>HOSPITALITY (ELARA CAPITAL)

Room for more
■ Secular uptrend likely in tourist arrivals
With the economic revival on the anvil, we expect a mature uptrend of in-bound tourist arrivals to resume with CAGR of 7.7% for the next ten years. Interestingly, tourist arrivals had nosedived in 2001-02 before recovering and clocking a CAGR of 16.3% in 2003-08. It subsequently hit a trough in November 2008 as a result of the worsening global slowdown only to capitulate with the 26/11 terror attack. Now with a reversal in these trends, we anticipate the growth momentum to sustain.

■ Demand supply sweet-spot to repeat during 2012-15
We see the mismatch in demand-supply to reemerge in line with an economic revival and a delayed supply pipeline. Increase in repeat journeys and an extension in length of stay by guests would be the real multiplier of demand. Occupancy levels are set to rebound to 68%-72% while average room rates (ARRs) are set to spike to INR8700- 11200 in FY11E, driven by a reinforced economy. Growth in demand is seen across business as well as leisure destinations.

■ Spotting the winner
We find players with a significant supply addition and a diverse geographical spread during 2009-12 to be the biggest beneficiaries of the impending upturn. We also find the branded mid-market players to gain from the growing domestic tourism. IHCL emerges a clear winner with the spread increasing by 38% during 2010-12 across the country along with ‘Ginger’ to cater to value conscious guests. With a significant portion of their topline coming from overseas operations, IHCL is expected to benefit from a revival in the US and UK economies. Hotel Leela is also expected to reap benefits of new property launches, and its distributed geographical spread.

■ Valuation
We believe EV/room is a better measure to value hotel stocks as it captures the effects of a changing capital structure along with operating efficiencies on a per room basis. The EV/room valuation should be considered attractive with a significant upside when a player is available, cheaper than the average replacement cost of INR12-15mn per room, invested in the premium category and around INR6-8mn in the Four-Star category. Indian Hotels, our preferred bet, trades at an FY12E EV/room of INR9.6mn, EIH at INR18.3mn and Hotel Leela at an FY12E EV/room of INR25.7mn.

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