>INDIA HOTELS (INDIA HOTELS)

We upgrade our view on the India Hotels industry from Cautious to In-Line. We cite improvement in tourism trends and likely deferment of oncoming room supply, which would be positive for RevPAR trends. We believe that F2010 will be weak due to weaker RevPAR and hence, earnings for F2H10 will still look weak. However, a likely pickup in tourist arrivals in F2011 would help room rates and occupancy rates improve on a sequential basis, which could drive stock performance. We have now rolled forward our DCF models to F2011 as we believe F2H10 will be weak; however, investors should start focusing on earnings in F2011 and beyond
– when we expect a recovery to kick in.

Upgrading IHCL and Hotel Leela: We upgrade IHCL to Overweight (from Underweight). We believe an improvement in the sector outlook would help the company show better performance; coupled with an improvement in its international portfolio, earnings should recover strongly. We upgrade Hotel Leela to Equal-weight (from Underweight). We remain Underweight on EIH, mainly due to rich valuations.

Recovery Under Way

Balance sheet stress decreasing: The macro outlook has improved considerably and liquidity may not be as much a constraint as it was a year ago. Hence, balance sheet stress may continue to ease, which in our view would be positive for IHCL and Hotel Leela.

Valuations: We reiterate our belief that markets will start to discount longer-term earnings. On a 12-month forward P/B, IHCL is trading at 1.7x (close to its long-term average of 1.8x), Hotel Leela at 1.4x (against the long-term average of 1x) and EIH at 3.2x (against the long-term average of 2x). On our new PT of Rs 88, IHCL would be trading on a 12-month forward P/B of 2x, which we believe is reasonable against its long-term average of 1.8x. Also, a likely turnaround in international operations in F2012 could be a key trigger for the stock.

To read the full report: INDIA HOTELS