Manoj Bahety, CFA +91 22 6623 3362 manoj.bahety@edelcap.

com

Manav Vijay +91 22 4063 5413 manav.vijay@edelcap.com

Edelweiss Securities Limited

Hotels & Tourism

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

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Edelweiss Securities Limited

Hotels & Tourism

Contents
At a glance ................................................................................................................. 3 Indian Travel & Tourism Industry: Overview ................................................................... 4 Demand-Supply Economics Favourable .......................................................................... 5 Improving ARRs and ORs during 2010-12..................................................................... 20 Global Player’s Indian Venture .................................................................................... 22 Vacation Ownership ................................................................................................... 23 Global Travel & Tourism ............................................................................................. 26 Key Trends ............................................................................................................... 28 Business Analysis ...................................................................................................... 30 Valuation Methodology ............................................................................................... 33 Key Risks ................................................................................................................. 35 Challenges ............................................................................................................... 36 Annexure I ............................................................................................................... 37 Annexure II .............................................................................................................. 38 Annexure III ............................................................................................................. 39

Companies Cox & Kings ............................................................................................................ 41 EIH .......................................................................................................................... 53 Hotel Leelaventure .................................................................................................... 67 Indian Hotels Company .............................................................................................. 81 Mahindra Holidays & Resorts India............................................................................... 87 Asian Hotels ............................................................................................................. 95 Taj GVK Hotels & Resorts ........................................................................................... 99

2

Edelweiss Securities Limited

777 Not rated FY07 4.877 4.205 3.9 38 6.3 13.382 12.615 3.1 13.275 2.9 (18) (42) (78) (78) 11.026 5.203 600 1.4 8.8 48.205 381 1.297 1.6 26.0 36.0 10 16 32 13.9 22.4 Mahindra Holidays 540 Asian Hotels 560 Edelweiss Securities Limited Taj GVK 157 3 .260 2.3 (7) (16) (25) (24) 12.1 36 8.522 1.235 5.8 44 85 (299) 299 32 19 72 (39) (54) (8) (9) 44 12 (97) 180 442 111 112 98 (5) 41 53 43 61 45 (53) 39 9 (25) 9.9 21.2 8.777 FY08 FY09 FY10E FY11E FY12E 74.143 1.7 14.7 19.7 FY08 FY09 9.9 17 (8) (8) 28 25 54 56 17 30 42 34 26 24 25 29 6 (8) Buy FY07 25.838 Not rated FY07 5.9 Hotel Leelaventure 50 377.5 9.9 50.4 30.415 2.557 1.9 (INR) (mn nos) Hotels & Tourism At a Glance Cox & Kings 488 East India Hotels 124 392.0 31 44 64 65 5.413 796 425 39.173 1.728 5.6 22.571 3.649 26.2 13.6 40.930 1.584 2.6 8.9 24.152 1.185 FY08 FY09 FY10E FY11E FY12E 84 FY08 FY09 FY10E FY11E FY12E 22.6 49.750 1.821 730 426 6.1 30.051 415 0.4 11.2 19 19 26 26 10.5 14.5 10.855 2.9 16.1 6.066 4.0 31.947 2.9 36.326 942 643 704 528 45.522 3.707 6.662 915 1.200 8.684 1.4 18.6 131.6 28.0 58 66 41 47 12.6 5.975 8.5 7.4 24.041 1.620 2.063 7.312 20.549 4.666 4.769 8.701 4.3 32.3 17.5 9.8 Indian Hotels 103 723.7 19 32 48 43 Hold FY07 10.956 5.8 13.800 5.4 22.2 29.485 3.417 371 0.1 28.135 6.869 1.056 148 0.8 165.196 1.5 11.762 2.381 1.156 1.920 3.5 52.7 14.9 38.5 4.7 6.545 1.9 15.1 58.038 348 0.3 21 20 20 15.442 840 798 1.547 2.8 89.2 14.8 23.574 12.7 10.442 2.221 1.3 11.995 1.769 4.4 17.1 22.9 24.421 1.168 3.1 27.593 6.214 628 10.999 4.479 3.4 14.6 11.6 8.1 54.6 72.8 FY08 FY09 62.8 88 82 115 43 10.5 Reco Year Revenue EBITDA Net profit EPS Revenue EBITDA Net profit EPS EV/EBITDA PE Growth (%) Valuations (X) Price Shares O/S Company 62.7 25.6 59.2 10.450 2.1 7.830 2.9 462.6 28.1 (11) (23) 4.3 28 27 33 33 18.3 19.0 54 83 38 41 24 (43) (0) 69 47 81 81 6 38 46 41 45 24 (4) 36 6 (16) 4.Financials (INR mn) Mkt cap (INR mn) 30.5 97.745 31.134 10.4 10.252 3.3 15.605 2.4 52.9 27.9 24 19 76 (39) (54) (8) (9) 50 11 (99) 520 577 116 112 98 (5) 52 53 43 61 45 (29) 39 9 (25) Reduce FY07 4.146 2.7 53 98 95 175 25.223 2.7 9.320 1.6 16.209 1.857 FY08 FY09 FY10E FY11E FY12E 18.6 3.708 1.463 1.0 2.245 5.772 1.426 Reduce FY07 2.1 16.6 13.4 (12) (32) 5.097 4.112 13.0 13.9 28 29 55 57 13.8 1.1 Hold FY07 970 402 297 4.2 20.705 FY08 FY09 FY10E FY11E FY12E 48.6 5.

