next five years (3,500, including four star rooms). We expect ORs of 60% in FY10E, followed by 65% in FY11E and 70% in FY12E. With increase in demand from IT/ITeS and auto majors like Ford, Hyundai, TVS, and Ashok Leyland, Chennai’s prospects look strong. The city is, however, typically skewed towards the mid market (three and four star hotels) segment, with the same accounting for 69% of the total hotel rooms. Chart 14: Outlook healthy for ORs

0.0

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0

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(%)

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s)

Supply Demand ORs


After 19% CAGR increase in ARRs over FY04-09, we expect a -12% decline in FY10 followed by increase of 10% in FY11E and FY12E. Chennai’s booming manufacturing and IT sectors provide it the essential impetus for economic growth. Chart 15: Increase in ARRs till FY12E due to back-ended supply

0.0

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(%)

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Chennai, being one of the main metros, business travellers form two-third of the total travelers; with its emergence as the main ITes center, the proportion of foreigners has

Strong IT and Auto sector

revival to keep demand

high

Back-ended supply to

keep ARRs firm


Hotels & Tourism

been rising consistently. As Chennai is also emerging as a hub for almost all auto majors, we expect this trend to continue, going forward. Chart 16: Business travellers to continue to form the majority

8.3 7.1 10.1 9.5

65.7 67.1 59.1 62.1

11.6 7.49.3 10.5

7.05.0 9.3

8.7

7.4 13.4 12.2 9.2

0.0

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40.0

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FY05 FY06 FY07 FY08

(%)

Others Tour Group Leisure Traveller Business Traveller Airline crew Source: CRISIL, Edelweiss research

Kolkata: Limited supply to keep ARRs firm Supply in Kolkata is expected to rise 12% between FY10E and FY12E, taking the total number of rooms to 1,400 in the premium category. Total premium category rooms expected to become operational in the next five years are 1,500 (2,400, including four star rooms). Chart 17: Healthy ORs till FY12E due to limited supply

0.0

16.0

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48.0

64.0

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0

320

640

960

1,280

1,600


(%)

(Room

s)

Supply Demand ORs


Kolkata is expected to witness the least decline in ARRs of just 5% in FY10E due to consistent rise in demand in the past few years and very limited supply. Taking advantage of the demand-supply mismatch that is likely to continue till FY12E, we expect 10% increase in ARRs in FY11E and FY12E.

Limited supply with

consistent demand growth

to keep ORs high


Hotels & Tourism

Chart 18: Strong ARRs till FY12E

0.0

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64.0

80.0

0

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3,200

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(%)

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R)

ARRs RevPAR ORs


Kolkata being primarily a financial hub, business travellers, along with airline crew, form the majority demand. We expect this trend to continue in the near future. Chart 19: Business travellers to continue to form the majority

7.8 1.711.5 13.1

75.7

66.362.8 65.1

8.5

15.2 6.88.2

3.88.3 8.6

4.9

4.2 8.5 10.3 8.7

0.0

20.0

40.0

60.0

80.0

100.0

FY05 FY06 FY07 FY08

(%)

Others Tour Group Leisure Traveller Business Traveller Airline crew Source: CRISIL, Edelweiss research

Bengaluru: ARRs under pressure due to huge supply Bengaluru is expected to witness 50% increased supply between FY10E and FY12E, taking total premium rooms to 3,725. Total premium category rooms expected to become operational in the next five years are 4,643 (6,000 including four star rooms). Owing to an unprecedented increase in demand during FY04-09, ORs were more than 75%. We expect ORs to remain constant at 65% till FY11E and then increase to 70% in FY12E, driven by IT, ITes, banking, research and development and engineering sectors.

Strong supply to outpace

the subdued demand

Witnessed strong ARRs

during 2010, better rates

going ahead


Hotels & Tourism

Chart 20: ORs to firm post FY12E

0.0

18.0

36.0

54.0

72.0

90.0

0

800

1,600

2,400

3,200

4,000


(%)

(Room

s)

Supply Demand ORs


We expect ARRs to rise 5% in FY11E and FY12E, after declining ~28% in FY10E (decline due to the IT slowdown and new supply of rooms). Chart 21: ARRs to firm FY11E onwards

0.0

18.0

36.0

54.0

72.0

90.0

0

3,200

6,400

9,600

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16,000


(%)

(IN

R)

ARRs RevPAR ORs

Source: CRISIL, Edelweiss research With the emergence of Bengaluru as India’s Silicon Valley, business and foreign travellers constitute more than three-fourth of the total demand. We expect this trend to continue in future.

ARRs to witness growth

only post FY11


Hotels & Tourism

Chart 22: IT/ITes business travellers to continue to form the majority

4.5 8.3 5.4 6.7

69.176 76.1 78.5

10.5

9.44.6

5.92.5

1.22.5

1.913.45.1 11.4 7

0.0

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FY05 FY06 FY07 FY08

(%)



Hyderabad: Conferencing the next big trend Hyderabad is expected to witness 45% increased room supply between FY10E and FY12E, taking the total number of rooms to 2,800 in the premium category. Number of premium category rooms expected to become operational in next five years is 2,500 (4,200 including four star rooms). We expect ORs to improve FY11E onwards, after hitting 55% in FY10E. Chart 23: Demand to catch up with supply post FY10E

0.0

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54.0

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(%)

(Room

s)

Supply Demand ORs


We believe, going forward, the Hyderabad hotel industry will shape up with the number of conferences happening there. Improved infrastructure already shows the efforts put in by the state government to make Hyderabad a leading business city in India. We expect slight improvement in ARRs FY11E onwards. With likelihood of Hyderabad becoming a major conference city in the South and much better connectivity to the new airport, ORs and ARRs are poised to improve, albeit gradually.

Conferencing facilities to

drive the growth in

demand


Hotels & Tourism

Chart 24: Gradual improvement in ARRs FY10E onwards

0.0

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90.0

0

1,800

3,600

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7,200

9,000


(%)

(IN

R)

ARRs RevPAR ORs


Proportion of business travellers and airline crew has been going up consistently. We expect this trend to continue in future, considering the way Hyderabad has come up on the world IT map. Chart 25: Proportion of business travellers to rise

1.5 0.4 6 5.5

60.6 68.4 58.7 62

6

10.4 15.8 13.53.5

8 7.2 828.412.8 12.3 11

0.0

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FY05 FY06 FY07 FY08

(%)



Strong demand to help

ARRs to improve post

FY10


Hotels & Tourism

Outlook on other major cities

Pune: We expect Pune to add 4,000 rooms over the next five years, growing more than 250%. In the premium category, ~1,000 rooms are expected to come up in the next five years. Owing to IT slowdown and the swine flu scare, ARRs are expected to fall 25% in FY10E and ORs to sub 50% levels. Likelihood of excess supply in the city is certain to keep the pressure on ORs and ARRs in FY11E and FY12E. Pune has become highly popular because of its biotechnology, pharmaceutical, IT, ITeS and BPO industries, which will eventually drive growth in its hospitality industry. Goa: The city is expected to register 30% jump in supply till FY12E, taking the total supply close to 3,900 rooms. Tough real estate laws are to be blamed for the slow development of hotels across the city. Including four star hotels, the total supply expected in the next five years is 2,178 rooms. We expect Goa to witness continuous rise in ARRs during FY11-12E, as we expect domestic travellers to replace the gap left by foreign travellers to some extent. Recent trends show increased demand for hotel rooms in Goa all year round, reducing the impact of seasonality on the local hotel market. This is also evident from the fact that ORs, FY04 onwards, have been moving up consistently.

Long-term positive

outlook on demand-

supply and ARRs on many

Indian cities


Hotels & Tourism

Improving ARRs and ORs During 2010-12 During FY11E and FY12E, we expect ARRs to move up 13% and ORs to improve to 65% and 70% respectively. In FY04-08, 32% increase in room demand outpaced 21% increase in supply, resulting in 132% increase in ARRs and more than 70% ORs during the same period. We believe that the demand-supply mismatch, coupled with slow development of planned projects, would be a positive for the hotel industry in the medium term. Global economic downturn during FY09 impacted the ORs, reducing them to 64% from 72% in FY08 with flat ARRs. The 26/11 Mumbai attack and swine flu fever in FY10 severely impacted the already weak numbers. In H1FY10, ARRs tumbled 25% and ORs reduced to just 53%. Improvement in the reported data of past few months and positive body language of the industry players give us confidence that worst for the industry is behind. Chart 26: High seasonality in tourist arrivals

0.0

0.1

0.3

0.4

0.6

0.7

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

(mns)

2006 2007 2008 2009

Source: CRISIL, Ministry of tourism, Edelweiss research CRISIL estimates 44% of the total new supply coming onstream during FY10-15 to become operational only in FY15, leaving the demand-supply mismatch favourable till FY12-13. We see geographically concentrated players at a relatively higher risk against those with a wider footprint. With an increase in the total number of travellers, we expect strong demand across segments.

Improvement in all India

ARRs and ORs till FY12


Hotels & Tourism

Chart 27: Scenario post FY10 looks promising

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0

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4,800

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(%)

(IN

R)

ARR Rev PAR Occupancy rate



Hotels & Tourism

Global Players’ Indian Venture With the growing economy and increasing FDI, several top international hotel chains, including the likes of Marriott, Four Seasons, Hilton, Accor & Intercontinental, have announced plans of entering Indian shores either by tying up with an existing domestic hotel chain or with a real estate player and managing them. As 100% FDI is permitted in hotels and tourism through the automatic route, there are no obstacles for these companies to launch operations.

Table 2: Top hospitality chains entering India S. No. Group Brand Origin Planned Hotels Partner (if any)

1 Claridges 5

2 Wyndham Worlwide Holiday Inn Express Ramada USA 10 Royal Orchid Hotels

3 Le Meridian Le Meridian USA 10

4 Carlson Hospitality Regent, Park Inn,

Country Inn USA 30 US PE fund

5 Marriott International Ritz Carlton, Marriott,

Renaissance, Courtyard USA 24

6 Accor France 200 Emaar-MGF

7 Hilton Corporation Hilton, Hilton Garden Inn,

Homewood Suites USA 75 DLF

8 Best Western Best Western USA 100 Licensee

9 Starwood Hotels Luxury Collection, Aloft USA 19 ITC

10 Choice Comfort Inn, Clarion,

Quality Inn USA 50

11 Berggruen Hotels Keys USA 38

12 Hampshire Hotels USA 25

13 Four Seasons Hotels Four Seasons Canada 8

14 Global Hyatt USA 15

15 Shangri la Traders Hotel, Shangri La Hong Kong 2 Phoenix Group

16 Intercontinental HG Intercontinental, Holiday Inn UK

17 Golden Tulip Hospitality Netherland 30-50

18 Dusit Hotels Thailand 6 Bird Group

19 Meuse Hotels Singapore 100 Source: Edelweiss research

With the global economy now reviving, international hotel companies are revisiting their India plans and are signing deals with realty players for future developments in the country. For instance, Carlson recently signed a Memorandum of Understanding (MoU) to manage a 160-key five star deluxe hotel in Gurgaon. Also, Hindustan Construction Company (HCC), for its township project in Lavasa, has signed four management contracts for the upcoming hotels there. We believe with the entry of major international players, not only ARRs in India will increase over a period of time, but service standards of hotels will also rise substantially. Undoubtedly, international chains will intensify competition for the leading Indian hotel chains like IHCL, EIH and Hotel Leela, but in the long run, they will also increase the size of the market.


Hotels & Tourism

Vacation Ownership

Vacation ownership (VO) is a part of leisure travel. With rising income levels and improving lifestyle, more Indians want to enjoy holidays. Better road connectivity and cheaper air tickets have made more remote places accessible to travellers. With just 4.5% (2006) of Indian population as holiday takers, India is far behind in comparison with the US (85%) and the UK (69%). Chart 28: Holiday takers as % of total Indian population

2.5 2.6

2.9

3.23.4

3.9

4.5

2.0

2.6

3.2

3.8

4.4

5.0

2000 2001 2002 2003 2004 2005 2006

(%)

Source: Travel and Tourism – India: Euromonitor International: Country Market Insights, November 2008,

Edelweiss research

Global timeshare industry: Globally, VO, commonly known as ‘timeshares’, posted sales of USD 15 bn in 2007, of which, the US accounted for majority. Ernst & Young (E&Y) puts the US VO industry sales at USD 10.7 bn in 2007, with a membership base of 6.5 mn. In 1990s, industry growth was led by large, established players such as Marriott, Hilton, and Hyatt. Their entry was seen as a sign of legitimacy and quality, and their capital strength allowed them to tap the entire VO value chain, from simple vanilla to high-end products. Apart from the US and Europe, the VO industry is at an early stage in Australia, Africa and Asia. South Africa had a membership base of 2,60,000 (Source: RCI South Africa) in 2006, while Australia 1,25,000 (Source: ATHOC). India, on the other hand, has a membership base of 2,50,000. Worldwide, VO has proved to be a difficult product to sell, where brand equity is the key to growth. VO, as a product, ranks high in terms of value and investment. Consequently, it assumes a quasi-investment strategy of locking in lifetime vacations in the current period. Customers’ trust in the company to deliver high quality holiday services over an extended period of time drives sales. Owing to its high value, the product has been slow to pick up as investors had less faith in smaller operators.

Huge untapped potential

in the Indian VO industry

US lead the worldwide VO

industry


Hotels & Tourism

Chart 29: Timeshare sales in the US since 1975

0.0

2.5

5.0

7.5

10.0

12.5

1975 1980 1985 1990 1995 2000 2005

(US

D b

n)

Source: MHRIL DRHP, Edelweiss research

Timeshare industry in India: In India, after an initial good response to the VO concept in 1990s, some unscrupulous operators duped investors, which hurt industry prospects. In the past few years, the industry has, however, regained some momentum with players adding members at a brisk pace. We expect India to follow the path of the US, where large and established players are expected to enter the industry at the initial years of growth. As per All India Resort Development Authority (AIRDA), there are 80 operating resorts, with a total membership base of 2,50,000.

Vacation ownership industry products Deemed ownership: A purchaser acquires ownership interest in the immovable property, which corresponds to the quantity of time allotments purchased. As the ownership of the property stays with the buyer, the buyer can transfer title to another person. Time ownership, undivided interest, co-operatives and fractional interests are some of the most common forms of deemed ownership. Right-to-use products: Allows users to avail accommodation during a specified period, season or time interval for a specified number of years. Post the specified years, the property returns to the developer or to the trust which disposes off the assets and proceeds on a pro rata basis among the members. Time period for which members have usage rights is usually long (25-50 years) and could stretch to 80 years as well. Club membership and holiday licenses are some of the commonly followed formats. According to AIRDA, some of the most important things to consider while purchasing timeshare ownership interest are:

• Flexibility with regards to different locations, unit size and time of the year

• Credibility of the timeshare company

• Opportunity to exchange other resort locations

Industry players Mahindra Holidays & Resorts (MHRIL) is the largest VO company in India with more than 1,00,000 members across different schemes. With 28 resorts and ~1,500 rooms, the company has gained the critical mass to expand on a large scale. As MHRIL entered the industry little late, it offered a fixed price non-deeded flexible product (customer only has right to use the property for a specified period and does not own it) against pure VO


Hotels & Tourism

product (customer owns a share of the unit, and can use it for the designated holiday period). MHRIL offers 25-year 7 nights holidays to its members where membership rates range from INR 0.15 to INR 1.00 mn. It offers purple, red, white and blue seasons as per the membership rates. MHRIL charges its members upfront and uses that cash to build its fixed assets inventory. The company also offers Zest (targeting young urban consumers seeking short breaks), Club Mahindra Fundays (targeting corporate customers) and Mahindra Homestays (targeting vacation travellers who prefer to stay with an Indian family). Further, the company plans to launch more schemes like Mahindra Heritage (for senior citizens), Gypsy (targeting teenagers) and fractional ownership property products (for high-end customers seeking a holiday home). MHRIL derives its revenues from membership fee, annual subscription fee, resort income, securitization income and interest income. As MHRIL charges customers upfront to build its resorts. The company gains as ownership of the property stays with it and the member gains over a period of time as the value of membership increases which is transferable. Country Club and Sterling Holiday Resorts are some of the competitors in the listed space, but their scale and operations are no comparison for MHRIL.

Mahindra Holidays

dominates the Indian VO

industry


Hotels & Tourism

Global Travel & Tourism

T&T is currently one of the world’s largest economic activities. It is the leading industry in many countries as well as the fastest growing economic sector worldwide in terms of job creation, according to the World Tourism Organization (UNWTO). Encompassing all components of T&T consumption, investment, government spending and exports, T&T is estimated to have generated ~USD 7,892 bn of economic activity worldwide in 2008. In 2008, global T&T is expected to have accounted for USD 5,890 bn of economic activity, equivalent to 9.9% of total GDP. In the same year, there were 230.5 mn jobs in the industry, making up 8.2% of the total employment worldwide. Rising economic importance of the industry has been fuelled by the large and growing number of international travellers. According to UNWTO, the number of international arrivals grew from 25 mn in 1950 to an estimated 763 mn in 2004, corresponding to an average annual growth rate of 6.5%. T&T is divided into inbound and outbound tourism, where inbound refers to countries attracting the largest number of tourists and outbound refers to countries from where the largest number of tourist originate.

Inbound tourism International tourist arrivals reached 907 mn in 2007, up 6.6% from 2006. The EU and US continue to attract maximum number of tourists, corning almost 70% of the total traffic. France (9%), Spain (6.5%) and the US (6.2%) were the top three tourist destinations worldwide. Asia and the pacific region were able to increase their share to almost 20% in 2007 against just 15% in 1997. Chart 30: World inbound tourism: International tourist arrivals in 2007

Europe, 484 mn, 54%

Asia and the Pacific, 184 mn,

20%

America, 142 mn, 16%

Africa, 44 mn, 5%

Middle East, 48 mn, 5%

Source: World Tourism Organization, Edelweiss research

In Asia, China attracted almost 6% of the total worldwide inbound traffic. India attracted ~5.6 mn (42nd rank) international tourists in 2007, accounting for just 0.56% of the total traffic. WTTC expects T&T economies’ GDP to contract 3.6% in 2009, but estimates the overall T&T economy to grow 4% in real terms in the next 10 years, accounting for almost 275 mn jobs or 8.4% of the total employment worldwide.

