December 18, 2008 | Hospitality

Hotel Industry – Terror Impact

Recession, terrorism cloud on tourism…

Rashesh Shah Rashes.shah@icicidirect.com

The recent terror attacks in Mumbai have added to the woes of the hospitality industry that is already reeling under the impact of the global financial meltdown. The terror attacks at Taj and Oberoi will not only impact premium segment occupancy levels and average room rates (ARRs) in Mumbai but also have a negative impact in other parts of the country especially leisure tourist destinations like Goa, Kerala, Rajasthan, etc. A sharp decline of the rupee against most foreign currency should have geared up growth of foreign tourist arrivals in India, but the global financial crisis and rising terrorist activities have brought the entire tourism industry growth under a cloud.

Foreign tourist arrivals growth tapered:
Due to the terror attacks in Mumbai, Indian hotel industry has seen huge cancellations / postponement of room bookings by many foreign tourists in the past 15-20 days. Since it was an attack inside five star hotel premises and that too in South Mumbai (premium location), it has given a rise to security issues in India. Due to this we expect its negative impact to continue to stay for a longer period of time. This, coupled with the global financial crisis is expected to drive down the tourist arrival growth to negative growth trajectory by the end of FY09E.

Average Room rates (ARRs) and Occupancy levels to see huge correction:
We expect average occupancy levels across major cities to decline further by around 800-900 bps, i.e. from the current average of 65-66% to 57-58% levels. We expect leisure destinations to get affected more than business destinations. With increase in room supply of about 7-8% over the last year and a subdued future demand outlook, average room rates (ARR) are expected to decline further by 15-20% over the next six to eight months.

Shortage of premium segment room supply in South Mumbai:
The terror attacks have created a sudden shortage of room supply of about 1,450 rooms from a total of around 2,238 premium segment hotel rooms in South Mumbai. Since Mumbai is the main business hub of the country, business travellers will continue to visit the city though on a lower scale. Also, several countries like the US, UK, Netherlands and Canada have started toning down the warnings issued to their citizens against travel to India. This is expected to provide a short-term marginal benefit to hotels located in the north and central regions of the city, like Hotel Leela, ITC and other hotels located near the airport.

Exhibit 1: Revised Estimates
Company EIH Hotel Leela Viceroy Hotels Kamat Hotels Sales FY09E FY10E 1075.60 1264.12 492.92 126.27 143.27 544.27 244.76 164.36 EPS FY09E 3.28 2.23 1.47 13.06 FY10E 5.11 2.58 3.21 13.15 EV/EBITDA FY09E FY10E 17.39 12.39 12.45 16.16 8.63 11.51 11.00 5.12 P/E FY09E 24.70 11.66 19.73 3.37 FY10E 15.85 10.08 9.03 3.35 Revised Target price 81.00 26.00 29.00 44.00 Recomendation UNDER PERFORMER PERFORMER PERFORMER PERFORMER

