>HOTELS & TOURISM (EDELWEISS)

■ 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 ‘SELL’ recommendation. Also featured in this report are Indian Hotels (BUY), Mahindra Holidays & Resorts India (SELL), Asian Hotels (NOT RATED), and TAJ GVK (NOT
RATED).

To read the full report: HOTELS & TOURISM