Worldwide T&T is a ~USD

8 tn industry

EU and USA dominate the

inbound tourism industry

with 70% market share


Hotels & Tourism

Chart 31: World inbound tourism: International tourism receipt 2007

Europe, USD 433, 51%

Asia and the Pacific, USD189 bn, 22%

America, USD 171 bn, 20%

Africa, USD 28 bn, 3%

Middle East, US$34 bn, 4%

Source: World Tourism Organization, Edelweiss research

International tourist receipt grew to USD 856 bn in 2007, up 5.6% from 2006. The EU and US continue to draw the highest amount of total receipt, corning almost 71% of the total receipt. The US (11.3%), Spain (6.7%) and France (6.3%) were the top three earners. Asia and the pacific region were able to increase their share to almost 22% in 2007 against just 18.6% in 1997. In Asia, China was the highest earner with almost 4.9% of the total international tourism receipt. India ranks 65th in the overall inbound traffic and 7th with regards to the number of world heritage sites. It is 6th in terms of price competitiveness, with very low ticket taxes and airport charges. With regards to the policy environment, property rights are indeed well protected and foreign ownership is authorized, although the stringency of visa requirements places India in a very low 106th position. Also, the tourism infrastructure in India remains underdeveloped. Furthermore, despite government and industry efforts to promote the country abroad (India ranked 4th with regards to tourism fair attendance) and the exposure given to recent promotional campaigns, the assessment of marketing and branding to attract tourists remains mediocre (ranked 59th) (Source: The Travel & Tourism Competitiveness Report 2007, World Economic Forum).

Outbound tourism According to UNWTO, Germany (USD 82.9 bn), the US (USD 76.2 bn), and the UK (USD 72.3 bn) were the top three spenders in 2007. China (ranked 5th) was the highest spender from Asia, spending almost USD 29.8 bn. India ranked 27th, closely followed by other emerging countries like Mexico and Brazil. Among the developed countries Australia, the US and UK are expected to show the highest growth in outbound tourism.


Hotels & Tourism

Key Trends

We believe with the resilience shown by the Indian economy since 1997, overall business environment in the country is changing. Along with this, the Indian hotel industry is also witnessing emergence of few key trends:

1. Domestic travellers: Despite growing at 12.3% CAGR during 1996 and 2008 compared

with 7.2% growth of FTAs, domestic travellers have long been ignored by the hotels in India. With lower propensity to spend, they bargain hard. In the past few years, their perception of money is, however, undergoing a tectonic shift with rise in the educated, middle class with disposable incomes. This, in turn, is driving domestic tourism. Rise in VO membership of MHRIL to almost 100,000 in FY09 against 28,500 in FY05 gives us enough evidence that at right price, domestic travellers are willing to spend. During H1FY10, many hotel companies have mentioned the important role played by domestic travellers in many leisure destinations.

2. Sources of revenue: Rising ORs have increased the contribution of room revenues, up from 57% in FY05 to 60% in FY09. Owing to the demand-supply mismatch witnessed by the hotel industry during FY04-09, ARRs increased at 20% CAGR. During the same period, the increase in F&B per occupied room was much less. We believe the current ratio of room, F&B and other revenue will continue as we expect modest increase in ARRs in FY11E and FY12E. Chart 32: Room revenue proportion has been rising

57.0 57.0 59.0 61.0 60.0

28.0 26.0 26.0 25.0 26.0

15.0 17.0 15.0 14.0 14.0

0.0

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100.0

2004-05 2005-06 2006-07 2007-08 2008-09

(%)

Other Food & Beverage Rooms Source: HVS, Edelweiss research

3. Visa on arrival: GoI has decided to offer visa-on-arrival to a few countries including

New Zealand, Japan, Luxembourg, Singapore and Finland. It was reluctant to offer this service earlier due to security reasons. The decision has been taken to promote Indian tourism and increase the inflow of international tourists, which will directly and positively affect the Indian hospitality industry.

4. Corporate guest houses: Following the steep rise in hotel tariffs in Bengaluru over the past 2-3 years, companies like Infosys and Wipro have set up their own guesthouses and hotels for accommodating their guests. This has been one of the reasons for lower occupancies in premium hotels in the city. This trend could be a concern if taken up in other cities as well.


Hotels & Tourism

5. Hotel brand growth in India: With the emergence of India as one of the leading T&T destinations worldwide, more than 25 leading international hotel names are lined up to have a presence in one of the fastest growing economies. This is a far cry from 2000 when IHCL, EIH, ITC, and ITDC (government owned) used to dominate the hospitality sector in India. Growth of Indian middle class offers a large consumer base for hotel chains ranging from luxury to budget. With the lower end of the market still in the hands of unorganized players, we expect huge scope for the organised sector.

6. Emerging MICE business opportunity: Convention or meetings tourism accounts for over 20% of all international arrivals worldwide. The US and Europe dominate this space, although several Asian countries have successfully captured a growing portion of MICE business in recent years. The Hyderabad International Convention Centre (HICC) is India's only branded (Novotel), large scale convention facility with a capacity of 5,000 which has been able to attract some business. IHCL is also planning to have a world-class convention center in Mumbai. We believe with the growth of science and technology related industries like biotechnology and pharmaceuticals (wherein companies host large conferences), India needs to successfully replicate the model of HICC to tap the emerging MICE business opportunity.

7. Food & beverage (F&B) concepts: With the emergence of standalone eating joints selling their own USPs, five star hotels are expected to face a tough competition going ahead. As diners are always ready to test different concepts with fine dining experience, restaurants like Indigo, Tote, Olives, Tetsuma, Trishna, Zest and Smoke House Grill are making marks in small pockets. We believe over a period of time, many more individual restaurants with different concepts and superior interiors will come into India and expand the market exponentially.


Hotels & Tourism

Business Analysis

We have evaluated companies under our coverage on two important parameters: (1) geographical diversification and (2) asset model. For geographical diversification, IHCL, with its presence in both India and abroad along with wide coverage of Indian cities is much better placed in comparison to EIH and Hotel Leela. EIH and Hotel Leela are dependent on the performance of couple of cities which form majority of their rooms and revenues. On the asset model as well, IHCL seems to be better placed as 48 out of its 97 properties are with associates/JV/Management contract. EIH and Hotel Leela perform poorly on this aspect as well. Going forward, IHCL plans to follow the asset-light model aggressively and intends to add 4,200 rooms under management contract in FY11E and FY12E. Following is a comparative snapshot of the companies under our coverage:

Table 3: Snapshot of major hotel companies

General parameters IHCL EIH Hotel Leela

Hotel as % of total revenue 92 70 100

Other businesses Air catering Air catering None

Printing

Car rentals

AviationPlanned expansion incl mgmt contract(FY10-12) 6,398 1,085 630 Owned rooms inventory 6,541 2,306 1,201

Rooms inventory (Incl. mgmt contracts) 11,546 3,643 1,610

No. of properties 97 24 6

Property Distribution

- In India 90 20 6

- Abroad 7 4

Property type

- Owned & managed (incl those by subs) 49 10 5

- Owned & managed by associates 17 10

- JVs 15 4

- Mangement contracts 16 1

Top 3 cities by number of rooms

Mumbai Mumbai Bengaluru

Delhi Delhi Mumbai

Bengaluru Bengaluru Goa

Revenue components (FY09)

- ARRs 10,504 11,709 11,610

- Ors (%) 66.0 60.0 63.0

- RevPAR 6,905 702,540 731,430 Source: IHCL, EIH, Hotel Leela, Edelweiss research

From the above snapshot, we can see that even though IHCL, EIH and Hotel Leela are comparable on the ARRs and ORs basis, the geographical spread and asset model of IHCL makes it a favourable play. Slow expansion of EIH, along with diversification in the unrelated areas like printing and car rentals, drag down the overall returns. High dependence of Hotel Leela on its Bengaluru property for above industry level profits and the heavy investment in the Delhi property makes it one of the most expensive companies in the entire space.


Hotels & Tourism

Geographical spread IHCL, with 80% of its rooms located in India and 25% of total revenues coming from international properties, is the most geographically diversified company in our coverage. IHCL has presence across luxury, business leisure and economy segments. IHCL is present with the ‘Taj’ brand in luxury, ‘Vivanta’ in upper upscale, ‘Gateway’ in upscale and ‘Ginger’ in the economy segments. IHCL plans to add 60 more properties in the next 2 years, adding 8,458 rooms (including 2000 room abroad). More than 50% of the room addition is expected to come under the asset light model of management contract. Table 4: Geographical spread

Q3FY10

Hotels Rooms Hotels Rooms Hotels Rooms

North 23 1,823 8 912 1 409

South 32 3,271 4 472 2 538

East 7 628 1 213 - -

West 19 3,334 7 1,748 3 663

India 81 9,056 20 3,345 6 1,610

Abroad 16 2,490 4 298 - -

Total 97 11,546 24 3,643 6 1,610

Indian Hotels EIH Hotel Leela

Source: IHCL, EIH, Hotel Leela, Edelweiss research

EIH is spread evenly in terms of number of rooms, but is concentrated in revenues in two cities - Mumbai and Delhi (accounting for majority of its revenues). Four of its properties located abroad are JVs and their accounts are not yet consolidated. Hotel Leela is still a two-city hotel, with Bengaluru and Mumbai accounting for more than three-fourth of its revenues. The Delhi property of Hotel Leela is expected to open in Q2FY11E. IHCL’s international portfolio: This includes 16 properties, 2,490 rooms across South East Asia, Middle East, Africa, UK and US. The entire portfolio consists of luxury rooms, catering to both business and leisure travellers. IHCL is making its maiden venture into China with management contracts for two hotels.

Asset model IHCL is the most diversified asset model company, making use of all available methods to increase the total rooms. The asset light model, where using the brand the company managing the property extracts a part of top line and bottom line of the hotel from the developer of the property, is a world-wide followed formula. Marriott International is a perfect example, where, of the total 5, 76,000 rooms, the hotel owns only 1,785 rooms. Worldwide, leading hotel chains leverage their brand by managing properties and charging a fee for it. In our coverage, IHCL drives the maximum mileage from its brand image with almost 16 hotels out of 97 under management contract. IHCL is planning to add more than 4,200 rooms through management contract in the next two years, both in India and abroad. This is more than 50% of the total planned expansion of the company.

Geographically IHCL is

best spread as compared

to its peers


Hotels & Tourism

Table 5: Asset model

Q3FY10

Hotels Rooms Hotels Rooms Hotels Rooms

Owned 25 3,633 8 2,082 5 1,201

Subsidiary 24 2,908 1 106 - -

Associate 17 2,113 10 1,072 - -

JV 15 1,275 5 383 1 409

Management Contract 16 1,617 - - - -

Total 97 11,546 24 3,643 6 1,610

EIH Hotel LeelaIndian Hotels

Source: IHCL, EIH, Hotel Leela, Edelweiss research

EIH also plans to add three properties in Bengaluru and Hyderabad under JV in the next 2-3 years. Hotel Leela added its first property through management contract in 2009 (409 rooms in Gurgaon).

Expansion plans We believe that the next few years present good business conditions for the Indian hospitality companies to expand and grow. With the high GDP growth expected for the Indian economy, business and leisure travel will increase commensurately. Major international players have also announced their plans to enter the Indian hospitality space. Considering the good economic environment, we expect IHCL to benefit the most considering its aggressive expansion plans. IHCL has the most aggressive plan in our universe of companies. It plans to add ~10,000 rooms in the next 24 months, across luxury, business, leisure and economy segments. The expansion is planned across the entire asset model. Table 6: Expansion plans - IHCL most aggressive

FY10E FY11E FY12E

Indian Hotels 1,026 5,372 3,500

EIH 440 592 493

Hotel Leela 495 295 340 Source: IHCL, EIH, Hotel Leela, Edelweiss research

To hedge against going asset heavy and to leverage the brand image of Taj, for IHCL, ~40% of the total addition is coming in the form of management contract. Also, under the Ginger brand in the economy segment, IHCL plans to add 3,500 rooms in next 24 months. Investment per room in Ginger is substantially lower than the average costs for a luxury room. Although in the next 24 months, IHCL plans to double its room inventory, the total planned expenditure is just INR 20 bn.

IHCL plans to add more than 30 properties in different cities in India and 8 properties aboard including China, Dubai, Qatar, UAE and Morocco. EIH, on the other hand, plans to add five properties in India; it also has plans to add properties in Dubai, Oman, Abu Dhabi and Morocco, but all these properties are expected to come under its wholly owned subsidiary EIH International where due to its registration status accounts are not merged with the consolidated entity. Hotel Leela plans to add only two properties in Delhi and Chennai in the next 18-24 months.

Among the many properties to be added by IHCL in FY10, FY11 and FY12, properties like Yeshwantpur (Bengaluru), Falaknuma Palace (Hyderabad), Taj Panjim (Goa) Fishcove expansion (Chennai) and Cape Town (South Africa) are expected to become operational in FY10 and FY11.

IHCL makes the most of

asset light model

IHCL has the most

aggressive expansion

plans


Hotels & Tourism

Valuation Methodology

Replacement costs (EV/Room) and EV/EBIDTA are the most followed valuation methods to evaluate hotel companies worldwide. Replacement cost provides the flexibility to compare peers across the market. It also acts as a value barometer in case of bad economic scenarios where earnings are suppressed to a very large extent. Average replacement costs of a luxury room is INR 25-30 mn compared with average replacement costs of INR 8-12 mn for a four star hotel.

Chart 33: Replacement costs – IHCL most attractive in the peer group

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EIH and Hotel Leela are trading (adjusted for managed rooms) at INR 35 mn per room on the replacement basis against IHCL that is trading at a significant discount of 60%. Owing to its portfolio mix across segments, IHCL’s discount is justifiable to some extent, but we believe given its portfolio diversification, there is value in the stock at the current price. EV/EBIDTA is another valuation tool for the hotel industry. This tool finds its utilisation during the periods where there is earnings visibility. Hotel industry, being a cyclical industry where 4-5 good years are followed by 1-2 bad years worldwide, it is very important to have different valuation parameters. On EV/EBIDTA basis, IHCL is trading at 10x FY11E and 7x FY12E. EIH, on the other hand, is trading at 13.5x FY11E and 12x FY12E, and Hotel Leela at 23x FY11E and 17x FY12E. Global hotel companies are trading at 12x FY11E and 10x FY12E. We believe that at current valuations, IHCL still has upside left, considering the fact almost 17% of its EBIDTA comes from management contracts that attract higher valuation worldwide.


Hotels & Tourism

Chart 34: IHCL a better bet on EV/EBIDTA

2.0

9.0

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Indian Hotels Hotel Leela EIH


EIH’s slow expansion and heavy dependence on two cities makes us believe that its current valuations are demanding; the stock price also factors in probability of a corporate action. We find Hotel Leela’s valuations too demanding, given its expensive expansion plan and severe pressure on ARRs in Bengaluru.


Hotels & Tourism

Key Risks

1. Terrorism acts: Following the event of 26/11, many countries issued travel warnings to their citizens, advising them against traveling to India. Considering the elasticity of demand in this industry, such acts of terrorism impact the sentiments and inflow of tourists into the country.

2. Competition from South Asian countries: Many South Asian countries are now consciously trying to increase their tourism activities by offering world-class facilities at highly competitive prices. These destinations pose threat to the Indian leisure hotels. To counter competition, GoI has, however, started many campaigns like Incredible India to promote India as a leading travel destination.

3. Employee cost: Employee cost (as a percentage of total income) is as much as 25%, the largest cost component in the overall cost structure of the hotel industry. With the estimated supply addition of almost 30,000 rooms in the next five years, we expect a lot of pressure on hiring and retaining trained manpower. Most leading players are, therefore, ensuring that the required supply of trained workforce comes through either their own hotel management institutes or through tie-ups with workforce training institutes.

4. Cost and time over-runs: In 2007, many hotels and real estate companies had announced their major plans, encouraged by a buoyant economy. Most of them were, however, shelved in 2008 and 2009 owing to constrained liquidity scenario following a financial slowdown. Delays in construction, which ultimately increases the overall project costs, are common in India.

Company-specific risks

1. Indian Hotels: Later–than-expected turnaround in the international portfolio and high

debt taken to finance the aggressive expansion of the past few years.

2. EIH: Better-than-expected performance of the Mumbai market, any possible land sale and open offer by ITC could provide an upside risk to our call.

3. Hotel Leela: Above expected performance of the Bengaluru property and upcoming Delhi property could help the company to tide over its liquidity constraints, improving the overall profit margins.

4. MHIL: Below estimated member addition, along with increase in commission payment to agents, could hit profitability. Also, if the company losses its ongoing case with the IT department, then it may have to part with a one-time payment of INR 900 mn.

5. Cox & Kings: Further deployment of working capital in the subsidiaries or for corporate travel business may strain its balance sheet. Integration of acquired companies is another key challenge for the company.


Hotels & Tourism

Challenges

Scores of agencies and licenses major hurdle As per ICRA, to start a new hotel in India, clearances from roughly 40 agencies and 110 licenses are required. Considering the state of bureaucracy in India, the time and costs involved in getting the required approvals is quite high. We believe that the country needs a single window clearance system, so that the industry can focus on getting the operational issues right, then doing the paperwork.

Low FSI + high land costs: A dangerous combination Considering the high costs of prime land in India, the current permissible FSI for hotels is woefully inadequate. Manhattan allows FSI of 15 for hotels; whereas, in Mumbai it is 3.45 at Nariman Point, 2.66 in the city and 1 in suburbs. Higher FSI will allow hotels to construct higher number of rooms, in turn, increasing the profitability of the property. We realise that higher FSI will increase the already heavy pressure on the existing inadequate infrastructure facilities. However, considering the importance of hotel industry to the overall economy and the fact that it doesn’t receive any kind of benefit from the government, we believe higher FSI is very much needed in India. In one of the recent development, Mumbai Metropolitan Region Development Authority (MMRDA) recently sanctioned an FSI of 9.34 in G block of BKC, Mumbai. The higher FSI was redistributed by MMRDA as the FSI in the area was underutilized.

Taxes: A complex issue 1. Section 80 IA (infrastructure status for the hotel industry): The Indian hotel

industry was asking for the infrastructure status under Section 80 IA of the IT Act. In 2010 budget, the government has included hotels under section 35 AD where any capex (excl. land, goodwill and financial instruments) incurred post 1.4.2010 is eligible for 100% deduction as investment linked tax incentive in the year of expenditure. We believe the benefit to help the industry in the long-term, even though the land costs forms a major part of total capex.

In fact, under Section 10 (23) g of the IT Act, hotels were added to the

infrastructure list so that the interest received by financial institutions and banks for loans extended to hotels were tax exempted. However, the section itself was discontinued from April 1, 2007.

2. Luxury tax: Luxury tax, which is a state level tax, is levied on the published rates

without taking into consideration the discount given on the rack rates and commission paid to agents. Luxury tax in India varies from 5% to 15%. The industry has been asking for the tax to be reduced to a maximum of 5%.

3. VAT, sales tax, excise duty, custom duty and service taxes are some of the other issues which the industry has been grappling with.

Infrastructure bottlenecks Woefully inadequate infrastructure has been one of the biggest problems for India to emerge as the topmost travel and tourism destination. In comparison to some of the leading tourist destinations of South East Asia, the infrastructure in India scores poorly. Inadequate infrastructure is one of the main reasons why many Indian cities with great potential remain untapped on the world tourism map.


