>India Hotels (MORGAN STANLEY)

●Investment conclusion: We turn Cautious on the India Hotel industry, as deteriorating tourism trends worsened by the impact of the 26/11 terror attacks in Mumbai have damaged tourist inflow and RevPAR trends. In addition, we believe corporate travel budgets have started to decline as corporate profitability is hit, which has in turn curtailed business travel. Balance sheets for most companies are under stress due to the acquisition of properties/land parcels at peak rates, which has resulted in rising debt servicing obligations and possible impairment of book value. As a result, we are now Underweight all the three stocks under our coverage.

●F2010 could be worse for earnings: For 9MF2009, all major listed Indian hotel companies showed decelerating performance, with the December quarter being the worst – revenues declined by 15% YoY and EBITDA witnessed an 11 ppt YoY decline. We believe F2010 will be worse for earnings as weakening demand for rooms due to the global slowdown and the Mumbai terror attacks will force down both average room revenue and occupancy rates, which will pressure operating margins. Rising interest costs due to high leverage will also affect earnings. As a result, we have cut our F2010 earnings estimates for all coverage stocks by 60-70%.

●Thoughts on coverage stocks: The global economic slowdown and the 26/11 terror attacks will have a significant impact on the earnings of all our coverage companies. Over and above that, some specific issues will affect each of the companies as follows: a) IHCL – earnings will likely be hurt due to weakness in international properties and rising interest costs; b) EIH – earnings will likely be impacted due to deferral of the Trident Bandra-Kurla property; and c) Leela – deferral of new properties and rising interest costs will likely affect earnings.

To see full report: INDIA HOTELS