as the direct industry contribution.Kingfisher Airlines . This will include INR 1.Cox & Kings Source: WTTC.ITC . the biggest contributor.Paramount Airways Tour operators (INR 150 bn) . only hotels. airlines (INR 350 bn in 2008).East India Hotels . and tours and travels industry in detail. and facilitation systems environemnt.Mahindra Holidays Airlines (INR 400 bn) .Asian Hotels . a CAGR of 12%. Chart 1: Indian T&T industry size Other exports 3% Visitor exports 8% Capital investments 24% Personal travel & tourism 55% Government expenditures 1% Business travel 9% Source: WTTC. WTTC estimates direct industry GDP in 2020 to increase to INR 6. Edelweiss research Personal T&T is expected to contribute 55% to the total industry. In this report.970 bn (USD 42 bn). Hotels (INR 600 bn in 2007).1% of total GDP. surface transport. Industry.533 bn (USD 118 bn) of economic activity. CRISIL.1 : Major players in the Indian T&T industry Indian T& T industry (INR 1970 bn) Hotels (INR 650 bn) . according to the World Travel & Tourism Council (WTTC). basic infrastructure. India’s T&T industry is expected to generate INR 5.Air India & Indian Airlines .Hotels & Tourism Indian Travel & Tourism Industry: Overview USD 42 bn is the estimated size of direct Indian tourism sector In 2010. The unorganised sector dominates Indian T&T. Personal T&T.Spicejet .Indigo .Kouni . followed by capital investments at 24%. and car rental (INR 10 bn in 2007) are some of the biggest direct contributors to the industry.Jet Airways .Hotel Leela . airlines and tour operators are part of the organised sector. Fig. equivalent to 3. we have discussed the Indian hotel industry.211 bn.GoAir . airlines.Indian Hotels . vacation ownership industry. is expected to grow 13% over the same period. Edelweiss research 4 Edelweiss Securities Limited .Thomas Cook . Some related sectors include hotels.Bharat Hotels .

guides to above 6 mn FTAs in 2010. Continuous tourist growth in India is attributable to factors like media campaigns ‘Incredible India’ organised by GoI. Limited supply of rooms. The Ministry of Tourism (MoT) aims to achieve 10 mn (versus 5.2% CAGR. the highest in the past three years. Foreign exchange earning from T&T has posted 13% CAGR in 1996-2008.0 8.0) Revenue (INR bn) 720 480 240 0 2009-10E 2010-11E Hospitality sector size FTAs growth Source: CRISIL. is expected to help hotels to post better performance. along with India’s emergence as one of the fastest economies. one of the highest in the world. Robust GDP growth will aid the business and leisure travel. Provisional estimates of December 2009 for FTA is 0. Chart 2: Rise in FTAs to aid growth in organised hospitality 1200 960 32. is likely to drive its business tourist traffic substantially. Healthy growth in both international and domestic tourists.1 mn in 2009) Indian tourism set for major growth foreign tourist arrivals (FTAs) and 675 mn (versus 563 mn in 2008) domestic tourists in 2010. we expect the share of hotel industry to increase to 22% in FY12 against 19% in FY09.27% in 2009) when global T&T is projected to grow at 4% according to WTCC.9% in 2018 (1.0 16. the hotels segment is likely to grow the fastest.0 24.0 (8. We estimate India’s contribution to the worldwide T&T growth to rise to 1. followed by increased ARRs.Hotels & Tourism Demand-Supply Economics Favourable Tourism demand on the rise in India Till 2019. Edelweiss Securities Limited 2011-12E 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 5 (%) . Recent jump in ORs across major cities. WTTC estimates India’s T&T demand to post 8.0 0. high level of service standards in the country and great regional diversity. Ministry of Tourism.65 mn. gives us confidence that the industry is set for a major business upturn. along with healthy demand. Edelweiss research Within T&T. implying a positive outlook for the Indian hospitality industry. With an expected 10% jump in ARRs in FY11 and FY12.