Hotels & Tourism

Annexure I Table 7: Properties and rooms to be added by IHCL till FY12

Property details No. of rooms Cost Date of

completion

IHCL

Taj Falaknuma Palace, Hyderabad 60 850 Mar-10

Yeshwantpur, Bengaluru 331 160 Dec-10

Taj Lake End, Udaipur 80 250 -

Taj Surya, Coimbatore 184 980 -

Taj Santacruz, Mumbai 175 1300 -

Moti Mahal, Bharatpur 40 400 -

Taj Residency, Noida 450 3150 Sep-10

Taj Group of Companies

Taj Palace, Cape Town 72 2960 Mar-10

Fishcove Expansion, Chennai 64 350 -

Gateway, Gondia 35 110 -

Gateway, Bannerghatta, Bengaluru 225 600 -

Ginger Hotels (different locations) 1,968 1200 -

Total 3,684 12,310 -

Management Contracts

Under Vivanta Brand:

Vivanta by Taj, Bekal 72 - Mar-10

Taj, Gurgaon 208 - -

Taj, Karkumaduma, Delhi 180 - -

Taj, Nagpur 337 - -

Taj, Pondicherry 60 - -

Under Gateway Brand:

OMR, Chennai 159 - -

Hinjewadi 150 - -

Karkumaduma, Delhi 300 - -

Kolkata 205 - -

Raipur 123 - -

Jallunder 123 - -

Kakkanad, Kochi 150 - -

Navi Mumbai 125 - -

International Contracts

Taj Palace temple of Heaven, China 60 - -

Taj Palace , Hainan, China 500 - -

Exotica Resort & Spa, Palm island, Dubai 262 - -

Taj Exotica Resort & Spa, Doha, Qatar 150 - -

Taj Mahal, Yas Island, Abu Dhabi, UAE 500 - -

Taj Hotel, Mina Zayed, Abu Dhabi, UAE 300 - -

Taj Tangiers, Morocco 65 - -

Taj Exotica Resort & Spa, Ras Al Khaimah 180 - -

Total 4,209 - - Source: Company, Edelweiss research


Hotels & Tourism

Annexure II

Table 8: City wise ARRs

FY04 FY05 FY06 FY07 FY08 FY09 9MFY10

ARR (INR)

Bengaluru 6,227 9,149 11,857 14,154 13,461 13,272 9,307

Chennai 3,564 4,118 5,119 6,044 7,515 7,755 6,473

Hyderabad 3,641 4,649 6,562 8,081 7,480 7,331 6,183

Kolkata 3,264 3,498 4,329 5,719 7,048 7,171 6,253

Delhi 4,441 5,404 7,463 9,968 11,332 11,818 8,881

North Mumbai 4,180 4,730 6,152 8,659 10,949 10,971 8,290

South Mumbai 5,142 5,806 7,297 9,992 12,314 12,725 9,324

Pune 2,901 3,579 4,811 7,754 8,407 8,054 6,198

Agra 2,451 2,991 3,758 4,781 6,554 6,873 5,983

Goa 3,741 4,085 5,002 6,311 7,465 7,386 6,324

Jaipur 4,595 5,294 6,964 6,969 7,028 7,130 5,281

Kerala 2,574 3,043 3,655 4,200 5,108 5,413 NA Source: CRISIL, Edelweiss research

Table 9: City wise ORs

FY04 FY05 FY06 FY07 FY08 FY09 9MFY10

Occupancy rate (%)

Bengaluru 82.1 77.5 77.3 74.5 71.0 64.9 61.0

Chennai 62.3 72.0 78.2 76.7 74.3 65.5 55.0

Hyderabad 75.9 79.3 85.0 75.0 70.0 58.4 59.0

Kolkata 58.2 67.6 73.9 74.5 75.0 68.3 63.0

Delhi 70.4 77.7 79.7 76.0 75.0 73.0 59.0

North Mumbai 69.4 76.9 80.0 80.5 75.0 64.5 59.0

South Mumbai 62.3 68.7 68.8 69.7 67.0 58.3 58.0

Pune 77.2 87.5 81.8 81.4 75.0 60.5 45.0

Agra 43.9 55.0 56.1 56.8 64.1 61.0 53.0

Goa 55.9 65.5 68.1 72.0 71.1 62.0 62.0

Jaipur 56.4 61.8 61.9 62.3 64.4 56.0 51.0

Kerala 60.0 63.0 63.0 68.0 67.0 64.0 NA Source: CRISIL, Edelweiss research


Hotels & Tourism

Annexure III Table 10: City wise room availability

FY04 FY05 FY06 FY07 FY08 FY09

Room availability

Bengaluru 1,567 1,563 1,581 2,282 2,455 2,558

Chennai 1,541 1,541 1,646 1,646 1,910 2,142

Hyderabad 1,013 1,017 1,017 1,302 1,495 1,799

Kolkata 1,244 1,244 1,249 1,249 1,249 1,249

Delhi 6,601 6,651 6,813 6,638 6,735 6,380

North Mumbai 3,925 4,219 4,418 4,616 4,602 4,832

South Mumbai 1,892 2,012 2,080 2,080 2,080 1,998

Pune 511 508 508 534 534 536

Agra 1,341 1,354 1,354 1,504 1,553 1,601

Goa 2,339 2,547 2,754 2,937 3,104 3,255

Jaipur 935 1,128 1,128 1,351 1,429 1,613

Kerala 843 843 999 1,194 1,253 1,393 Source: CRISIL, Edelweiss research

Table 11: City wise room demand

FY04 FY05 FY06 FY07 FY08 FY09

Room demand

Bengaluru 1,287 1,212 1,222 1,700 1,743 1,663

Chennai 960 1,109 1,287 1,262 1,420 1,392

Hyderabad 769 807 864 977 1,046 1,043

Kolkata 724 841 923 931 937 849

Delhi 4,650 5,170 5,430 5,045 5,051 4,658

North Mumbai 2,725 3,245 3,534 3,716 3,452 3,107

South Mumbai 1,178 1,382 1,431 1,450 1,394 1,159

Pune 394 445 416 435 401 322

Agra 589 744 759 854 995 977

Goa 1,308 1,668 1,875 2,115 2,207 2,018

Jaipur 528 697 698 842 920 903

Kerala 506 531 629 812 840 891 Source: CRISIL, Edelweiss research


Hotels & Tourism

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Hotels & Tourism

Geographical diversification minimises event risk Cox & Kings (CNK), with operations in 19 countries, is geographically diversified

for an event risk. We expect India to account for just 50% of its FY11E revenues

and PAT. A combination of inbound, outbound, and domestic tourist growth is

expected to drive the company’s Indian operations. Entry into new segments like

rail tourism and visa processing is expected to further enhance revenue diversity.

We expect UK, Japan, Australia, Dubai, and US to account for almost 75-80% of

subsidiaries revenue.

Consistent innovation and acquisitions driving revenues Innovative product offerings like Duniya Dekho, Bharat Dekho, and FlexiHol are

some of CNK’s most popular schemes. To capture the high end tourist outside

India, the company has made sizable acquisitions in the UK, Australia, and US. To

drive growth further, it has launched a pan-India luxury train in JV with IRCTC

along with an ambitious visa processing project. We expect the luxury train and

visa processing initiative to contribute 7% to FY11E revenues.

Increasing leisure travel to reduce working capital requirement We expect the additional working capital deployment to dip going forward as the

share of leisure travel increases in the overall portfolio. CNK is likely to generate

approximately INR 3.8 bn of positive operating cash flow in FY11E and FY12E.

With its strong brand equity, the company can negotiate better terms with

corporates and in turn reduce working capital deployed.

Outlook and valuations: Positive; initiating coverage with ‘HOLD’ CNK, due to its strong brand equity and vast knowledge of various geographies,

has created a niche for itself in the T&T space. Although it is poised to exploit the

high growth expected in the worldwide T&T space, we believe, a lot of these

expectations are already factored in the share price at current levels. We expect

the stock to trade at 25.0x FY11E and 20.0x FY12E P/E. At CMP of INR 488, CNK

is trading at 23.4x and 18.6x consolidated P/E of FY11E and FY12E, respectively.

Using the target P/E, we arrive at a target price of INR 520, and initiate coverage

on the stock with a ‘HOLD’ recommendation.


India Midcap Research Initiating Coverage

COX AND KINGS

Making holidays more organised

April 1, 2010

Reuters : COKI.BO Bloomberg : COXK IN

Absolute Rating HOLD

MARKET DATA CMP : INR 488

52-week range (INR) : 505 / 304

Share in issue (mn) : 62.9

M cap (INR bn/USD mn) : 30.6 / 683.6

Avg. Daily Vol. BSE/NSE (‘000) : 1,734.2 SHARE HOLDING PATTERN (%)

Promoters* : 63.6

MFs, FIs & Banks : 8.5

FIIs : 18.7

Others : 9.0

* Promoters pledged shares : Nil (% of share in issue) RELATIVE PERFORMANCE (%)

Sensex Stock Stock over Sensex

1 month 5.5 10.8 5.3

3 months 0.8 8.7 7.9

Manoj Bahety, CFA

+91-22- 6623 3362

[email protected]

Manav Vijay

+91-22- 4063 5413

[email protected]

EDELWEISS RATING

Financials

Year to March FY09 FY10E FY11E FY12E

Revenues (INR mn) 2,869 3,684 4,708 5,605

Growth (%) 57.5 28.4 27.8 19.1

EBIDTA (INR mn) 1,214 1,545 1,995 2,381

Net profit (INR mn) 634 845 1,297 1,611

Share outstanding (mn) 28 63 63 63

EPS (INR) 10.0 13.3 20.6 25.6

EPS growth (%) 47.4 33.0 55.3 24.2

Diluted P/E (x) 48.9 36.8 23.7 19.1

ROAE (%) 32.7 16.5 15.1 16.3


Hotels & Tourism

Investment Rationale

Geographical diversification minimises event risk With operations in 19 countries, CNK is geographically diversified to minimise any event risk. We expect India to account for less than 50% of its FY11E revenues and PAT. A good combination of inbound, outbound, and domestic tourist growth is expected to drive the company’s Indian operations. Entry into new segments like rail tourism and visa processing is expected to further enhance revenue diversity. We expect UK, Japan, Australia, Dubai, and US to account for almost 75-80% of subsidiaries revenue. Chart 1: Foreign subsidiaries minimise impact of an event risk

0.0

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(Revenue

%)

India Subsidiaries

Source: Company, Edelweiss research

Considering that T&T is part of discretionary spending and the first to bear the brunt of any event (terrorist or disease) risk, CNK has diversified its revenue stream across geographies. Main foreign subsidiaries like UK, Japan, Australia, Dubai, and US handle a mix of inbound and outbound traffic and generate outbound tour packages for approximately 55 countries. We discuss CNK’s major revenue generating countries:

1) India: In FY09, India accounted for 55% of revenue and PAT. Indian operations serve the inbound, outbound, and domestic traffic for leisure and corporate travel. Duniya Dekho, Bharat Dekho, and FIT are some of the company’s most popular product offerings. Pan-India luxury train and visa processing facility are expected to increase the gamut of services further.

2) UK (Cox & Kings Travel and ETN Services): Cox & Kings Travel is an outbound tour operator and caters to only the leisure travel market. It concentrates on the up-market business. ETN Services is an inbound travel wholesaler / ground handling service provider in Europe. Both the subsidiaries accounted for 26% and 27% of FY09 revenues and PAT, respectively.

3) Japan: This subsidiary generates revenues principally from package consultancy and services for major wholesalers and societies. It has a tour operator class licence from the Overseas Tour Operators Association of Japan (OTOAJ). In FY09, the Japan subsidiary accounted for almost 10% and 9% of revenues and PAT, respectively.

4) Other subsidiaries: Dubai, Australia, and US act as outbound tour operators and accounted for 9% and 4% of FY09 revenues and PAT, respectively. The Australian subsidiary was acquired in November 2008 and is a specialist in outbound tours. The

Foreign subsidiaries reduce the geographical risk


Hotels & Tourism

US subsidiary was acquired in April 2009 and is a boutique travel company offering private travel and group travel to high net worth clients.

Consistent innovation and acquisitions driving revenues Product offerings like Duniya Dekho for outbound travel, Bharat Dekho for domestic travel, and FlexiHol for flexible individual travelers are some of CNK’s most popular schemes. To capture the high end tourist outside India, the company has made sizable acquisitions in the UK, Australia, and US. In FY07, India accounted for 92% and 100% of revenues and PAT, respectively. Strategic acquisitions in UK (2007), Australia (2008), and the US (2009) along with new companies started in Dubai and Singapore accounted for almost 50% of FY09 revenue. We consider the acquisitions and new starts as innovative steps by the management.

Table 1: Acquired companies are complementary to existing services

Year Company acquired Added services

2006 Clearmine (along with subsidiary ETN Services)

Destination management services for tours to Europe and inbound tours in Europe for other tour operators

2007 Cox & Kings.,UK (along with its subsidiary Cox & Kings Travel)

Outbound specialist tour operator that caters to leisure travel market of Europe

2007 Cox & Kings (Japan) Dedictated wholesaler of products and services to other tour operators and offer ground handling capabilities in select geographies

2008 Quoprro Global Services Visa processing [appovals from Singapore, Athens (Greece) and Hong Kong] for outsourcing their visa processing activities to C&K

2008 Tempo Holidays Pty., Australia (along with its sub Tempo Holidays NZ in NZ)

Significant part of its business is in European countries

2009 East India Travel Company Selling upmarket tours and travel packages in the US

Source: Company, Edelweiss research To drive growth, the company has launched a pan-India luxury train in JV with IRCTC. The train will run from September to April and carry 84 passengers per journey for 7-8 nights with fares starting at USD 800 per night and make 16 journeys every year. The service is aimed at the very high end tourist. We expect the initiative to contribute approximately 5% to FY11E revenue. The visa processing initiative is another ambitious project to drive growth. We expect the luxury train and visa processing initiative to contribute 7% to FY11E revenues.

Increasing leisure travel to reduce working capital requirement We expect the additional working capital deployment to dip going forward as the share of leisure travel in the overall portfolio increases. The company is likely to generate approximately INR 3.9 bn of positive operating cash flow in FY11 and FY12. With its strong brand equity, CNK can negotiate better terms with corporates and in turn reduce the working capital deployed. Meetings, incentives, conferences, and exhibitions (MICE); corporate travel; and forex are the business segments where the company needs to provide credit period to customers. CNK has become selective in taking on the corporate travel business and is ready to forego potential business if the same is coming at an incremental working capital deployment.

Acquisitions and innovations drive revenue growth

Reduced working capital going forward


Hotels & Tourism

Table 2: MICE and corporate business travel requires working capital Business % of total

revenue Average credit

days

India - Leisure (Inbound, outbound, domestic) 36.1 Zero

India - Leisure (MICE) 13.5 10 days

India - Corporate / business travel 2.7 20 - 25 days

India - Forex 2.7 7 -8 days

Foreign - Leisure 45 Zero Source: Company, Edelweiss research

CNK has also loans and advances and debtors worth INR 2.5 bn that have been extended to various subsidiaries, associates, and group companies. We believe as the subsidiaries attain reasonable size, future fund deployment will be limited in comparison to the past. Management is confident of turning around the working capital cycle and aims to report a positive working capital going forward. One of the stated purposes of IPO proceedings was to invest INR 625 mn into subsidiaries. We believe future deployment of funds post this round of investment will be minimal.

Bulk buying advantage Due to its strong brand image and geographical reach, CNK gets bulk buying discounts for air travel, hotel accommodations, car rentals, and ground handling. This enables the company to offer competitive packages to clients and customers. This bulk buying happens without any capital commitment on the part of CNK. Constant innovation of new schemes helps the company fulfill commitments to hotels, airlines, and other partners involved. In the earlier years, small travel operators earned nearly 80-90% of total revenues from airline ticket bookings where margins were as high as 10%. However, with the emergence of online booking portals like yatra, ezeego, and makemytrip and to some extent with the weak financial condition of airlines, the mom and pop shops are under severe threat. CNK is also active in this space with its associate company Ezeego One Travel & Tours, where it holds 14.98%. Ezeego is a neutral market place which showcases products of all companies including CNK and its competitors and offers customers the flexibility to choose what they deem fit.

Global reach and alliances CNK has global presence with operations in 19 countries besides India through its subsidiaries, branch and representative offices. In India, it has 255 points of presence covering 164 locations through a mix of 14 branch sales offices, 75 franchised sales shops, and a mix of 185 general sales agents (GSAs) and preferred sales agents (PSAs). As a member of Radius, a global travel company, CNK is connected to a network of 90 Radius members from more than 80 prominent countries with over 3,600 locations and service clients originating through them within India. The company enhances its global presence through a network of GSAs and PSAs covering other countries. Taking advantage of its global network, the company offers outbound travel products to almost 150 countries.

Strong brand equity CNK has evolved over 250 years and is one of the oldest and recognized holiday brands, catering to the travel requirements of Indian and international travelers. The brand was ranked No. 1 in India and 152 amongst top 1,000 brands in the Asia Pacific region in 2008 by Media Magazine & TNS.

Big discounts due to bulk buying

Rooms and revenue lopsided towards Mumbai


Hotels & Tourism

Valuation Considering CNK’s ability to merge an acquistion seamlessly in its existing operations, we believe acquistions in Australia and US will be value accreavtive on a long term basis. We also believe that the JV with IRCTC for a pan-India luxury train and the visa processing facility will lead to substantial growth in FY11 and FY12. PE multiple is the right valuation parameter for a company like CNK which is growing fast, taking advantage of the industry’s organic growth and using acquistions as an inorganic growth route. With its strong brand equity and vast knowledge of various countries/geographies, CNK has created a niche for itself in the T&T space. Considering the high growth expected in the worldwide T&T space, the company is in a sweet spot to exploit the opportunity. At CMP of INR 488, CNK is trading at 23.4x and 18.6x consolidated P/E of FY11E and FY12E, respectively. We expect the stock to trade at 25.0x FY11E and 20.0x FY12E P/E. Some of the Asian peers like Hanatours and Huangshan are also trading at similar multiples. Using the target P/E, we arrive at a target price of INR 520, and initiate coverage on the stock with a ‘HOLD’ recommendation.


Hotels & Tourism

Key Risks

Bulk buying advantage could prove to be transient CNKs ability to deliver volumes to its business partners is the prime reason behind it earning good discounts from hotels, airlines, and car rental agencies. Also, as the discount is without any kind of capital commitment from CNK, failure to drive volumes could spell end of this advantage. To continue to enjoy the discounts and in turn offer lower prices to customers, the company needs to consistently innovate schemes and prices.

Deployment of further working capital The company has an exposure of INR 2.5 bn in its subsidiaries and group companies as investments, debtors, and loans and advances. As the subsidiaries are making efforts to attain suitable size, the investment was necessary. But going forward also if CNK continues to provide resources to these companies, then its working capital requirement will grow manifold. Including the above, in another promoter owned company Ezeego One Travel & Tours, CNK has advanced approximately INR 900 mn for the losses incurred as Ezeego is writing off the goodwill for a swap of share equity to advertisement space. Further assistance by CNK to this entity could add to the existing debt. CNK has advanced approximately INR 350 mn to two of its loss making group companies viz., Tulip Star Hotels and V Hotels, in the form of investments and advances. The amount is part of the overall INR 2.5 bn exposure mentioned above.