Source: ICICIdirect.com Research

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00 58. In crore) 14. In the medium-term.238 premium segment hotel rooms in South Mumbai. ITC and other hotels located near the airport. the picture is still unclear as to when and up to what proportion of total loss including loss of revenues. While a major part of its Mumbai property will be opened for business from December 21 2008. the company will get from insurers. Out of four premium hotel properties.com Research Estimated loss of revenue* (Rs. the company will have to shell out all these extraordinary expenses from its own pocket.Impact of terror attack on companies under coverage – Direct Impact Closure of hotel property for renovation: East India Hotels (EIH) gets about 43-45% of its revenues from its 868-room property in Mumbai. is likely to remain closed till the first quarter of FY10. Sudden shortage of premium segment room supply in South Mumbai: The terror attacks have created a sudden shortage of room supply of about 1. This is expected to provide a short-term marginal benefit to hotels located in the north and central regions of the city. The Oberoi. these two properties are insured against such incidents to the tune of Rs 1.00 72. Though both properties are insured against terror attacks and loss of revenues. business travellers will continue to visit the city though on a lower scale. Netherlands and Canada have started toning down the warnings issued to their citizens against travel to India. meant for expansion to repairs and renovation: Apart from loss of revenues. Till that time. UK. While the 541 room Trident hotel is expected to open in the third week of December 2008. Exhibit 1: Estimated Loss of Revenue Hotel Trident Oberoi No of rooms 541 327 868 Source: Company. Since both these properties in Mumbai are major revenue contributors to EIH’s total revenue.500 crore. several countries like the US.450 rooms from a total of around 2. Though the terror attack has caused huge damage to its hotel properties especially Oberoi hotel. Trident (541 rooms) and Taj Hotels (new tower wing – 235 rooms) are expected to re-open by the end of December 2008. which has 327 rooms. Since Mumbai is the main business hub of the country. this will impact the company’s expansion plans and its future projects may get delayed by at least 8-12 months. Also. ICICIdirect. the company will have to grapple with a drastic decline in occupancy levels in FY09E and FY10E. 2|Page . bringing back these two properties to their erstwhile condition with fool proof security would be the top priority of the company. like Hotel Leela.00 Expected time to re-open Dec 08 End Q1FY10 Diversion of funds. The old tower of Hotel Taj (330 rooms) is expected to re-open after a year and Oberoi (327 rooms) would be opening up in Q1FY10. there would be a diversion of funds earlier meant for expansions to repairs and renovation.

We expect leisure destinations to get affected more than business destinations. Oct05) MonthlyGrowth Yearly Growth Terror attack on Taj & Oberoi (Nov 08) Source: Ministry of Tourism. We will see the full impact of terror attacks in Q4FY09.0% -30. the room booking cancellations/postponement process continues for around two to three months.Indirect Impact Decline in growth of foreign tourist arrivals (FTAs): India receives huge tourist inflows from the UK and US. Leisure tourist destinations like Goa. Australia. Due to the terror attacks in Mumbai. coupled with the global financial crisis. etc had issued travel advisory notes. This.0% Attack on Akshardham Temple (Sep 02) Attack on WTC (Sep 01) -40. ICICIdirect. many countries like the UK. With increase in room supply of about 7-8% over the last year and a subdued future demand outlook. The historical data shows that whenever such terror attacks happen. This has led to huge cancellations/postponements of room bookings by many foreign tourists to the tune of 35-40% in the last 1015 days. Kerala.0% Jan-98 -10.0% Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 -20. Exhibit 2: Growth in foreign tourist arrivals from January 1998 to November 2008 40.0% 0. could drive down the tourist arrival growth to negative growth trajectory by the end of FY09E.0% Global Financial Crisis 10.com Research Impact on average room rates and occupancy levels: We expect average occupancy levels across major cities to decline further by around 800-900 bps. i.0% Kargil War (May-July 99) 30. etc are expected to be impacted more than business destinations. since it was an attack inside five star hotel premises and that too in South Mumbai (premium location) we expect its negative impact to continue for a longer period than in the past. average room rates (ARR) are expected to decline further by 15-20% over the next six to eight months. Mumbai & Delhi (Sep05. from the current average of 65-66% to 57-58% levels. Jaipur.e. 3|Page . US.0% Bomb Blasts.0% Guj Earth quack (Jan 01) SARS(Nov02-July03) London Train Blasts (July 05) Mumbai Train Blasts (July 06) Attack on Parliament (Dec 01) Iraq war (Mar 03) 20. However. advising their citizens to not to visit India.

