>INDIAN HOTELS (IIFL)

A strong up-tick in the foreign tourist arrivals (up 21% YoY in Dec’09), which makes up for 65-70% of the demand for premium rooms, heralds the beginning of a revival in the hotel industry that was the worst hit by the economic crisis. This is corroborated by the robust uptrend in occupancies and room rates across properties. We estimate that the supply deficiency in the Indian market will further support the RevPAR in the coming years. Supply growth has also abated considerably over the past couple of years, tilting the demand-supply equation in favour of the incumbents. Profitability of market players like Indian Hotels (IH) and East India Hotels (EIH), which took a big hit over FY09-10, is likely to jump sharply in FY11-12. A pick up in the pace of recovery in the Indian and global economies will add further momentum to this turnaround. We initiate with BUY on IH and ADD on EIH.

Strong start to the season: Occupancies and ARRs have been improving sequentially, with room rates in many cities rising between 20-50% from June to December. Many properties have experienced a surge in occupancies, with occupancy rates surging as high as 85%-90% in some properties.

IH—Leader with a diversified profile: IH, with an inventory of 11,596 rooms, has presence in all value segments (premium, mid-market, and budget) in India. A wide footprint in international markets (~25% of revenues) further derisks its profile. Aggressive room expansion will widen IH’s lead over peers in the coming years. IH will benefit from a broad recovery in the Indian economy. Growth momentum will further be supported by: (a) the opening of The Pierre,
New York and heritage wing of Taj Mahal, Mumbai in FY10ii, (b) lower losses in its US portfolio, (c) recovery in the US/UK markets, and (d) strong pipeline of management contracts lined up over FY11-12. Strong revenue momentum will drive a sharp turnaround in EBITDA in FY11ii (up 430bps YoY). We initiate with a BUY and a TP of Rs138.

EIH—Beneficiary of demand buoyancy in metros: EIH manages 2,926 rooms and its presence is restricted to the super premium and premium segment in the domestic market and some management contracts in international markets. We expect EIH’s profitability to reverse in FY11 due to its large exposure (~85%) to metros that are experiencing a strong demand. The re-opening of its flagship property, Oberoi Mumbai (~12%), will be an added boost. We believe EIH will grow earnings at 83% CAGR over FY10-12ii. We initiate with an ADD with a TP of Rs156.

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