Unforeseen events like war or disease Outbreak of any disease like swine flu on a worldwide basis can affect business severely even though CNK’s revenue stream is diversified in terms of geographies. As 90-95% of revenue is from leisure travel, in case of any unforeseen event, leisure travel can face a big decline.

Future acquisitions turning sour Although CNK has the history of integrating acquisitions quite well with existing operations, in 2010 the company needs to get the US and Australian acquisitions correct. Also, as the company has raised funds for more acquisitions, any uncertainty on this front could prove to be a major dampener.


Hotels & Tourism

Company Description CNK is one of the largest and widely recognised holiday brands in India and has evolved over 250 years. The company caters to overall travel needs of Indian and international travelers. It has presence in 19 countries and in India has 255 touch points covering 164 locations. International operations account for almost 50% of total revenue. CNK’s business can be broadly categorized as leisure travel, corporate travel, forex and visa processing. It provides end to end travel solutions including land, air and cruise bookings, hotel bookings, in-transit arrangements and various other services. In India, the company caters to travelers coming into India, going out of India, and domestic travelers within the country. Due to its extensive knowledge of various countries and geographies, the company also caters to travelers originating from any country other than India to any other country. Leisure travel dominates the revenue stream and the company has aggressive plans like the Maharaja Express and visa processing to strengthen it. As the corporate travel part of the business is capital intensive, the company is looking at measures to reduce the deployment of working capital without any adverse impact on existing business.

Fig 1: Business chart

Corporatebusiness - India

Cox & Kings (India)

Leisure business-India

Leisure business- Foreign

Royal Indian RailTours

Quorprro Global - For Visa

processing, yet tocommenceoperations

Constitutes 50%of net revenue

Constitutes 5% ofnet revenues

Constitutes 45% of net revenues

Fig. 2: Corporate structure

Cox & Kings (India)

Cox and Kings -Equity of INR 635 mn(Owns Cox & KingsTravel - Touroperators and travelorganizers for EU. Thebiggest sub, contributes 22% oftotal revenue).

Cox & Kings (Japan)Equity of INR 233mn; second largestsub contributing 10%of total revenues.

ETN Services - Ground handlingunit; contributes5% of totalrevenue

Cox & Kings (Aus)-Equity of INR 86 mn;outbound operatorcontributing 6% oftotal revenues

East India Travel Co.Outbound operatorfrom US; contributes2% of revenue

Royal Indian RailTours - 50:50JV with IRCTC. Yet to commenceoperations



Hotels & Tourism

Financial Outlook

Acquisitions and new initiatives to drive revenue growth Acquisitions by CNK in Australia (FY09) and US (FY10) and the starting of luxury train along with the visa processing facility are expected to drive 28% and 33% revenue growth in FY10E and FY11E, respectively. As past acquisitions attain size and the synergies become more evident, CNK is in a sweet spot to exploit the tremendous growth opportunity in the T&T space. Chart 2: Sales growth momentum to continue

0.0

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FY07 FY08 FY09 FY10E FY11E FY12E

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R m

n)

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Given the larger base of FY09, growth numbers of FY11 and FY12 are reasonable and are not strictly comparable to the company’s growth rate in FY07 and FY08.

Strong margins to continue We expect the company to report approximately 42% and 23% EBIDTA and PAT (adjusted for extraordinary item) margins between FY10 and FY12, respectively. It is difficult to predict the synergy benefits of the integration of its subsidiaries, but we expect all the subsidiaries to be complementary. Chart 3: Margins to improve in FY11

15.0

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EBITDA margins Net profit margins


Thrust from inorganic growth going forward


Hotels & Tourism

We expect margins to remain strong even though more than 50% of the revenue comes from outside India as CNK primarily caters to the upper end of tourists who are less sensitive to rates.

Positive operating cash flow due to reduced working capital requirement We expect CNK to report positive cash flow from operations of approximately INR 3.5-4.0 bn between FY10E and FY12E. The company is likely to start reporting positive operating cash flows as subsidiaries attain size and its conscious efforts to choose the corporate travel business. Management is also confident of reducing the working capital requirement going forward. Chart 4: Cash flow from operations to turn positive FY10 onwards

(1,600)

(800)

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We expect the incremental fund deployment in subsidiaries to decrease going forward and reduce the working capital strain on the parent company.

Bhaskar

Note

Marked set by Bhaskar


Hotels & Tourism

Financial Statements Income statement (INR mn)

Year to March FY08 FY09 FY10E FY11E FY12E

Income from operations 1,821 2,869 3,684 4,708 5,605

Total operating expenses 1,091 1,655 2,139 2,713 3,224

Employee cost 506 791 1,040 1,313 1,544

Other expenditure 586 865 1,099 1,400 1,680

EBITDA 730 1,214 1,545 1,995 2,381

Depreciation and amortisation 64 96 116 138 147

EBIT 666 1,118 1,429 1,857 2,234

Interest 59 201 304 267 211

Total other income 62 67 137 347 382

Profit before tax 669 983 1,261 1,936 2,405

Provision for tax 217 349 416 639 794

Core profit 451 634 845 1,297 1,611

Extraordinary income/(loss) - - 276 - -

Profit after tax 451 634 1,122 1,297 1,611

Minority interest (25) (6) (10) - -

Profit after minority interest 426 628 1,112 1,297 1,611

Shares outstanding (mn) 16 28 63 63 63

EPS (INR) basic 6.8 10.0 13.3 20.6 25.6

Diluted shares (mn) 16 28 63 63 63

EPS (INR) diluted 6.8 10.0 13.3 20.6 25.6

Dividend per share (INR) 0.2 0.2 2.0 2.2 2.5

Dividend payout (%) 1.5 1.0 13.2 12.8 11.4

Common size metrics- as % of net revenues


Operating expenses 59.9 57.7 58.1 57.6 57.5

Employee cost 27.8 27.6 28.2 27.9 27.5

Other expenditure 32.2 30.1 29.8 29.7 30.0

Depreciation and amortisation 3.5 3.3 3.1 2.9 2.6

Interest expenditure 3.2 7.0 8.3 5.7 3.8

EBITDA margins 40.1 42.3 41.9 42.4 42.5

Net profit margins 24.8 22.1 22.9 27.6 28.7

Growth metrics (%)


Revenues 87.9 57.5 28.4 27.8 19.1

EBITDA 81.8 66.2 27.3 29.1 19.4

PBT 96.4 47.0 28.3 53.5 24.2

Core net profit 115.0 40.5 33.2 53.5 24.2

EPS 43.3 47.4 33.0 55.3 24.2


Hotels & Tourism

Balance sheet (INR mn)

As on 31st March FY08 FY09 FY10E FY11E FY12E

Equity capital 279 279 629 629 629

Reserves & surplus 1,380 2,000 7,437 8,567 9,996

Shareholders funds 1,659 2,280 8,066 9,197 10,625

Secured loans 502 2,363 2,992 2,492 1,742

Unsecured loans 794 1,178 229 229 229

Borrowings 1,296 3,542 3,221 2,721 1,971

Deferred tax (net) 30 22 22 22 22

Sources of funds 2,986 5,843 11,309 11,940 12,618

Gross block 852 1,173 1,400 2,050 2,150

Depreciation 323 459 575 713 860

Net block 529 715 826 1,338 1,291

Capital work in progress 25 103 125 125 125

Intangible assets 102 1,110 2,254 2,254 2,254

Investments 465 457 4,457 4,457 4,957

Inventories 41 35 50 64 77

Sundry debtors 1,787 2,322 2,220 2,580 2,764

Cash and bank balances 561 634 384 199 298

Loans and advances 1,745 3,081 3,881 4,081 4,281

Total current assets 4,133 6,072 6,536 6,925 7,420

Sundry creditors and others 1,796 1,836 2,110 2,379 2,650

Provisions 486 818 818 818 818

Total current liabilities & provisions 2,282 2,654 2,928 3,197 3,468

Net current assets 1,851 3,418 3,609 3,728 3,952 Deferred tax (net) 15 39 39 39 39 Uses of funds 2,986 5,843 11,309 11,940 12,618

Book value per share (INR) 26 36 128 146 168

Free cash flow (INR mn)


Net profit 426 628 1,112 1,297 1,611

Depreciation 64 96 116 138 147

Others 59 201 28 267 211

Gross cash flow 549 925 1,255 1,702 1,969

Less: Changes in working capital (1,080) (1,826) (440) (304) (126)

Operating cash flow (531) (901) 815 1,398 1,844

Less: Capex (522) (1,400) (248) (650) (100)

Free cash flow (1,053) (2,301) 567 748 1,744

Cash flow metrics


Operating cash flow (531) (901) 815 1,398 1,844

Financing cash flow 1,422 2,374 4,327 (933) (1,145)

Investing cash flow (522) (1,400) (5,392) (650) (600)

Net cash flow 368 73 (250) (185) 98

Capex (522) (1,400) (248) (650) (100)

Dividend paid 7 7 147 166 184


Hotels & Tourism

Ratios


ROAE (%) 36.5 32.7 16.5 15.1 16.3

ROACE (%) 39.4 28.3 23.4 25.9 29.5

Inventory (days) 6 5 5 4 5

Debtors (days) 256 261 220 186 174

Payable (days) 480 400 360 302 285

Cash conversion cycle (219) (134) (135) (111) (106)

Current ratio 1.8 2.3 2.2 2.2 2.1

Debt/EBITDA 1.8 2.9 2.1 1.4 0.8

Interest cover (x) 11.3 5.6 4.7 6.9 10.6

Fixed assets turnover (x) 3.4 4.0 4.5 3.5 4.3

Total asset turnover (x) 0.6 0.5 0.3 0.4 0.4

Equity turnover(x) 1.7 1.7 0.8 0.6 0.6

Debt/Equity (x) 0.8 1.6 0.4 0.3 0.2

Adjusted debt/Equity 0.9 2.3 0.6 0.5 0.3

Du pont analysis


NP margin (%) 24.8 22.1 22.9 27.6 28.7

Total assets turnover 0.8 0.6 0.4 0.4 0.5

Leverage multiplier 1.8 2.3 1.7 1.4 1.2

ROAE (%) 36.5 32.7 16.5 15.1 16.3

Valuation parameters


Diluted EPS (INR) 6.8 10.0 13.3 20.6 25.6

Y-o-Y growth (%) 43.3 47.4 33.0 55.3 24.2

CEPS (INR) 17.5 25.9 34.1 51.4 63.0

Diluted P/E (x) 72.1 48.9 36.8 23.7 19.1

Price/BV(x) 18.7 13.7 3.8 3.4 2.9

EV/Sales (x) 4.4 5.6 7.9 6.1 4.9

EV/EBITDA (x) 11.0 13.2 18.8 14.4 11.5

EV/EBITDA (x)+1 yr forward 6.4 8.8 15.4 12.9

Dividend yield (%) 0.0 0.0 0.4 0.5 0.5


Hotels & Tourism

Banking on Mumbai with 60% rooms inventory and 50% FY11E revenue With opening of the Trident in Bandra Kurla Complex (BKC), a 436-room property,

Mumbai will account for 60% of East India Hotels’ (EIH) total owned rooms

inventory and approximately 50% of total FY11E revenues. Although we expect

45% and 15% jump in FY11E and FY12E revenues, respectively, much is

dependent on the performance of the Mumbai hotel market. The South Mumbai

market is expected to be robust in FY11 and FY12, whereas the North Mumbai

market is expected to remain challenging due to 20% increase in supply.

Insufficient expansion a long-term negative EIH’s project pipeline is insufficient compared to the robust expansion plans of

other players. The BKC property (first major addition after four-five years) opened

in Q3FY10 after a delay of almost four-five quarters. Post the launch, in the

absence of no major project in the pipeline for the next 12-18 months, the

company’s earnings growth is dependent on increase in average room rates

(ARRs) and occupancy rates (ORs). We believe, with a slow expansion programme,

EIH is curtailing its earnings expansion and not leveraging on its brand image.

International operations not reflected in financials Due to British Virgin Islands regulations where EIH’s international subsidiary is

registered, the company reports only miniscule dividend income on the INR 1.8 bn

investment. Also, as the management of properties under the subsidiary is not

with EIH, we believe value of this investment is not reflected in financials. We

expect further capital to flow to this subsidiary due to the current expansion plans

in Dubai, Oman, and Morocco.

Outlook and valuations: Expensive; initiating coverage with ‘HOLD’ At CMP of INR 124, EIH is trading at 13.4x and 11.3x consolidated EV/EBIDTA of

FY11E and FY12E, respectively, a 10-15% premium to peers. We expect the stock

to trade at 12.0x FY11E and 10.0x FY12E EV/EBIDTA, similar to its peers as the

advantage of low leverage is set off by insufficient expansion. Using the target

EV/EBIDTA and EV/room and valuing the international operations at 2x of

investments, we arrive at a target price of INR 120, and initiate coverage on the

stock with a ‘HOLD’ recommendation.



EAST INDIA HOTELS

Priced to perfection

April 1, 2010

Reuters : EIHO.BO Bloomberg : EIH IN

Absolute Rating HOLD


52-week range (INR) : 154 / 86


M cap (INR bn/USD mn) : 48.9 / 1,082.5

Avg. Daily Vol. BSE/NSE (‘000) : 263.2 SHARE HOLDING PATTERN (%)

Promoters* : 46.4


FIIs : 2.7

Others : 37.4

* Promoters pledged shares : 1.7 (% of share in issue) RELATIVE PERFORMANCE (%)


1 month 5.5 1.8 (3.7)

3 months 0.8 (11.1) (11.9)

12 months 71.0 44.4 (26.6)

Manoj Bahety, CFA

+91-22- 6623 3362

[email protected]

Manav Vijay

+91-22- 4063 5413

[email protected]

EDELWEISS RATING

Financials


Revenues (INR mn) 11,769 9,620 13,877 15,235 Growth (%) (7.1) (18.3) 44.2 9.8 EBIDTA (INR mn) 4,143 2,417 4,463 5,196 Net profit (INR mn) 2,245 1,701 371 1,479 Share outstanding (mn) 393 393 393 393 EPS (INR) 4.3 0.9 3.8 5.0 EPS growth (%) (24.5) (78.2) 298.7 32.3 Diluted P/E (x) 28.6 131.3 32.9 24.9 ROAE (%) 12.8 2.6 10.0 12.3


Hotels & Tourism


Banking on Mumbai with 60% rooms inventory and 50% FY11E revenue With the opening of the Trident, BKC, in December 2009 and the expected reopening of

the Oberoi, Nariman Point, in Q4FY10, we expect Mumbai to account for 60% (1,310

rooms out of 2,192 rooms) of EIH’s total owned room inventory and approximately 50%

of total FY11E revenue. Thus, performance of the Mumbai hotel market is critical for the

company. While limited supply is expected to keep the South Mumbai market robust, the

North Mumbai market is expected to remain soft due to 20% increase in supply in the

next two years.

Chart 1: Highly concentrated in few cities

874 874

1,310 1,310

287 287

287 287 263 263

263 263

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160 160

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Mumbai NCR Kolkata Bengaluru Udaipur Ranthambore Rajgarh


Outlook on Mumbai hotel market South Mumbai: South Mumbai commands one of the highest ARRs in the country due

to the location advantage and limited room supply. We believe, as BKC is fast developing

as an alternative business destination, Nariman Point will lose its premium tag over a

period of time.

North Mumbai: Banking and financial services are the primary demand generaters for

North Mumbai, but due to ample supply of rooms we expect ARRs and ORs to be soft in

the next 12-18 months. North Mumbai is expected to add 2,000 rooms by 2013, taking

the total to 7,000 rooms. Ample supply is expected to keep ARRs soft, which had jumped

230% to INR 11,000 during FY05-09. We are not including any effect of 4-star hotels

which are coming up in that part of town, although these hotels if not take away the

traffic, will atleast affect sentiments.

Rooms and revenue lopsided towards Mumbai


Hotels & Tourism

Chart 2: ARRs and ORs struggling in North Mumbai market

40

47

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ARRs ORs


Insufficient expansion a long-term negative The 436-room BKC property is the only addition after almost four-five years. Post BKC,

Oberoi, Rajgarh with 60 rooms is expected to come up in FY11E. Apart from these, few

other properties are lined up for FY11 and FY12, but mostly under management contract

(MC).

Chart 3: Slow expansion limits earnings growth

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Slow expansion in rooms has led to revenue CAGR of just 17% from FY04-09 with ARRs

increasing at 15% CAGR during the same period. Had the company aggressively

expanded its rooms inventory, sales growth during the previous good business cycle

would have been much higher. Although we expect 45% and 15% increase in revenues

in FY11E and FY12E, respectively, majority of it accounts from the reopening of the

Oberoi, Nariman Point, and launching of the Trident, BKC.

No major expansion post Trident, BKC


Hotels & Tourism

Till FY12, EIH plans to add approximately 1,000 rooms through MC, increasing its total

rooms to approximately 1,600. In FY11E, although we expect MC to contribute 7% to the

consolidated EBIDTA, its impact on return ratios is not significant.

International operations go unaccounted EIH International, a wholly owned subsidiary of EIH, with an investment of INR 1.8 bn,

holds stakes in various international properties. Since properties in which investments

are made through EIH International are not considered as an associate or subsidiary,

EIH’s consolidated numbers do not reflect actual performance of these properties.

EIH, through EIH International, has presence in Indonesia, Mauritius, and Egypt and

across four properties has approximately 300 rooms. Due to the registration of this

subsidiary in the British Virgin Islands, EIH recognises only dividend income from it.

Although the inherent value of these properties is high, due to regulations, the real effect

of this is not visible. Through EIH International, EIH is also planning to increase its

presence internationally by adding properties in Dubai, Abu Dhabi, Morocco, and Oman.

We expect further flow of funds to this subsidiary due to the current expansion plans.

As the management of these properties is not with EIH or EIH International, the

company also does not report any MC income from them.

Mashobra Resort: Uncertainty continues Due to the ongoing dispute with its JV partner, the Government of Himachal Pradesh, the resort has been losing money. This has created uncertainty over EIH’s total investment of INR 1.4 bn (comprising INR 0.26 bn in equity and INR 1.13 bn in loans and advances). The dispute in regard to cost over runs and EIH’s subsequent request to convert its debt into equity is with the high court. The dispute has resulted in Mashobra losing INR 482 mn in the past five years on net basis. In the meantime, the company continues to pay the debt and interest obligations. EIH is expected to provide another INR 100 mn in FY10E towards the interest and the principal due to banks.

Airport and flight services: Tepid growth Oberoi Flight Services (OFS) and Oberoi Airport Services (OAS) with an estimated annual

revenue of INR 1.8-1.9 bn (16% of consolidated revenue of FY09) in FY09 is not showing

any signs of growth. The company is expected to end FY10 with flat growth and

profitability is likely to be under stress considering the doddering financial condition of

the airline industry.

EIH caters to only foreign airlines. Growth in the business has been tepid and the

company is not enthusiastic to pursue the business. In H1FY10, the estimated top line

for the business was INR 860 mn and the company expects similar performance in

H2FY10 as well.

