>Indian Hotels (CITI)

* Average Jan’09 occupancies down to 58%, ARRs fell 14% — While this was better than Dec’08 (immediately post the terror attacks), data is disappointing. Jan is traditionally considered peak business season for hotels and average occupancy falling to 58% (vs. 79% in Jan’08) with ARRs down 14% YoY in 10 key cities across India does raise downside risks to earnings. Bangalore and Pune reported the least occupancy for the month at 49% and 43% respectively, with Mumbai at 54%.

* Occupancy likely to remain subdued — With business and tourist traffic down following the global economic downturn and risks of likely supply kicking in (though with delays), we expect occupancies to remain muted over the next 1-2 years. We forecast occupancies to decline to 63-66% in FY09-11E vs. 72% in FY08.

* Intensifying competition to impact ARRs — Declining ARR in Jan’09 could be early signs of intensifying competition. With more international hotels looking to enter India and existing players having ongoing expansion plans across most markets, we see pressure building on ARRs and forecast a 1% CAGR decline in ARRs for FY09-11E, with ARRs down 6% in FY10E.

* Reiterate cautious outlook — Hotel stocks have fallen 33-55% in the last six months and look attractive on valuations. However, with no near-term catalysts, and expectations of lower occupancy and ARR levels and increasing risks to earnings, we maintain our cautious outlook on the sector. Indian Hotels is our best relative play, on attractive valuations of 0.7x P/BV; maintain Hold (2H).

To see full report: INDIAN HOTELS