if the company comes out with any developments with respect to recoveries from insurance companies. the same is expected to improve in FY10 due to opening up of its new hotel property in BKC. but it needs to be seen how much of the total loss is expected to be recovered from insurance companies. We also expect a rise in other operating cost by around 15-18% on account of rise in security and other expenses.39 442.6% -34. At this price.11. At higher P/E multiple compared to other major hotel players. We will revise our earnings estimates further. Valuations We have revised our earning estimates downwards taking into consideration the post-terror impact and arrived at a target price of Rs 81 using the DCF methodology.11 6. East India Hotels (EIH) Particulars Sales EBITDA PAT EPS Operating margin Net profit margin • • • • 2008-09E New Old 1.60 274.30 128. We rate the stock as ‘UNDERPERFORMER’. Operating margins are expected to decline further by 780 bps in FY09 due to closure of Oberoi and Trident hotels and anticipated further decline in foreign tourist arrivals in the current winter season.7% % Change -10.Change of Estimates: We have revised our estimates for FY09 and FY10.27 340. EIH has insurance cover of Rs 750 crore against each property.80 376.6% -26.264.97 26.8% 16. the stock commands a premium over other large players on account of its brand value (Trident.405. location (with 51% of total rooms in Mumbai. We expect EIH to take a hit of at least Rs 47 crore in FY09E and Rs 25 crore in FY10E on account of loss of revenue due to closure of its two premium hotel properties (Oberoi and Trident) for repairs and renovation.075.6% 10. Oberoi.230.7% -780 bps -560 bps 2009-10E New Old 1.06 5.4%. (ITC Group) 14.97 224.90 3.0% -23.28 and at 15.1% 17.7x FY09E EPS of Rs 3. re-opening of Hotel Oberoi in Q1FY10 and some improvement in growth of foreign tourist arrivals.1% -28.36 195.28 5. The company has also taken loss of profit insurance cover.9% 31.7% -42.53% Sonata Investments Ltd.4% % Change -12.10 244. However. 4|Page . To that extent.60 1. Note The stock price has risen sharply to Rs 130 from a low of Rs 75 post the terror attack on account of promoter’s raising their stake and at the same time due to major bulk deals happening last week. etc).12 1. taking into consideration both the direct and indirect impact on the companies under our coverage.5% 14.95% LIC 6.8% 30. the stock contains an upside risk. the stock is available at a P/E of 24. 20% of total rooms in NCR) and steady revenue growth along with a strong management team.(ADAG) 1.7% -460 bps -360 bps • We expect average occupancy levels for FY09E to decline to 57-58% from last year’s average occupancy of 66-67% and average room rates are expected to decline further by around 10-15% in Q4FY09 across all major cities. As of 30/09/2008 Other major stake holder's % Held Russell Credit Ltd. the stock could move up further on account of the promoter’s group increasing their stake to more than 50% in six to eight months from the current 46.9% -42.68% Source: BSE.72 22.8x FY10E EPS of Rs 5. In the short to medium-term.

We also expect a rise in other operating cost by around 12-15% on account of a rise in security and other expenses.1% 20.8% -11.86 40.58. Concern One of the major concerns of the company is that it has a high debt-equity ratio of 2. Also. As far as business destinations are concerned.85 225.2 compared with other major hotel players.6% % Change -4.23 2. In contrast.0% 20.8% -280 bps -70 bps • • Hotel Leela derives 70% of its total revenues from its Mumbai and Bangalore properties.35 2.Hotel Leela (HOTLEE) Particulars Sales EBITDA PAT EPS Operating margin Net profit margin • • 2008-09E New Old 492. in the current scenario.92 524.6% -9. If we value the company by the net asset value (NAV) method then it commands a value of Rs 37 per share (based on 2005-06 hotel property prices).74 2. Valuations We expect some major delays in its expansions plans on account of the liquidity crunch. 5|Page .23 and at 10x FY10E EPS of Rs 2. while 30% of its total revenues come from its other two premium hotel properties in Goa and Kovalam.1% -10. At this price. thereby impacting its future revenues and profitability.58 2.76 110. the company would either have to refinance debt or sell some of its attractive properties. since all its properties are located at premium locations and command a high premium along with its brand value.8% -11.17 141.2% 43.53 125.29 246.0% -9.73 202. In case of that situation.9% -180 bps -140 bps 2009-10E New Old 544. the stock is available at a P/E of 11. Also. As a result.6x FY09E EPS of Rs 2. it becomes a good buy at this level with an investment horizon of 12-18 months. we do not expect its Bangalore property to have any major adverse impact on its occupancy levels on account of the terror attacks in Mumbai. its operating margins are expected to decline further by 180 bps in FY09 and by 280 bps in FY10E. we expect its Mumbai property to get some benefit of marginal increase in occupancy level due to shortage of hotel rooms in South Mumbai in the short-term to medium term.85 219.9% 21. In that case also. We believe Hotel Leela would find it difficult to pay its FCCBs liabilities through cash generated from operations.3% 43.1% -11.8% % Change -6.53 41. its hotel properties at Goa and Kovalam are expected see a sharp decline in average occupancy levels from 74% to 61% on a YoY basis. we have revised our earning estimates downwards and arrived at a target price of Rs 26 using the DCF methodology and rate the stock as ‘PERFORMER’.4% 21. its hotel properties in Goa and Kovalam are expected to see major decline in occupancy levels.40 128. Considering the same.27 571.