Printing and car services business: The minions We consider EIH’s car rental (Mercury Car Rentals; EIH holds 66.67%) and printing press businesses as non core areas and believe the total investment of approximately INR 2 bn in them to be overall dilutive for profitability. We believe it is difficult for these segments to generate the hotel business EBIDTA margin of 25-30%. The car rental business is a JV with Avis of Europe, wherein the latter holds one third equity. In FY09, on sales of INR 776 mn, it posted a negative PBT of INR 73.4 mn as many of the company’s initiatives did not yield the desired results. In FY10, the company

No income from international operations

No growth in flight catering business

Substandard returns from printing and car rental businesses


Hotels & Tourism

is expected to post marginal profits, both due to improved business conditions and measures to cut loss making segments. EIH generated revenue of INR 500 mn from the printing business where approximately 20% of the business is in house. Till 2008, the business operated out of Maiden Hotels in Delhi. In FY09, the company invested INR 1 bn to expand and shift the business to Manesar (close to Gurgaon, Haryana). The company has aggressive plans for this business, but we believe its overall profitability is not more than 10-15%.


Hotels & Tourism

Valuation We have used valuation parameters like EV/EBIDTA, EV/sales, P/B, and DCF to value EIH. The stock is currently available at 13.4x and 11.3x consolidated EV/EBIDTA of FY11E and FY12E, respectively, while its global peers are trading at 12.0x and 10.0x their EV/EBIDTA of FY11E and FY12E, respectively. With a target price of INR 120, we believe the 10-15% current premium over other comparables is not justified and expect EIH to trade at similar multiple as peers. As we don’t have any light on the financial details of its overseas company, we have valued the investments at 2x, which adds another INR 10 to our target price. At CMP of INR 124, EIH is currently trading at 3.2x FY11E P/B. Although it is less than its historical P/B of 4.1x over FY06-09, we believe at the current price, the stock fully factors in better business performance. Disappointment on any of these fronts can adervsely impact stock sentiments. Our sensitivty analysis for the main valuation parameters like EV/EBIDTA and EPS also shows a limited upside to our estimates. Table 1: Sensitivtiy of EV/EBIDTA – FY12E

ARR increase 60% 65% 70% 75%

5% 13.8 12.7 11.7 10.9

10% 13.3 12.2 11.3 10.5

15% 12.8 11.8 10.9 10.120% 12.4 11.4 10.53 9.8

ORs


Table 2: Sensitivity of EPS – FY12E

ARR increase 60% 65% 70% 75%

5% 3.5 4.1 4.7 5.3

10% 3.7 4.4 5.0 5.6

15% 4.0 4.6 5.3 5.920% 4.3 4.9 5.57 6.2

ORs

Source: Edelweiss reserarch

We have assumed 70% ORs and 15% growth in ARRs for calculations. This is considering the fact that 60% of its owned rooms are located in Mumbai, EIH has better chances of increasing overall ARRs. The sensivity table clearly demostrates that even with ORs of 70% and 15% growth in ARRs in FY12E, the company would be trading at EV/EBIDTA of 11.3x, which is a 10% premium than peers. We initiate coverage on the stock with a ‘HOLD’ recommendation.

Insufficient expansion to affect the earnings growth


Hotels & Tourism

Key Risks

Further stake increase by ITC With ITC’s stake in EIH at 14.98%, further acquisition of shares by the former through the open offer route will increase its involvement in the company. Even though ITC has been holding this stake for the past five-six years, any open offer will affect the share price.

Announcement of major projects An aggressive expansion plan by the current management can propel the current slow

expansion to a fast track. As the company’s balance sheet is not highly leveraged, it is

possible for EIH to increase its rooms inventory under the ownership structure.

Sale of land bank Sale of any land parcels by EIH may give access to substantial cash. We do not have

exact details of its land bank.

Monetisation of international operations Efforts to monetise the value of EIH International may provide the much needed clarity

on international operations. As contribution of the international subsidiary is currently

minimal due to the registration regulation, we have assumed investment under the same

only at its book value.


Hotels & Tourism

Company Description EIH, the third largest hospitality company in India after Indian Hotels and the ITC Welcome Group, manages more than 3,000 rooms across 19 properties in India. It is the largest company in the Oberoi Group. The group, founded in 1934, owns and manages luxury hotels across five countries under the Oberoi and Trident brands. The group’s portfolio includes hotels and operations in flight catering, airport restaurants, travel & tour services, car rentals, project management, and corporate air charters. It manages more than 3,500 rooms across India and the international market. The company also operates luxury cruisers in India. Besides hotels, the group also owns a printing press.

In 2003, the group entered into a strategic alliance for Trident hotels with Hilton International to cover eight hotels with approximately 1,900 rooms across India under the Trident Hilton brand. In 2007, the company decided to call off the arrangement as Hilton itself was increasing its presence in India. Post the break up, all eight hotels were re-branded as Trident.

Fig. 1: Business flow chart

Mgmt contract/associate 1,071 rooms10 owned hotels

East India Hotel

Owned rooms2,086 rooms9 owned hotels

Airport and flightservices Printing press Car rental

Constitutes 64%of net revenue

Constitutes 8% ofnet revenues




Fig. 2: Corporate structure

Oberoi Kerala Hotels & Resorts - equity of INR 22 mn (80% interest)

East India Hotel

EIH International- equity of INR 1.9 bn(Owns interest in 4international properties,not clubbed in the con no’s.)

Mashobra Resort -equity of INR 260 mn;loans of INR 1.13 bn (78.79% interest)

Mumtaz Resort -equity of INR 394 mn(60% interest)

Mercury Car Rentals - equity of INR 10 mn (66.67% interest)

EIH Flight Services- equity of INR 45 mn (100% interest)

EIH Associated Hotels - equity of INR 596 mn(36.1% interest)



Hotels & Tourism

Financial Outlook

Revival of Mumbai market essential for sales growth With the general revival in economic conditions, business and leisure travel is picking up at a slow pace. Although we expect EIH to post sales growth of 45% and 15% in FY11E and FY12E, respectively, we believe higher proportion of villa properties in the portfolio will delay recovery as foreign tourist arrival is still weak due to the global slowdown. FY11 recovery is dependent on recovery of the Mumbai market as the same will account for almost 60% of owned rooms in FY11.

Chart 4: Robust sales growth FY11 onwards

-30%

-15%

0%

15%

30%

45%

0

3,500

7,000

10,500

14,000

17,500


(%)

(IN

R m

n)

Sales Sales Growth Source: Company, Edelweiss research

Margins to remain subdued Though we expect EIH’s profitability to improve with revival of the tourism industry, return ratios will still be lower than those in FY07 and FY08. In the absence of any major addition of rooms post the Trident, BKC, earnings growth is dependent on improvement in ARRs and ORs.

Chart 5: Margins to improve in FY11

0.0

10.0

20.0

30.0

40.0

50.0


(%)

EBIDTA Margin Net Profit Margin


Mumbai is essential for sales growth

Margins are dependent on growth in ARRs and ORs


Hotels & Tourism

Return ratios to improve, but at slower pace With improvement in sales and operating margins, we expect the company’s RoE and RoCE to improve FY11 onwards.

Chart 6: Slow improvement in return ratios

0.0

5.0

10.0

15.0

20.0

25.0


(%)

ROE ROCE


EIH’s return ratios are likely to improve FY11 onwards, but at a slower pace as the Trident, BKC, investment will start contributing only FY11 onwards. We expect returns to remain muted considering the investment made in EIH International and the loss making Mashobra resort. The average returns generated by the printing and car rentals businesses should also keep overall returns ratios below historical ones.

Return ratios to remain below average


Hotels & Tourism





Employee cost 2,517 2,726 2,742 3,469 3,504

F&B 963 822 716 967 1,027

Power & fuel 698 700 625 902 990

Other expenditure 3,541 3,377 3,120 4,076 4,518

EBITDA 4,947 4,143 2,417 4,463 5,196

Depreciation and amortisation 653 749 934 1,162 1,221

EBIT 4,295 3,394 1,483 3,301 3,975

Interest 904 953 1,207 1,387 1,319

Total other income 288 333 286 327 353

Profit before tax 3,679 2,774 562 2,241 3,009

Provision for tax 1,400 1,074 191 762 1,023

Profit after tax 2,245 1,701 371 1,479 1,986


EPS (INR) basic 5.7 4.3 0.9 3.8 5.1


EPS (INR) diluted 5.7 4.3 0.9 3.8 5.1

Dividend per share (INR) 1.8 1.2 0.5 1.0 1.2 Dividend payout (%) 37.2 33.1 62.1 31.1 27.8




Employee cost 19.9 23.2 28.5 25.0 23.0




EBITDA margins 39.1 35.2 25.1 32.2 34.1


Growth metrics (%)


Revenues 19.3 (7.1) (18.3) 44.2 9.8

EBITDA 31.9 (16.3) (41.7) 84.6 16.4

PBT 43.6 (24.6) (79.7) 298.7 34.3

Core net profit 47.8 (25.4) (78.2) (298.7) 34.3

EPS 43.3 (24.5) (78.2) 298.7 34.3


Hotels & Tourism



Equity capital 786 786 786 786 786



Secured loans 9,189 11,399 15,399 15,399 13,899

Unsecured loans 125 10 10 10 10

Borrowings 9,314 11,409 15,409 15,409 13,909

Minority interest 250 272 294 317 339

Deferred tax (net) 1,102 1,210 1,210 1,210 1,210

Sources of funds 23,174 27,016 31,156 32,175 32,108

Gross block 20,085 21,101 32,273 34,123 35,623

Depreciation 4,691 5,241 6,175 7,337 8,558

Net block 15,394 15,860 26,098 26,786 27,065

Capital work In progress 4,292 6,171 - - -

Intangible assets 185 186 186 186 186

Investments 2,510 2,659 3,159 3,659 3,659

Inventories 374 345 322 354 439

Sundry debtors 1,308 1,062 1,172 1,287 1,595

Cash and bank balances 468 789 77 673 273


Other current assets 7 7 7 7 7



Provisions 951 694 694 694 694


Net current assets 776 2,139 1,714 1,545 1,198

Misc expenditure 17 - - - -

Uses of funds 23,174 27,016 31,156 32,175 32,108

Book value per share (BV) (INR) 32 36 36 39 42



Net profit 2,224 1,705 371 1,479 1,986

Depreciation 653 749 934 1,162 1,221

Deferred tax 133 108 110 115 114

Others 784 748 1,000 1,153 1,081

Gross cash flow 3,794 3,310 2,415 3,909 4,402

Less: Changes in working capital (173) 1,040 287 (766) 54

Operating cash flow 3,967 2,270 2,128 4,674 4,348

Less: Capex (2,985) (2,897) (5,000) (1,850) (1,500)

Free cash flow 981 (627) (2,872) 2,824 2,848

Cash flow metrics



Financing cash flow (1,887) 996 2,563 (1,847) (3,372)

Investing cash flow (2,296) (2,936) (5,403) (2,231) (1,376)

Net cash flow (217) 330 (712) 596 (400) Capex (2,985) (2,897) (5,000) (1,850) (1,500) Dividend paid (834) (562) (230) (460) (553)


Hotels & Tourism

Ratios


ROAE (%) 19.1 12.8 2.6 10.0 12.5

ROACE (%) 21.9 15.1 5.7 11.7 14.0


Debtors (days) 36 37 42 32 35

Payable (days) 91 110 126 100 108


Current ratio 0.3 0.2 0.2 0.3 0.3

Debt/EBITDA 1.9 2.8 6.4 3.5 2.7

Interest cover (x) 4.8 3.6 1.2 2.4 3.0




Debt/Equity (x) 0.7 0.8 1.1 1.0 0.8


Du pont analysis


NP margin (%) 17.8 14.5 3.9 10.7 13.0



ROAE (%) 19.1 12.8 2.6 10.0 12.5



Diluted EPS (INR) 5.7 4.3 0.9 3.8 5.1

Y-o-Y growth (%) 43.3 (24.5) (78.2) 298.7 34.3

CEPS (INR) 7.4 6.2 3.3 6.7 8.2

Diluted P/E (x) 21.6 28.6 131.3 32.9 24.5

Price/BV(x) 3.9 3.4 3.4 3.2 2.9

EV/Sales (x) 4.3 4.8 6.3 4.3 3.9

EV/EBITDA (x) 11.1 13.7 25.2 13.4 11.3

EV/EBITDA (x)+1 yr forward 13.3 23.5 13.6 11.5 NA

Dividend yield (%) 1.5 1.0 0.4 0.8 1.0


Hotels & Tourism



Hotels & Tourism

Era of super normal profits a thing of past; 35% margin likely in FY11E IT slowdown, ample supply of new rooms, and shifting of the airport to the

outskirts of the city are expected to limit upside on ARRs for Hotel Leelaventure’s

(HLV) Bengaluru property. Post 35% dip in ARRs in H1FY10 over H1FY09, we

expect an overall 25% decline in FY10 over FY09 in this property’s ARR. Although

we expect the company’s EBIDTA margin to improve to 35.4% in FY11E over

29.8% in FY10E, it will be substantially low compared to over 44.6% margin

posted in FY08.

FCF likely to be negative till FY11; high leverage a concern Adjusted for the revaluation reserve, we expect HLV’s debt/equity to be at 3.5x in

FY11E, highest in the industry. We expect FCF to be negative till FY11 as the

company continues to remain in heavy capex mode. With INR 5 bn of likely capex

in FY10E and FY11E for the upcoming Delhi and Chennai properties, considering

the high existing leverage, equity raising is the likely option as operations continue

to remain weak due to business slowdown. Likely redemption of EUR 39.2 mn

FCCB at 125.5% of the principal amount will also keep liquidity pressure on the

company. We are not factoring in any FCCB buyback or equity dilution, although

HLV has already passed a resolution to raise equity of up to INR 7.5 bn.

Margins likely to be at par with industry going forward With the Bengaluru property generating industry average profits going forward,

high interest costs as the Delhi and Chennai properties become operational by July

2010 and December 2010, respectively, and the amortisation of INR 1.15 bn of

exchange losses in FY10 and FY11 are likely to lead to PAT margins of 16.5% and

15.2% in FY11E and FY12E, respectively, compared to 28.9% in FY08.

Outlook and valuations: Expensive; initiating coverage with ‘REDUCE’ At CMP of INR 50, HLV is trading at 23.6x and 17.4x consolidated EV/EBIDTA of

FY11E and FY12E, respectively, a premium of more than 70% to other listed

players. As the company is likely to generate industry level margins going forward,

we expect the stock to trade at industry level valuations. Using the target

EV/EBIDTA, EV/room, and DCF methodology, we arrive at a target price of INR 25,

and initiate coverage on the stock with a ‘REDUCE’ recommendation.



HOTEL LEELAVENTURE

Expensive on all counts

April 1, 2010

Reuters : HTLE.BO Bloomberg : LELA IN

Absolute Rating REDUCE




M cap (INR bn/USD mn) : 18.8 / 416.0


Promoters* : 52.7


FIIs : 3.2

Others : 37.0



1 month 5.5 4.7 (0.7)

3 months 0.8 (1.1) (1.9)

12 months 71.0 160.2 89.2

Manoj Bahety, CFA

+91-22- 6623 3362

[email protected]

Manav Vijay

+91-22- 4063 5413

[email protected]

EDELWEISS RATING

Financials


Revenues (INR mn) 4,522 4,041 6,223 8,571 Growth (%) (12.1) (10.6) 54.0 37.7 EBIDTA (INR mn) 1,557 1,203 2,205 3,038 Net profit (INR mn) 909 416 381 348 Share outstanding (mn) 378 378 378 378 EPS (INR) 2.4 1.1 1.0 0.9 EPS growth (%) (38.8) (54.2) (8.4) (8.7) Diluted P/E (x) 25.5 55.6 60.7 66.5 ROAE (%) 12.8 5.7 5.0 4.5


Hotels & Tourism


Era of super normal profits a thing of past; 35% margin likely in FY11E Slowdown in IT, ample supply of new rooms, and shifting of the airport to the outskirts

of the city are expected to limit upside on ARRs for HLV’s Bengaluru property. We expect

this property’s ARRs to decline by 25% in FY10E. During H1FY10, ARRs dipped 35% over

H1FY09. Although we expect the company’s EBIDTA margin to improve to 35.4% in

FY11E over 29.8% in FY10E, it is low compared to the over 44.6% margin posted in

FY08.

IT boom along with limited supply of rooms had led to unprecedented increase in ARRs in

Bengaluru with an almost 127% jump between FY04 and FY07. The location advantage

of Leela Bangalore worked in its favor as the company was able to charge much higher

ARRs than prevalent in the city. HLV was able to charge on an average 25% more than

its peers in the city with almost same ORs. We believe with the doubling of rooms

between FY09 and FY14 in Bengaluru, growth in the company’s ARRs is likely to be

muted. Taking an optimistic view, we expect 10% increase in ARRs in both FY11E and

FY12E with 65% and 70% ORs during the same period.

Chart 1: HLV has enjoyed better than average ARRs in the past

50.0

56.0

62.0

68.0

74.0

80.0

10,000

12,000

14,000

16,000

18,000

20,000

FY06 FY07 FY08 FY09

(%)

(IN

R)

Leela ARRs City ARRs Leela ORs City ORs Source: Company, CRISIL, Edelweiss research

With severe decline in ARRs, we expect Bengaluru property’s overall contribution to dip

to ~35% and ~26% in FY10E and FY11E, respectively, as new properties like Udaipur

and Delhi also start contributing to sales. Even with new properties we do not expect the

company to report all time high EBIDTA margin of 45-46% reported during FY06 and

FY08 as the new properties will become operational in highly competitive areas.

While Bengaluru is expected to add 2,000 premium category rooms in the next five

years, the city is expected to add 6,300 rooms including four star hotels (Source: HVS).

Though we expect a reasonable growth in demand, ARRs are likely to remain under

pressure till FY12 because of major upcoming supply.

Era of abnormal ARRs in Bengaluru is over


Hotels & Tourism

Chart 2: Bengaluru hotels—Rooms availability and demand

0

1,000

2,000

3,000

4,000

5,000

FY07 FY08 FY09 FY10E FY11E FY12E FY13E

(No. of ro

om

s)

Rooms availability Rooms demand Source: CRISIL, Edelweiss research

FCF likely to be negative till FY11; high leverage a concern Adjusted for the revaluation reserve, we expect HLV’s debt/equity to be at 3.8x in FY11E,

highest in the industry. The company’s FCF is likely to be negative till FY11 as it

continues to remain in heavy capex mode. With INR 5 bn of likely capex in FY10 and

FY11 for the upcoming Delhi and Chennai properties, considering the high existing

leverage, we believe equity raising is the likely option as operations continue to remain

weak due to business slowdown. Likely redemption of EUR 39.2 mn FCCB at 125.5% of

the principal amount will also keep liquidity pressure on the company. We are not

factoring in any FCCB buyback or equity dilution, although HLV has already passed a

resolution to raise equity of up to INR 7.5 bn. The company has EUR 39.2 mn FCCB

outstanding liable to retire or convert by September 2010. The conversion price is INR

47 and the redemption will happen at 125.5% of the principal amount. As conversion

makes sense to the FCCB holder only if the market price goes beyond INR 60, we do not

expect any conversion. In case of redemption, we expect the company to pay INR 3.2-

3.3 bn.

In a recent development, HLV has repurchased FCCBs of USD 25 mn due in 2012 at a

steep discount. The redemption premium payable was 46.61%. Assuming the minimum

RBI allowed discount of 15%, we believe, there is an exceptional gain of approximately

INR 200 mn. As the payment has been refinanced with another bank loan, this

transaction only reduces the overhang of outstanding FCCBs to some extent.

Following are the details of capex for FY10 and FY11:

1. Delhi hotel: The 290-rooms hotel in Delhi is expected to become operational in July

2010, before the start of the Commonwealth Games in October 2010. Apart from

the land cost of INR 6.5 bn, the company is expected to spend INR 4.0-4.5 bn on

construction. We expect capex of INR 2 bn in FY10 and FY11 on this property.

2. Chennai hotel: The 340-rooms Chennai hotel is expected to become operational by

December 2010. Total cost is expected to be INR 5.0-5.5 bn. Due to tight liquidity

conditions, HLV has put this project on a slow track. We expect capex of INR 3 bn in

FY10 and FY11 on this property.

High leverage to continue due to ongoing capex and debt repayments


Hotels & Tourism

3. Office space in Chennai: HLV has constructed an office space of 0.35 mn sq ft

adjacent to the Chennai hotel at an estimated capex of INR 700 mn. Initially it was

to be an IT park, but with the slowdown in the sector, the company is converting the

project into normal office space. The decision of leasing or selling has still not been

taken. We expect revenue from this property to start from FY11.

With the addition of properties mentioned above, the company is doubling its total rooms

to almost 2,247 in FY12E from 1,119 in FY09.

Chart 3: Total rooms availability

0

500

1,000

1,500

2,000

2,500


(No. of ro

om

s)

Rooms availability


Margins likely to be at par with industry going forward 45% decline in ARRs in the Bengaluru property since FY07 along with decline in ORs are

the primary reasons for the decline in EBIDTA margins to 34.4% in FY09 compared to

46.4% in FY07. With the expected continuous pressure on ARRs in Bengaluru and normal

30-35% operating margins from other properties, we do not expect above industry

margins from the company, as was the case earlier.

Chart 4: Normal EBIDTA margins going forward

20.0

26.0

32.0

38.0

44.0

50.0


(%)

EBITDA margins


Only normal industry margins going forward


Hotels & Tourism

As Leela Bangalore has lost its locational advantage, it would be difficult for the property

to charge above average ARRs. In this light, we expect the hotel to generate normal

industry EBIDTA of 30-35% and PAT margins of 15-18%.

With the opening of the Delhi property in July 2010 and Chennai property in December

2010, we expect the revenue contribution of the Bengaluru property to dip to

approximately 35% and 25% in FY10E and FY11E, respectively.

Upcoming Delhi hotel: Too much at stake To finance the upcoming Delhi hotel, HLV’s D/E ratio has jumped to 3.8x in FY09

compared to 1.5x in FY07. Due to the high land cost of INR 6.5 bn, management intends

to offer only high class club rooms with an expected ARR of INR 20,000. Introduction of

Sec 80 ID of Income Tax Act in the NCR region, where a five-year tax holiday has been

extended to 1, 2, 3, and 4 star hotels, is expected to put pressure on ARRs. HVS expects

Delhi to add 8,200 rooms including budget rooms in the next five years. We believe

success of the Delhi property is essential for HLV to reduce its high leverage as going

forward the Bengaluru property is not expected to generate above normal profits.

Investment of approximately INR 11 bn for 290 rooms in New Delhi is one of the largest

investments ever done by the company. HLV plans to pitch the hotel as an alternative to

the Imperial Hotel. We believe given the latter’s rich heritage, it would be difficult for

HLV to draw a comparison.

Major investment in the upcoming Delhi property


Hotels & Tourism

Valuation

We have used valuation parameters like EV/EBIDTA, EV/sales, P/B, and DCF to value HLV.

The stock is currently available at 23.6x and 17.4x consolidated FY11E and FY12E

EV/EBIDTA, respectively, while its global peers are trading at 12.0x and 10.0x their FY11E

and FY12E EV/EBIDTA, respectively. At a target price of INR 25, with the hotel likely to

generate normal profits going ahead, there is no reason for it to trade at substantial premium

to other listed players.

At CMP of INR 50, HLV is currently trading at 3.4x FY11E P/B. Although it is less than its

historical P/B of 4.0x over FY06-09, we believe there is significant downside in the stock

considering the high leverage and absence of above average industry profits going forward.

We initiate coverage on the stock with a ‘REDUCE’ recommendation.


Hotels & Tourism

Key Risks

Better-than-expected improvement in Bengaluru ARRs Better-than-expected improvement in Bengaluru ARRs can improve the overall EBIDTA

margins substantially. ARRs similar to FY07 and FY08 can easily push the overall EBIDTA

margin beyond 40% for HLV. Considering the demand-supply economics of the city, we

believe the probability of this event is quite low.

Sale of land bank HLV has land banks in Agra (7 acres, close to Taj Mahal), Hyderabad (4 acres), and Pune

(6 acres). Though the company plans to develop hotels on all these properties, if the

company decides to sell these land bank(s) to reduce leverage, it could ease some of the

excess leverage concerns on the company.

Sale of Chennai general office space The company has built a 3.5 lakh sq ft office space in Chennai, adjacent to its upcoming

hotel. As of now HLV plans to lease the space, but an outright sell can fetch

approximately INR 4 bn. A sale is likely to reduce leverage concerns to some extent.


Hotels & Tourism

Company Description Hotel Leela Venture (HLV), a chain of luxury resorts and business hotels, operates 1,617

rooms, across six locations in India. Five properties with 1,205 rooms are owned by the

company and 409 rooms are under management contract. Compared to other hotel chains in

the country, HLV is small, but it has prominent presence in cities where it operates.

HLV has a marketing alliance with Kempinski for its properties in India. The company caters

to both business and leisure travelers. With rapid growth in room demand, the company

plans to increase presence, both through ownership and management contract routes. In

2009, HLV added its first property in Delhi through the management contract route. It also

holds land parcels in Agra, Hyderabad, and Pune, where it plans to build hotels in the future.

It is the flagship company of the Leela Group, where promoters’ holding is 55%.


Hotels & Tourism

Financial Outlook

Margins to be at par with industry going ahead We expect HLV’s operating and net profit margins to decline 25% and 80% in FY11E and

FY12E, respectively, over the base of FY08 as the above average profits of the Bengaluru

property cease. We also expect profitability to come under further pressure as the entire

CWIP block shifts to fixed assets and the P&L starts reflecting the actual interest payable.

Channelisation of MTM loss of INR 1.04 bn through P&L will further erode profitability.

Chart 5: Peak profits are behind

0.0

10.0

20.0

30.0

40.0

50.0


(%)

Net profit margins EBITDA margins Source: Company, Edelweiss research

Heavy leverage taking its toll on return ratios With the ongoing capex of INR 15 bn on Delhi and Chennai properties, which will become

operational only by FY11E and FY12E, respectively, we believe hotel CWIP of INR 9.3 bn

as of FY09 will affect return ratios. We expect RoE of 5.0% and RoCE of 3.8% in FY11E.

The improvement in ratios from FY10 is primarily due to the expected opening of the

Delhi property and general improvement in the business scenario.

Chart 6: High leverage to affect return ratios

0.0

5.0

10.0

15.0

20.0

25.0


(%)

ROAE ROACE Source: Company, Edelweiss research

High leverage reducing return ratios


Hotels & Tourism

Negative FCF to continue till FY11 With an estimated capex of INR 5.5 bn in FY10E and FY11E, we expect FCF to remain

negative till FY11. As the cash generated from operations will not be sufficient for the

ongoing capex, we expect the D/E to remain at 3.5x in FY11E. In FY12E, as the capex

slows down, Delhi and Chennai properties become operational, and general business

environment improves, we expect a positive FCF.

Key highlights from 2009 annual report • Hotel Leelaventure availed the option of capitalising/deferring foreign exchange

difference on long-term monetary items provided by Accounting Standard 11. Consequently,

• Exchange loss aggregating INR 1.8 bn are added to fixed assets and would be depreciated over the life of related assets.

• Exchange losses aggregating INR 1.1 bn are accumulated in “foreign currency monetary translation difference account” (net of FY09 amortisation aggregating INR 104.7 mn) and will be amortised over the next two financial years or earlier.

• Exchange gains, recognised in earlier years, aggregating INR 227.4 mn and INR 112.0 mn were adjusted in fixed assets and “foreign currency monetary translation difference account” respectively.

As a result, PAT for the year is higher by INR 2.8 bn, ~ 1.5x of reported PBT.

• Post March 2009, INR appreciated ~ 11.8% vis-à-vis the USD and a substantial portion of the MTM losses on outstanding derivative positions and the unrealized exchange loss on foreign currency denominated borrowings could be recouped.

• Losses on derivative positions recognised during the year aggregate INR 29.4 mn. Provision for losses on derivative positions aggregate INE 81.5 mn (FY08: INR 78.5 mn). Derivative exposure on March 31, 2009 is not disclosed.

• Borrowings increased by INR 4.1 bn (20.0%) to INR 24.5 bn (FY08: INR 20.4 bn). Fresh borrowings (net) aggregate INR 1.2 bn and restatement of borrowings at depreciated INR aggregate INR 2.9 bn. ~ 59.0% of total borrowings are denominated in foreign currency. However, debt equity ratio decreased moderated by 90bps to 1.3x (FY08: 2.2x) due to higher equity base, courtesy revaluation of land.

• Premium on redemption of FCCB’s and FCCB issue expenses are charged to securities premium account. FY08 charge aggregates INR 256.3 mn (net of taxes and redemption premium on FCCB’s bought back during the year). However, gain (discount) on buyback of FCCB’s aggregating INR 646.4 mn, ~ 33.4% of PBT, is recognised in the income statement.

• Freehold and leasehold land rights on properties situated in Mumbai, Bangalore, Goa and Kovalam were revalued during the year by INR 10.3 bn. Revaluation reserves aggregate INE 12.4 bn, ~ 63.9% of net worth.

• Interest expenditure decreased 29.0% to INR 237.9 mn (FY08: INR 335.0 mn). Borrowing cost (ex FCCB) decreased 290bps to 1.5% (FY08: 3.5%).

• Exchange gains recognised during the year aggregate INR 87.0 mn, 4.5% of reported PBT.

• Sundry creditors increased 1.6x to INR 703.7 mn (FY08: INR 275.1 mn) due to 5.9x increase in project related creditors aggregating INR 427.8 mn (FY08: INR 62.0 mn).


Hotels & Tourism




Employee costs 815 884 889 1,307 1,800

Other expenses 2,034 2,081 1,949 2,938 3,960


EBITDA 2,297 1,557 1,203 2,205 3,038

Depreciation and amortisation 453 549 694 842 1,011

EBIT 1,843 1,008 509 1,363 2,028

Interest expenses 356 267 458 1,464 2,187

Other income 745 653 660 669 678

Profit before tax 2,233 1,393 711 568 519

Provision for tax 747 485 295 188 171

Core profit 1,485 909 416 381 348

Extraordinary items - 542 184 - -

Profit after tax 1,485 1,450 600 381 348

Profit after minority interest 1,485 1,450 600 381 348


EPS (INR) basic 3.9 2.4 1.1 1.0 0.9

Diluted equity shares (mn) 483 463 463 463 463

EPS (INR) diluted 3.1 2.0 0.9 0.8 0.8


Dividend payout (%) 14.9 12.2 7.4 34.8 63.6




Depreciation and Amortization 8.8 12.1 17.2 13.5 11.8


EBITDA margins 44.6 34.4 29.8 35.4 35.4


Growth metrics (%)


Revenues 23.8 (12.1) (10.6) 54.0 37.7

EBITDA 19.0 (32.2) (22.7) 83.4 37.8

PBT 52.1 (37.6) (49.0) (20.1) (8.7)

Net profit 75.9 (38.8) (54.2) (8.4) (8.7)

EPS 72.4 (38.8) (54.2) (8.4) (8.7)


Hotels & Tourism



Equity capital 756 756 756 756 756



Secured loans 12,911 18,186 20,336 26,336 27,836

Unsecured loans 7,445 6,309 5,159 2,659 2,659

Borrowings 20,357 24,495 25,495 28,995 30,495

Deferred tax liability (net) 914 1,004 1,004 1,004 1,004

Sources of funds 30,571 44,898 46,370 50,034 51,577

Gross block 25,531 38,870 38,870 53,715 55,715

Depreciation 3,364 3,985 4,762 5,688 6,782

Net block 22,167 34,885 34,108 48,027 48,933

Capital work in progress 4,058 9,345 11,345 0 0

Total fixed assets 26,225 44,231 45,453 48,027 48,933

Investments 1 1 1 1 1

Inventories 387 420 332 511 704

Sundry debtors 386 315 310 477 657

Cash and equivalents 2,958 306 445 23 709

Other current assets 2,675 2,846 3,046 3,246 3,446


Sundry creditors and others 933 1,713 1,711 1,744 2,367

Provisions 1,129 1,508 1,508 508 508

Total CL & provisions 2,061 3,221 3,218 2,252 2,874

Net current assets 4,344 666 915 2,006 2,643

Uses of funds 30,571 44,898 46,370 50,034 51,577

Adjusted BV per share (INR) 13.9 13.5 14.6 14.9 15.0



Net profit 1,485 1,450 600 381 348

Depreciation 453 549 694 842 1,011

Deferred tax 199 90 0 0 0

Others (293) (764) (216) 973 1,697

Gross cash flow 1,845 1,325 1,078 2,196 3,055

Less:Changes in WC 657 (647) 110 513 (49)

Operating cash flow 1,188 1,972 968 1,684 3,104

Less: Capex (9,320) (6,547) (2,000) (3,500) (2,000)

Free cash flow (8,131) (4,575) (1,032) (1,816) 1,104

Cash flow metricsYear to March FY08 FY09 FY10E FY11E FY12E

Operating cash flow 1,188 1,972 968 1,684 3,104

Financing cash flow 10,316 891 497 904 (908)


Net cash flow 2,833 (2,653) 139 (423) 687

Capex (9,320) (6,547) (2,000) (3,500) (2,000)

Dividend paid (221) (177) (44) (133) (221)


Hotels & Tourism

Ratios


ROAE 21.2 12.8 5.7 5.0 4.5

ROACE 8.0 3.3 1.5 3.8 5.3

Inventory days 26.0 32.5 34.0 24.7 25.9

Debtors days 29.1 28.3 28.2 23.1 24.2

Payable days 131.2 162.8 220.2 148.5 130.3

Cash conversion cycle (76.1) (102.0) (158.0) (100.7) (80.2)

Current ratio 3.1 1.2 1.3 1.9 1.9

Debt/EBITDA 8.9 15.7 21.2 13.1 10.0

Interest coverage 5.2 3.8 1.1 0.9 0.9

Fixed assets t/o (x) 0.3 0.2 0.1 0.2 0.2

Debt/equity 2.8 3.5 3.4 3.8 4.0

Du pont analysis


NP margin (%) 28.9 20.1 10.3 6.1 4.1



ROAE (%) 21.2 12.8 5.7 5.0 4.5



Diluted EPS (INR) 3.1 2.0 0.9 0.8 0.8

Y-o-Y growth (%) 53.1 (36.1) (54.2) (8.4) (8.7)

CEPS 5.1 3.9 2.9 3.2 3.6

Diluted P/E (x) 16.3 25.5 55.6 60.7 66.5

Price/BV (x) 3.6 3.7 3.4 3.4 3.3

EV/Sales (x) 7.9 10.5 11.9 8.4 6.2

EV/EBITDA (X) 17.6 30.4 40.1 23.6 17.4

EV/EBIDTA (x)+1 yr forward 26.0 39.3 21.8 17.1

Dividend yield (%) 1.0 0.8 0.2 0.6 1.0


Hotels & Tourism



Hotels & Tourism

Strong ORs and growth in ARRs going forward In Q3FY10, the Indian Hotels Company (IHCL) posted its highest ORs of 70% in

the past eight quarters, signaling a healthy turnaround in the industry. ARRs

registered a healthy increase of 28% Q-o-Q and we expect them to firm up from

these levels going forward. We expect ORs of 67% and 70% in FY11E and FY12E,

respectively.

Sea Rock restructuring akin to REPO; interest cost to skirt P&L IHCL shifted the ownership of Sea Rock to an SPV where it holds 20% (the

balance is held by other TATA Group companies and third parties). The SPV has

raised INR 6.8 bn and paid that money back to IHCL. IHCL has the option to take

the asset back after 37 months which we believe will happen at principal +

interest.

Low coupon cumulative bond; reserves to take a hit The company raised INR 4 bn at 2% coupon and 9.85% YTM for an average seven

years to retire offshore debt in its international subsidiaries. The difference of INR

3.76 bn between coupon and YTM has been adjusted against the securities

premium account. We believe the transaction will have no positive impact on

adjusted profitability.

Better cash flows due to investment linked benefits We expect IHCL to save INR 2 bn over FY11E and FY12E due to the inclusion of

hotels in Sec 35 AD of the Income Tax Act. With its ongoing capex, we expect the

company to start paying MAT FY11 onwards.

Outlook and valuations: Business turning around; maintain ‘BUY’ With improvement in ARRs and ORs, cost containment exercise, shifting of Sea

Rock to a SPV and dedicated efforts to turnaround the US portfolio, we believe the

company is on a revival path. To effectively manage liquidity, management is

committed to complete the ongoing capex within the time schedule and budget.

With revival in the tourism industry, we believe the next 18-24 months present a

conducive business environment for the company. We maintain our ‘BUY’

recommendation on the stock.


India Midcap Research Company Update

INDIAN HOTELS COMPANY

Better outlook going ahead

April 1, 2010

Reuters : IHTL.BO Bloomberg : IH IN

Absolute Rating BUY




M cap (INR bn/USD mn) : 74.2 / 1,643.6


Promoters* : 29.5


FIIs : 13.3

Others : 28.4



1 month 5.5 8.9 3.4

3 months 0.8 (3.8) (4.6)

12 months 71.0 156.7 85.7

Manoj Bahety, CFA

+91-22- 6623 3362

[email protected]

Manav Vijay

+91-22- 4063 5413

[email protected]

EDELWEISS RATING

Financials (Consolidated)


Revenues (INR mn) 26,800 24,728 31,769 39,574

Growth (%) (8.2) (7.7) 28.5 24.6

EBIDTA (INR mn) 5,056 5,051 8,547 12,549

Net profit (INR mn) 51 318 2,155 4,648


EPS (INR) 0.2 0.6 3.1 6.6

EPS growth (%) (97.0) 179.7 442.2 110.7

Diluted P/E (x) 499.6 178.6 32.9 15.6

ROAE (%) 0.2 1.0 6.7 13.7


Hotels & Tourism

Sea Rock restructuring akin to REPO; interest cost to skirt P&L To manage the current liquidity crisis in the company, IHCL shifted the Sea Rock property to an independent SPV where it holds 20%; the balance 80% is held by other TATA Group companies and third parties. The SPV has raised INR 6.8 bn zero coupon money on the strength of its assets and paid that money back to IHCL. IHCL has the option to take the asset back after 37 months. Although, the stated transaction will get the interest liability down for the next 37 months, it just pushes back the liability without actually reducing it.