97 1.1% 6.79 6. in Q4FY09 and Q1FY10 we expect 20% and 18% decline in occupancy levels from our earlier estimated occupancy levels of 64% and 60%.40 37.1% 23.15 by 3.1% % Change 0.61 27.22 7.06 by 3.1% -8.4x and FY10E diluted EPS (before exceptional items) of Rs 13.41 16. respectively.38 36. Kamat Hotels (KAMHOT) Particulars Sales EBITDA PAT EPS Operating margin Net profit margin • 2008-09E New Old 143.8% 5.21 4. The target price discounts the FY09E diluted EPS (before exceptional items) of Rs 13. Gurgaon and Hyderabad.04 9. Bangalore. We value the company at 9x its revised FY10E EPS of Rs 3. However.04 5.0% Kindly refer our detailed report on Kamat Hotels named “Concall update” dated December 3 2008 that incorporates the post-terror impact. we do not expect any major decline in occupancy levels on a YoY basis on account of terror attacks in Mumbai.19 37. With a fall in inflation rate.0% 0. Valuation We have valued the company at Rs 44 using the DCF approach. We rate the stock as “PERFORMER”.27 143.59 16.61 27.00 35. Hyderabad being a business destination.40 5.9% % Change -4.7% % Change -2.27 53.38 36.0% 0.3% 16. 6|Page .47 1.3% -6.0% 0. However.4% -19.95 3.0% 0.9% 28.76 249.0% 0.34x. margins from its hotel business are expected to remain under pressure due to expected room supply outpacing room demand in cities like Hyderabad and Chennai.9% -22.0% -21. (Refer report dated December 3 2008).27 132.99 54. its operating and net profit margins are expected to decline further by 70 bps and 100 bps in FY09E. Vijaywada and 10 “Bread Talk” outlets in Mumbai.5% 6.8% -70 bps -110 bps 2009-10E New Old 244. it is trading at Rs 25-26 levels.21 per share (post terror impact) and arrive at a target price of Rs 29.55 9.41 16.3% 16.Viceroy Hotels (PALHEI) Particulars Sales EBITDA PAT EPS Operating margin Net profit margin • • 2008-09E New Old 126. Currently.8% -19.4% 6. we had downgraded the stock and arrived at a target price of Rs 36 with 11% downside. we expect some improvement in its operating margins from the F&B business.00 22.88 27.36 59.6% 4.0% 0. We also expect a rise in other operating cost by around 8-10% on account of a rise in security and other expenses. the company operates around nine restaurant outlets at Hyderabad.55 53.4% 37.16 13.8% -160 bps -120 bps • • • Viceroy Hotels currently operates at its Hyderabad location.0% % Change 0. The stock in recent times has fallen sharply.17 59.0% 0.0% 0. Currently.0% 0.0% 2009-10E New 164.0% Old 164.36 59.0% 0. As a result.7% 5. Valuations In our report dated November 17 2008.

Government initiatives: In order to provide some relief to the hotel sector and considering the forthcoming mega event “Commonwealth Games 2010” to be held in Delhi. 7|Page . The proposal includes abolition of 12. then it would be helpful for the Indian hospitality industry to become more competitive in terms of room tariffs compared to other South Asian nations. reduction in development charges for adding more rooms in existing hotels and convincing states to have a 4% uniform luxury tax across the country. if the government comes out with such relief measures. If these proposals come through. the government is considering a slew of measures.5% service tax on tour packages. We will revisit our earnings estimates for FY10E.

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