Low coupon cumulative bonds: Reserves to take a hit IHCL raised INR 4 bn at 2% coupon and 9.5% YTM for an average period of seven years, to pay off the debt of its international subsidiaries. The company plans to add another INR 3 bn in March 2010 with similar terms. These funds are being utilised to retire USD 95 mn of Samsara Properties (Orient Express stake) and USD 90 mn of IHMS US (for the Boston and NYC property). The premium on redemption of INR 4 bn debenture has been adjusted against the securities premium account. Our analysis suggests that with this transaction, the debt/equity for FY10E will increase to 1.8x from the current 1.5x. The aforesaid accounting practice will result in keeping yearly interest cost of ~ INR 500 mn off P&L and, hence, will result in higher reported profits (no impact on adjusted profits).

Better cash flows due to investment linked benefits In 2010 budget, hotels have been included in Sec 35 AD of the Income Tax Act where investment linked benefits have been extended for any new hotel coming up anywhere in India. We expect IHCL to save approximately INR 2 bn over FY11E and FY12E due to its ongoing capex. We expect the company to pay MAT due to the heavy ongoing capex.


Hotels & Tourism

Company Description

IHCL is the largest hotel operator in India with presence in luxury, business and leisure hotel segments. The company manages 12,243 (103 properties) across India and international locations. It has also entered into the budget hotel segment with a new brand, ‘Ginger’ and has also gone into the adventure business with wildlife lodges. IHCL also runs airline catering business under the brand of Taj SATS, which contributes 6-7% to total sales. The company has aggressive expansion plans, both in India and abroad by using ownership and asset light model of management contract.

Investment Theme With the revival of ARRs and ORs across India, the hotel industry is looking for better times ahead. With India emerging as one of the fastest growing economy, FTAs of both business and leisure are expected to pick up. Domestic tourism is also on a great revival path and with more Indians ready to take holidays, the segment is expected to perform well in the years to come. We expect IHCL’s Indian portfolio (almost 80% of total sales) to post healthy growth with the revival of domestic ARRs and ORs. We also expect international operations to turnaround and start contributing significantly to overall margins.

Key Risks Economic slowdown is the biggest risk for the company as travel and tourism takes the first knock in uncertain times. Unexpected events like terrorist attack or swine flu also affect the industry badly as many countries advise their citizens against traveling to affected regions. The company can continue to earn negative returns on its international investments due to longer-than-expected turnaround of international operations and the stake of Orient Express.


Hotels & Tourism





Employee cost 7,644 8,552 8,194 9,281 10,018

F&B 2,782 2,772 2,473 3,177 3,957

Power & fuel 1,547 1,677 1,360 1,747 2,177

Other expenditure 8,307 8,743 7,651 9,018 10,872

EBITDA 8,920 5,056 5,051 8,547 12,549

Depreciation and amortisation 1,676 1,885 2,195 2,491 2,690

EBIT 7,244 3,171 2,856 6,055 9,859

Interest 2,203 2,711 3,393 3,603 3,568

Total other income 1,106 1,111 1,012 764 646

Profit before tax 6,147 1,571 475 3,216 6,938

Provision for tax 2,426 1,520 157 1,061 2,289

Core profit 3,720 51 318 2,155 4,648

Extraordinary income/(loss) (542) - - - -

Profit after tax 3,179 51 318 2,155 4,648

Minority interest (414) (97) (97) (97) (97)

Profit after minority interest 3,593 148 415 2,252 4,745


EPS (INR) basic 6.9 0.2 0.6 3.1 6.6


EPS (INR) diluted 6.9 0.2 0.6 3.1 6.6


Dividend payout (%) 0.4 7,636.1 133.0 58.9 31.9




Employee cost 26.2 31.9 33.1 29.2 25.3




EBITDA margins 30.5 18.9 20.4 26.9 31.7


Growth metrics (%)


Revenues 16.5 (8.2) (7.7) 28.5 24.6

EBITDA 23.8 (43.3) (0.1) 69.2 46.8

PBT 15.4 (74.4) (69.8) 577.2 115.7

Core net profit 10.6 (98.6) 520.3 577.2 115.7

EPS 11.5 (97.0) 179.7 442.2 110.7


Hotels & Tourism



Equity capital 603 723 723 723 723

Preference share capital - 1,200 1,200 1,200 1,200



Secured loans 16,316 26,596 30,596 32,596 29,596

Unsecured loans 18,353 19,873 19,873 19,873 19,873

Borrowings 34,668 46,469 50,469 52,469 49,469

Minority Interest 2,820 2,741 2,116 2,116 2,116

Deferred tax (net) 1,485 1,602 977 977 977

Sources of funds 61,665 83,790 86,435 89,271 89,438

Gross block 46,465 53,924 61,586 69,536 72,036

Depreciation 11,321 13,041 15,235 17,727 20,417

Net block 35,144 40,883 46,350 51,809 51,619

Capital work In progress 4,352 7,273 1,273 1,273 1,273

Intangible assets 2,970 3,612 3,612 3,612 3,612

Investments 15,419 24,077 21,582 19,825 19,825

Long term deposits 1,421 1,628 1,628 1,628 1,628

Inventories 533 641 542 609 651

Sundry debtors 2,079 1,778 1,694 2,176 2,711

Cash and bank balances 2,576 3,322 3,612 3,071 3,790




Provisions 861 2,015 2,015 2,015 2,015


Net current assets 2,267 7,035 12,146 11,280 11,637

Misc expenditure 92 76 76 76 76

Uses of funds 61,665 83,790 86,435 89,271 89,438




Net profit 3,593 148 415 2,252 4,745

Depreciation 1,676 1,885 2,195 2,491 2,690

Others 1,874 2,397 2,787 2,932 3,015

Gross cash flow 7,144 4,431 5,397 7,675 10,450

Less: Changes in working capital (79) 1,297 520 (325) (362)


Less: Capex (6,820) (8,623) (3,662) (7,950) (2,500)

Free cash flow 403 (5,489) 1,215 50 8,312

Cash flow metrics



Financing cash flow 10,334 17,230 184 (2,872) (8,049)


Net cash flow 805 746 291 (541) 719

Capex (6,820) (8,623) (3,662) (7,950) (2,500)

Dividend paid (163) 416 - - -


Hotels & Tourism

Ratios


ROAE (%) 17.1 0.2 1.0 6.7 13.7

ROACE (%) 16.7 6.0 4.6 9.0 14.2


Debtors (days) 26 26 26 22 23

Payable (days) 93 95 97 83 84


Current ratio 1.3 1.9 2.8 2.5 2.3

Debt/EBITDA 3.9 9.2 10.0 6.1 3.9

Interest cover (x) 3.3 1.2 0.8 1.7 2.8




Debt/Equity (x) 1.5 1.4 1.5 1.6 1.3


Du pont analysis


NP margin (%) 12.7 0.2 1.3 6.8 11.7



ROAE (%) 17.1 0.2 1.0 6.7 13.7



Diluted EPS (INR) 6.9 0.2 0.6 3.1 6.6

Y-o-Y growth (%) 11.5 (97.0) 179.7 442.2 110.7

CEPS (INR) 8.0 2.8 3.6 6.6 10.3

Diluted P/E (x) 15.0 499.6 178.6 32.9 15.6

Price/BV(x) 3.3 2.3 2.3 2.3 2.1

EV/Sales (x) 2.7 3.5 4.0 3.3 2.5

EV/EBITDA (x) 8.8 18.4 19.7 12.1 8.0

EV/EBITDA (x)+1 yr forward 15.5 18.5 11.6 8.3 6.6

Dividend yield (%) 1.9 1.2 0.5 1.5 1.7


Hotels & Tourism

Back-end and maintenance expenditure to increase going forward We expect the repairs & maintenance (RM) expenses to rise substantially in the

future as properties come of age. With an expected capex of INR 2-3 bn every

year for the next 3-4 years, we expect Mahindra Holidays & Resorts (MHRIL) to

incur ~INR 300-350 mn on RM expenses in FY14-15E. Since we have explicit

assumptions only till FY12 and we had valued the company on DCF basis

assuming 20% growth rate of FCF for the next 10 years beyond FY12, we are

now revising our numbers down 2.0-2.5% as the scope and scale of future

liabilities is still not clear.

Addition of star properties and more rooms a must We expect MHRIL to aggressively add a few star properties to resume the sale of

its ‘purple’ membership which was stopped a few quarters ago. The primary

reason behind stopping this membership was the heavy demand for some

properties like Goa, Coorg, and Munnar which were running at almost peak

capacity. MHRIL needs to be aggressive in adding rooms, because the company

knows in advance how many new members will have to be serviced in the next

12 months. We expect the company to add minimum 500 rooms every year.

Outlook and valuations: Positives priced in; downgrade to ‘REDUCE’ At CMP of INR 540, we believe the price fully factors in all the good news flow.

Post the disappointing Q3FY10 results, severe decline in the stock shows that

expectations are high from the company. Although we are positive on the

business model and concept, we are concerned about the rich valuations.

Considering the future liability of its expenses to serve current members, we

arrive at a fair price of INR 420 using the DCF approach. We downgrade our

recommendation on the stock to ‘REDUCE’ from ‘HOLD’.


India Midcap Research Company Update

MAHINDRA HOLIDAYS & RESORTS INDIA

Rich valuations; little room for upside

April 1, 2010

Reuters : MAHH.BO Bloomberg : MHRL IN

Absolute Rating REDUCE


52-week range (INR) : 574 / 306


M cap (INR bn/USD mn) : 45.4 / 1,006.7


Promoters* : 83.1


FIIs : 4.1

Others : 8.3



1 month 5.5 21.9 16.4

3 months 0.8 15.6 14.8

Manoj Bahety, CFA

+91-22- 6623 3362

[email protected]

Manav Vijay

+91-22- 4063 5413

[email protected]

EDELWEISS RATING

Financials


Revenues (INR mn) 4,421 5,762 8,168 10,975

Growth (%) 17.2 30.3 41.8 34.4

EBIDTA (INR mn) 1,522 2,097 3,066 4,320

Net profit (INR mn) 798 1,209 1,855 2,662


EPS (INR) 10.2 14.4 22.0 31.6

EPS growth (%) (5.0) 40.9 53.4 43.5

Diluted P/E (x) 53.0 37.6 24.5 17.1

ROAE (%) 47.1 37.2 35.6 38.5


Hotels & Tourism

Back-end and maintenance expenditure to increase going forward We expect the RM expenses to rise substantially in the future as the properties come of age. With an expected capex of INR 2-3 bn every year for the next 3-4 years, MHRIL is likely to incur ~INR 300-350 mn RM expenses in FY14-15E, similar to a hotel company. Since we have explicit assumptions only till FY12 and have valued the company on DCF basis assuming 20% growth rate of FCF for the next 10 years beyond FY12E, we are now revising our numbers down 1.0-1.5% as the scope and scale of future liabilities is still unclear. In FY09, on total GFA of INR 4.3 bn, the company incurred INR 100 mn on RM, which we believe is not the correct representation of future as we expect expenses to rise as old properties start needing more maintenance work. We believe rise in back-end expenses to serve the existing members, together with higher maintenance expenditure, will reduce FCFF growth assumption by ~3%. Based on the reasons mentioned above, we are reducing our FCF growth rate to 17% from 20% earlier beyond FY12E for 10 years. The current cash flow fully recognizes the company’s cash collection procedure without putting due emphasis on expenses which are back ended. Our revised DCF assumption considers 25% growth in membership and 7% increase in membership fee for FY11 and FY12, followed by 17% growth in FCFF for the next 10 years beyond FY12E and 5% terminal growth rate. We have considered WACC of 12.7%. We believe there is little scope for positive surprise to the above assumptions.

Revenue recognition method to lead to income expenditure mismatch Membership fee comprises non-refundable admission fee (60% of membership fees) and entitlement fee (40% of membership fees) which is refundable. While MHRIL recognises the entire admission fees as current year’s revenues, entitlement fee is recognised linearly over the balance period of membership. As MHRIL recognises significant portion of membership fee upfront, we believe 40% of membership fees will not be sufficient for servicing existing members for the next 24 years, leading to an income expenditure mismatch. Although the company charges its members an AMC which is indexed to the Urban Consumer Price Index published by RBI, we believe this income will be inadequate to meet future expenses of existing members. As the company is just 12-13 years old and has attained size in the past 4-5 years, as the number of members grows, the liability of servicing them will also grow manifold.

Addition of star properties and more rooms a must We expect MHRIL to aggressively add properties along with some star properties, to resume the sale of its purple membership which had been stopped a few quarters ago. The primary reason for stopping them was the heavy demand for some of the properties like Goa, Coorg, and Munnar which were running at almost peak capacity. We believe with its cash flows, MHRIL needs to be aggressive in adding rooms, more so because it knows in advance how many new members will have to be serviced in the next 12 months. We expect the company to add minimum 500 rooms every year for 25% membership growth.

Owing to the heavy rush at the most popular properties, members often complain of

non-availability of rooms during the desired period. We believe the company, in its

attempt to sell memberships, has actually oversold higher class memberships. As almost

33% of its members come from referrals, we believe this number could be at a serious

risk if this problem is not addressed early.

Growth in back ended expenditure to hit the profitability in later years


Hotels & Tourism

No Sec 35 AD benefit The Union Budget 2010 has extended the benefit of Sec 35AD of the Income Tax Act to all new hotels coming anywhere in India post 1.4.2010. As MHRIL is not classified as a hotel company, we expect the company to continue to pay full corporate tax rate of 33%. This is not strictly disadvantageous for the company. However, if the company makes a case before the IT department to get classified as a hotel company, it may lose its ongoing tax dispute of INR 900 mn with the department.


Hotels & Tourism

Company Description

MHRIL was started in 1997 and offers a unique vacation ownership model to Indian consumers with resorts spread across India. The company has different schemes for families, singles and corporates. With almost 100,000 members spread across different membership schemes, the company uses the upfront membership fee charged from members to build resorts. With its resorts located across India, the company plans to aggressively expand its reach both in terms of members and new resorts.

Investment Theme With its unique business model, although MHRIL is in a sweet spot to exploit the growth in the Indian travel & tourism sector, but we are concerned with the accounting treatment of the income and expenditure done by the company. We believe with its aggressive income recognition principle, the future expenses to serve the existing members is not getting properly accounted. Due to the limited history of its operations, we believe only 5-10 years down the line we will have the visibility of its full scale expenses. We are not assigning any value to the change in valuations once the cycle of 25 years of membership ends as the same resorts can again be re-used for new members considering the resorts would also be attracting lumpy capex which we have not taken in our assumptions.

Key Risks Launching new schemes, restart to sell the Purple membership, increase in overall

average membership fee are some of the factors that could provide risk to our estimates.

Settlement of ongoing Munnar property and IT dispute can also provide upside risk to

our estimates.


Hotels & Tourism





Employee cost 474 608 908 1,254 1,644

Sales promotion and comission 882 1,117 1,135 1,633 2,149

Other expenditure 975 1,174 1,622 2,215 2,862

EBITDA 1,442 1,522 2,097 3,066 4,320

Depreciation and amortisation 113 168 264 334 426

EBIT 1,329 1,354 1,833 2,732 3,894

Interest 33 70 62 62 62

Total other income - - 60 140 200

Profit before tax 1,296 1,284 1,832 2,810 4,032

Provision for tax 456 486 623 955 1,371

Profit after tax 840 798 1,209 1,855 2,662


EPS (INR) basic 10.7 10.2 14.4 22.0 31.6


EPS (INR) diluted 10.7 10.2 14.4 22.0 31.6


Dividend payout (%) 19.4 34.4 32.1 23.5 18.2




Sales promotion and comission 23.4 25.3 19.7 20.0 19.6




EBITDA margins 38.2 34.4 36.4 37.5 39.4


Growth metrics (%)


Revenues 56.3 17.2 30.3 41.8 34.4

EBITDA 81.2 5.6 37.8 46.2 40.9

PBT 93.2 (0.9) 42.7 53.4 43.5

Core net profit 97.6 (5.0) 51.5 53.4 43.5

EPS 97.6 (5.0) 40.9 53.4 43.5


Hotels & Tourism



Equity capital 764 770 829 829 829

Reserves & surplus 666 1,188 3,714 5,040 7,124


Secured loans 201 247 247 247 247

Deferred tax (net) 236 295 295 295 294

Sources of funds 1,867 2,500 5,084 6,411 8,494

Gross block 2,734 4,293 6,593 8,343 10,643

Depreciation 479 641 905 1,239 1,664

Net block 2,255 3,652 5,688 7,018 8,806

Capital work In progress 450 513 513 513 513

Investments 0 0 1,500 2,000 3,000

Inventories 35 53 73 93 113

Sundry debtors 4,034 4,826 5,286 7,127 9,459

Cash and bank balances 76 328 837 1,573 2,594

Loans and advances 621 665 765 865 965


Sundry creditors and others 609 821 1,026 1,429 1,864

Advance from member facilities 4,825 6,410 8,247 11,044 14,786

Provisions 171 306 306 306 306


Net current assets (838) (1,665) (2,617) (3,121) (3,825)

Uses of funds 1,867 2,500 5,084 6,411 8,494




Net profit 840 798 1,209 1,855 2,662

Depreciation 113 168 264 334 426

Deferred tax 34 59 - - (1)

Others (825) 1,485 2,985 2,540 3,512

Gross cash flow 163 2,510 4,458 4,729 6,599

Less: Changes in working capital (303) 926 1,462 1,239 1,725

Operating cash flow 466 1,584 2,996 3,490 4,874

Less: Capex (732) (1,633) (2,300) (1,750) (2,300)

Free cash flow (266) (50) 696 1,740 2,574

Cash flow metrics


Operating cash flow 466 1,584 2,996 3,490 4,874

Financing cash flow 9 (183) 1,300 (518) (566)

Investing cash flow (492) (1,149) (3,787) (2,237) (3,287)

Net cash flow (17) 251 509 736 1,021

Capex (732) (1,633) (2,300) (1,750) (2,300)

Dividend paid (87) (140) (388) (436) (485)


Hotels & Tourism

Ratios


ROAE (%) 76.9 47.1 37.2 35.6 38.5

ROACE (%) 94.0 62.0 60.3 68.4 78.6


Debtors (days) 301 366 320 277 276

Payable (days) 79 90 92 88 90

Cash conversion cycle 226 281 235 195 191

Current ratio 0.9 0.8 0.7 0.8 0.8

Debt/EBITDA 0.1 0.2 0.1 0.1 0.1

Interest cover (x) 40.3 19.3 29.7 44.3 63.1




Debt/Equity (x) 0.1 0.1 0.1 0.0 0.0


Du pont analysis


NP margin (%) 22.3 18.0 21.0 22.7 24.3



ROAE (%) 76.9 47.1 37.2 35.6 38.5



Diluted EPS (INR) 10.7 10.2 14.4 22.0 31.6

Y-o-Y growth (%) 97.6 (5.0) 40.9 53.4 43.5

CEPS (INR) 12.6 13.1 17.5 26.0 36.6

Diluted P/E (x) 50.3 53.0 37.6 24.5 17.1

Price/BV(x) 29.6 21.6 10.0 7.7 5.7

EV/Sales (x) 11.2 9.5 7.5 5.2 3.7

EV/EBITDA (x) 29.4 27.7 20.7 13.7 9.3

Dividend yield (%) 0.3 0.6 0.7 0.8 0.9


Hotels & Tourism



Hotels & Tourism

Company Description Asian Hotels (AHL) was established in 1980 and is the fourth largest listed 5-star

hotel company in India. It has over 1,100 rooms across three properties in the

country viz., Delhi, Mumbai, and Kolkata. While the Delhi property is owned by

AHL, Hyatt International operates the hotel and provides marketing, branding,

and management services. Delhi accounts for 44% of total rooms and almost

48% of total revenue. Mumbai accounts for 34% and Kolkata for 22% of the total

1,150 rooms.

Key Highlights With three different groups as promoters, AHL has decided to trifurcate the

company. The Jatia Group will take over the Delhi property and the company will

be renamed Asian Hotels. The Saraf Group will take over the Kolkata property

along with development rights in Bhubaneshwar, Regency Convention Center and

Hotels and appropriate cash to form Vardhaman Hotels. The Mumbai property

along with the development options of Bengaluru will go to the Gupta Group and

will be named Chillwinds Hotels. The company’s restructuring aims to give higher

flexibility to promoters to expand their businesses, resulting in higher growth

prospects in the future.

Key Risks With the Delhi property accounting for close to 50% of AHL’s total revenue, the

company is heavily dependent on a single market for its performance.

Delay in finalisation of the restructuring process could be a negative as the

exercise is already under process since a long time.


India Midcap Research Company Profile

ASIAN HOTELS

Waiting for clarity

April 1, 2010

Reuters : ASHT.BO Bloomberg : AHOT IN

Absolute Rating NOT RATED


52-week range (INR) : 590 / 207


M cap (INR bn/USD mn) : 12.8 / 283.1


Promoters* : 63.6


FIIs : 0.8

Others : 32.0

* Promoters pledged shares : 4.9 (% of share in issue)

Manoj Bahety, CFA

+91-22- 6623 3362

[email protected]

Manav Vijay

+91-22- 4063 5413

[email protected]

EDELWEISS RATING

Financials

Year to March FY06 FY07 FY08 FY09Revenues (INR mn) 3,290 4,134 5,135 6,415

Rev. growth (%) 25.7 24.2 24.9

EBITDA (INR mn) 1,258 1,830 2,275 2,173

Net profit (INR mn) 567 915 1,326 942

Shares outstanding (mn) 23 23 23 34

Diluted EPS (INR) 24.9 40.1 58.1 27.5

EPS growth (%) 61.3 44.9 (52.7)

Diluted P/E (x) 22.5 14.0 9.6 20.4

EV/EBITDA (x) 11.7 7.8 5.9 6.7

ROAE (%) 18.5 12.2 9.8 NA


Hotels & Tourism


Year to March FY06 FY07 FY08 FY09

Net revenues 3,290 4,134 5,135 6,415

Total operating expenses 2,032 2,304 2,860 4,242

Empolyee expenses 668 653 863 902

Other expenses 1,363 1,651 1,997 3,340

EBITDA 1,258 1,830 2,275 2,173

Depreciation 210 221 246 414

EBIT 1,049 1,609 2,029 1,759

Other income 14 13 220 71

EBIT incl. other income 1,063 1,623 2,249 1,830

Net interest 192 174 214 295

PBT 871 1,449 2,035 1,535

Provision for taxation 304 534 709 593

Core PAT 567 915 1,326 942

Profit after tax 567 915 1,326 942

Profit after minority interest 567 915 1,326 942

Equity shares outstanding (mn) 23 23 23 34

EPS (INR) basic 24.9 40.1 58.1 27.5

Diluted shares (mn) 23 23 23 34

EPS (INR) fully diluted 24.9 40.1 58.1 27.5

CEPS (INR) 40.2 51.0 73.5 NA

DPS 10 10 1 1

Dividend payout ratio (%) 46 28 2 3

Common size metrics - as % of net revenues


Cost of materials 61.8 55.7 55.7 66.1

Administrative and other expenses 20.3 15.8 16.8 14.1

Selling costs 41.4 39.9 38.9 52.1

Depreciation 6.4 5.3 4.8 6.5

Net interest expenditure 5.8 4.2 4.2 4.6

EBITDA margin 38.2 44.3 44.3 33.9

EBIT margin 31.9 38.9 39.5 27.4

Net profit margin 17.2 22.1 25.8 14.7

Growth metrics (%)

Year to March FY07 FY08 FY09

Revenues 25.7 24.2 24.9

EBITDA 45.5 24.3 (4.5)

PBT 66.3 40.4 (24.6)

Net profit 61.3 44.9 (28.9)

EPS 61.3 44.9 (52.7)


Hotels & Tourism


As on 31st March FY06 FY07 FY08 FY09

Equity Capital 228 228 228 342

Pref Share capital 200 3,510

Reserves 2,841 11,707 14,592 14,401

Shareholders' funds 3,069 11,935 15,020 18,253

Secured loans 2,023 2,078 1,385 1,653

Borrowings 2,023 2,078 1,385 1,653

Deferred tax (net) 458 486 589 688

Sources of funds 5,550 14,498 16,993 20,594

Gross block 6,543 15,093 15,691 16,162

Less depreciation 997 1,184 1,410 1,796

Net fixed assets 5,546 13,909 14,281 14,366

Capital work in progress 107 263 401 73

Investments - 235 287 2,947

Current assets 662 1,433 4,131 6,171

Inventories 80 83 98 91

Sundry debtors 96 133 162 222

Cash and bank balance 39 342 455 3,360

Loans and advances 447 876 3,416 2,498

Current liabilities 766 1,343 2,107 2,963

Liabilities 446 552 715 1,688

Provisions 320 791 1,393 1,275

Working capital (104) 90 2,024 3,208

Uses of funds 5,550 14,498 16,993 20,594

BV (INR) 135 523 659 533

Cash flow statement (INR mn)


Net profit 567 915 1,326 NA

Depreciation 210 221 246 NA

Deferred tax 141 27 104 NA

Others 217 203 1,160 NA

Gross cash flow 1,134 1,366 2,836 NA

Less: Changes in WC (137) (108) 1,820 NA

Operating cash flow 1,272 1,474 1,016 NA

Less: Capex 175 573 619 NA

Free cash flow 1,097 900 397 NA

Cash flow metric


Operating cash flow 1,272 1,474 1,016 NA

Financing cash flow (1,030) (826) 2,780 NA

Investing cash flow (165) (792) (3,828) NA

Net cash flow 77 (144) (33) NA

Capex (175) (573) (619) NA

Dividends paid 360 261 56 NA


Hotels & Tourism

Ratios


ROAE 18.5 12.2 9.8 NA

ROACE 18.9 16.2 13.1 NA

Debtor days 11 10 10 NA

Inventory days 9 7 7 NA

Payable days 85 119 150 NA

Current ratio 0.9 1.1 2.0 NA

Debt/EBITDA 1.6 1.1 0.6 NA

Cash conversion cycle days (65) (101) (132) NA

Debt/Equity 0.7 0.2 0.1 NA

Adjusted debt/equity 0.7 0.2 0.1 NA

Interest coverage (x) 5.5 9.3 9.5 NA

Operating ratios


Total asset turnover 0.6 0.4 0.3 NA

Fixed asset turnover 0.6 0.4 0.4 NA

Equity turnover 1.1 0.6 0.4 NA

Du pont analysis


NP margin (%) 17.2 22.1 25.8 NA

Total assets turnover 0.6 0.4 0.3 NA

Leverage multiplier 1.8 1.3 1.2 NA

ROAE (%) 18.5 12.2 9.8 NA



Diluted EPS (INR) 24.9 40.1 58.1 27.5

Y-o-Y growth (%) 61.3 44.9 (52.7)

CEPS (INR) 40.2 51.0 73.5 NA

Diluted P/E (x) 22.5 14.0 9.6 20.4

Price/BV (x) 4.2 1.1 0.9 1.1

EV/Sales (x) 4.5 3.5 2.6 2.3

EV/EBITDA (x) 11.7 7.8 5.9 6.7

Basic EPS (INR) 24.9 40.1 58.1 27.5

Basic P/E (x) 22.5 14.0 9.6 20.4


Hotels & Tourism

Company Description Incorporated in 1999, Taj GVK Hotels & Resorts is a joint venture of the Taj and

GVK groups. The Tata Group company, Indian Hotels Company (IHCL), holds

25.52% and other promoters hold 49.47% of the company. IHCL is a strategic

investor in the company. The company currently operates five premium properties

totaling 900 rooms. These locations include Hyderabad, Chennai, and Chandigarh

with Hyderabad accounting for majority of the rooms and revenue.

Key Highlights To take advantage of its land bank, the company is running a capex programme

of INR 2.5 bn. The expansion involves 180 rooms in its existing property at Taj

Deccan, a block of 43 room service apartments at Taj Krishna, and addition of

nearly 190 rooms at Begumpet. The company is also planning a 12,000 sq ft retail

expansion at its Taj Krishna property which is expected to be operational by

Q1FY11. It has also acquired a 6.5 acre plot in Bengaluru for future expansion. It

is also contemplating Jaipur, Kodaikanal, and Amritsar for expansion.

Key Risks Taj GVK receives more than 75% of its revenue from three hotels located in

Hyderabad. Although the company has diversified by opening hotels in Chennai

and Chandigarh, the dependence on a single city is high.

Delay in execution of its projects along with oversupply of premium category

rooms in Hyderabad are the main concerns for the company.


India Midcap Research Company Profile

TAJ GVK HOTELS & RESORTS

Regional play

April 1, 2010

Reuters : TAJG.BO Bloomberg : TAJG IN

Absolute Rating NOT RATED




M cap (INR bn/USD mn) : 9.8 / 217.9


Promoters* : 75.0


FIIs : 1.4

Others : 15.8



1 month 5.5 2.1 (3.3)

3 months 0.8 5.3 4.6

12 months 71.0 231.7 160.7

Manoj Bahety, CFA

+91-22- 6623 3362

[email protected]

Manav Vijay

+91-22- 4063 5413

[email protected]

EDELWEISS RATING

Financials

Year to March FY06 FY07 FY08 FY09Revenues (INR mn) 1,894 2,442 2,584 2,382

Rev. growth (%) 29.0 5.8 (7.8)

EBITDA (INR mn) 848 1,152 1,221 1,026

Net profit (INR mn) 463 643 704 528

Shares outstanding (mn) 63 63 63 63

Diluted EPS (INR) 7.4 10.3 11.2 8.4

EPS growth (%) 39.0 9.4 (25.0)

Diluted P/E (x) 21.3 15.3 14.0 18.6

EV/EBITDA (x) 12.3 9.0 8.6 10.9

ROAE (%) 31.3 38.9 34.0 21.1


Hotels & Tourism

Financial Statements (Consolidated) Income statement (INR mn)


Net revenues 1,894 2,442 2,584 2,382

Total operating expenses 1,045 1,291 1,362 1,356

Empolyee expenses 271 319 379 453

Other expenses 774 971 984 903

EBITDA 848 1,152 1,221 1,026


EBIT 739 1,039 1,106 890

EBIT incl. other income 739 1,039 1,106 890

Net interest 40 31 21 62

PBT 700 1,008 1,085 828

Provision for taxation 237 365 381 301

Core PAT 463 643 704 528

Profit after tax 463 643 704 528

Profit after minority interest 463 643 704 528

Equity shares outstanding (mn) 63 63 63 63

EPS (INR) basic 7.4 10.3 11.2 8.4

Diluted shares (mn) 63 63 63 63

EPS (INR) fully diluted 7.4 10.3 11.2 8.4

CEPS (INR) 9.4 12.3 13.2 11.1

DPS 2.0 2.5 2.6 2.0

Dividend payout ratio (%) 31 34 33 28

Common size metrics - as % of net revenues


Cost of materials 55.2 52.8 52.7 56.9

Administrative and other expenses 14.3 13.1 14.7 19.0

Selling costs 40.9 39.8 38.1 37.9

Depreciation 5.8 4.6 4.5 5.7

Net interest expenditure 2.1 1.3 0.8 2.6

EBITDA margin 44.8 47.2 47.3 43.1

EBIT margin 39.0 42.6 42.8 37.4

Net profit margin 24.4 26.3 27.2 22.1

Growth metrics (%)

Year to March FY07 FY08 FY09

Revenues 29.0 5.8 (7.8)

EBITDA 35.7 6.1 (16.0)

PBT 44.0 7.6 (23.6)

Net profit 39.0 9.4 (25.0)

EPS 39.0 9.4 (25.0)


Hotels & Tourism


As on 31st March FY06 FY07 FY08 FY09

Equity Capital 125 125 125 125

Reserves 1,391 1,734 2,204 2,585

Shareholders' funds 1,516 1,860 2,329 2,710

Secured loans 706 684 505 1,090

Unsecured loans 150 50 240 300

Borrowings 856 734 745 1,390

Deferred tax (net) 65 81 202 133

Sources of funds 2,437 2,674 3,276 4,233

Gross block 2,541 2,581 2,686 4,631

Less depreciation 609 644 759 891

Net fixed assets 1,932 1,937 1,928 3,740

Capital work in progress 207 760 1,386 694

Investments 140 - - -

Current assets 627 619 503 327

Inventories 25 31 39 45

Sundry debtors 73 60 54 64

Cash and bank balance 140 253 113 21

Loans and advances 389 276 297 197

Current liabilities 507 669 559 544

Liabilities 352 402 298 395

Provisions 155 267 261 149

Working capital 120 (50) (56) (218)

Misc expenditure 38 27 18 17

Uses of funds 2,437 2,674 3,276 4,233

BV (INR) 24 29 37 43

Cash flow statement (INR mn)


Net profit 463 643 704 528


Deferred tax 19 16 9 33

Others (31) (337) 99 85

Gross cash flow 559 434 926 782

Less: Changes in WC (11) (283) 134 (70)

Operating cash flow 571 717 792 852

Less: Capex 469 349 732 1,258

Free cash flow 102 368 61 (406)

Cash flow metric


Operating cash flow 571 717 792 852

Financing cash flow 27 (258) (200) 314

Investing cash flow (469) (349) (732) (1,258)

Net cash flow 128 110 (139) (92)

Capex (469) (349) (732) (1,258)

Dividends paid 64 141 219 234


Hotels & Tourism

Ratios


ROAE 31.3 38.9 34.0 21.1

ROACE 32.2 41.8 37.2 23.7

Debtor days 14 10 8 9

Inventory days 5 5 6 7

Payable days 98 100 79 83

Current ratio 1.2 0.9 0.9 0.6

Debt/EBITDA 1.0 0.6 0.6 1.4

Cash conversion cycle days (79) (85) (65) (68)

Debt/Equity 0.6 0.4 0.3 0.5

Adjusted debt/equity 0.6 0.4 0.3 0.5

Interest coverage (x) 18.7 33.2 51.9 14.4

Operating ratios


Total asset turnover 0.8 1.0 0.9 0.6

Fixed asset turnover 1.0 1.3 1.3 0.8

Equity turnover 1.2 1.4 1.2 0.9

Du pont analysis


NP margin (%) 24.4 26.3 27.2 22.1

Total assets turnover 0.8 1.0 0.9 0.6

Leverage multiplier 1.6 1.5 1.4 1.5

ROAE (%) 31.3 38.9 34.0 21.1



Diluted EPS (INR) 7.4 10.3 11.2 8.4

Y-o-Y growth (%) 39.0 9.4 (25.0)

CEPS (INR) 9.4 12.3 13.2 11.1

Diluted P/E (x) 21.3 15.3 14.0 18.6

Price/BV (x) 6.7 5.4 4.3 3.7

EV/Sales (x) 5.5 4.2 4.1 4.7

EV/EBITDA (x) 12.3 9.0 8.6 10.9

Basic EPS (INR) 7.4 10.3 11.2 8.4

Basic P/E (x) 21.3 15.3 14.0 18.6


Hotels & Tourism

Cox & Kings EIH

300

340

380

420

460

500

Dec-09 Jan-10 Feb-10 Mar-10

(IN

R)

Hotel Leelaventure Indian Hotels

0

14

28

42

56

70

Apr-

09

May-0

9

Jun-0

9

Jul-

09

Aug-0

9

Sep-0

9

Oct

-09

Nov-0

9

Dec-

09

Jan-1

0

Feb-1

0

Mar-

10

(IN

R)

Mahindra Holidays & Resorts India

Hold

Buy

Buy300

360

420

480

540

600

Jul-

09

Aug-0

9

Sep-0

9

Oct

-09

Nov-0

9

Dec-

09

Jan-1

0

Feb-1

0

Mar-

10

(IN

R)

35

65

95

125

155

185

Apr-

09

May-0

9

Jun-0

9

Jul-

09

Aug-0

9

Sep-0

9

Oct

-09

Nov-0

9

Dec-

09

Jan-1

0

Feb-1

0

Mar-

10

(IN

R)

Buy

Buy

30486684

102120

Apr-

09

May-0

9Ju

n-0

9Ju

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Aug-0

9S

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9O

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ov-0

9D

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09

Jan-1

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b-1

0M

ar-

10

Apr-

10

(IN

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Hotels & Tourism

Buy

BuyBuy

150

350

550

750

950

1,150

Jul-0

8A

ug-0

8S

ep-0

8O

ct-0

8N

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8D

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Feb-

09M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-0

9

(INR

)

Edelweiss Research is also available on www.edelresearch.com ,Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected]

Naresh Kothari Co-Head Institutional Equities [email protected] +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Head Research [email protected] +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Hotels Indian Hotels and Mahindra Holidays & Resorts India

Recent Research

04-Dec-09 Indian Time to check-in; 88 Buy Hotels Initiating Coverage 12-Oct-09 Mahindra Membership-led 346 Buy Resorts & growth; India Initiating Coverage

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 53 43 29 128

* 3 stocks under review

Market Cap (INR) 72 41 15

> 50bn Between 10bn and 50 bn < 10bn

Date Company Title Price (INR) Recos

Buy Hold Reduce Total

This document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integrated investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Edelweiss and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Edelweiss nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Analyst holding in the stock: no.

Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved

Access the entire repository of Edelweiss Research on www.edelresearch.com

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold depreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 101 56 9 169

* 3 stocks under review

Market Cap (INR) 103 53 13

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Edelweiss Value ScannerEdelweiss Value ScannerEdelweiss Value ScannerEdelweiss Value ScannerEdelweiss Value Scanner

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