2010 should be a healthy year for the industry if FTA growth for December 2009 is any indicator. ICC World Cup Cricket. Edelweiss research FTAs on the rise. a record high in the past 36 Upcoming sports events to aid FTA growth months. However. Ministry of Tourism.0 20. Also.0 Revenue (INR) 120 60 0 10. After a -3. target was set in 2008).0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008P Foreign tourists % Growth Source: Ministry of Tourism. Events like 26/11. similar to the 2003-07 levels.0 8.6 mn in December 2009 India has had positive FTA growth in 11 out of the past 14 years.0 0. Though MoT target of achieving 10 mn foreign tourists in 2010 looks unlikely (in view of the current trends. probability of a substantial jump over 2009 is certainly not ruled out.0 . past 0.4% growth in 2009.6 mn in December 2009.Hotels & Tourism Chart 3: Increased ARRs and tourist influx to aid hotel industry 300 240 25. mn) 3. 6 Edelweiss Securities Limited 2009P (%) (%) 180 15. Arrivals crossed 0.0 (8. We also expect foreign exchange earnings to grow much faster than the overall FTAs growth as overall fee from tourism earned in 2003-08 grew 25% every year. swine flu and travel warnings are certainly cause for certain.0 5.8 32. Edelweiss research We estimate FTAs in India to grow 15% during 2011 and 2012. upcoming events like Commonwealth Games.2 0. GoI’s sincere efforts at promoting India as a leading travel destination are likely to grow FTAs.0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10E 2010-11E Total mkt size Hotel industry as a % of total T&T demand Source: CRISIL. World Cup Hockey and Formula 1 are certain to attract a lot of sports fans from across the world to India.0 16.0 0.4 1. going forward.0 24.0 4.6 2. Chart 4: FTAs to rise substantially 2011-12E 6.0) (FTA.

Hence.3% CAGR since 1996.0 12. driven by demographic and lifestyle changes in India. Edelweiss Securities Limited 2008P 7 (%) .0 8. domestic tourism is expected to touch 675 mn by 2010. Chart 5: Domestic tourism is expected to do well 600 480 20. mn) 360 240 120 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Domestic tourists % Growth Source: Ministry of Tourism. Further. the emergence of low-cost carriers expanded the overall airline Increasing airlines traffic translates into higher hotel business traffic by 17% CAGR. 15% Y-oY growth in the first three quarters of FY09-10 shows that demand is coming back with improved business confidence. Domestic travel in 2008 at all time high With increasing purchasing power. what has helped improve India’s image on the world tourism map is its improving infrastructure that has connected the remotest of the places within the country. the highest ever number achieved by the industry.0 0.0 4. Explosive growth in the telecom industry and low-cost carriers has proved that at the right price.0 16. We expect the economy segment to register faster growth at 15-20% CAGR over 2010-12. rising job opportunities and comfortable GDP/saving ratio. According to MoT. the burgeoning Indian middle class is ready to spend. In December 2009. more and more Indians are taking holidays.12.0 (FTA. domestic air traffic was 45 mn. low-cost airlines. Domestic travellers in 2008 were at all Expanding economy is driving the growth of domestic tourist time high of 563 mn . highway development and better power situation have buoyed India’s tourism prospects. average length of stay yield more business During 1999 and 2008. After a decline of 11% during 2008-09. Increasing ORs and better ARRs of Q3FY09-10 across major business and leisure destinations indicate that corporates are raising their travel budgets.Hotels & Tourism Moreover. we believe there is likely to be considerable demand for the three star and four star category hotels. Edelweiss research Given the value proposition seeking habit of Indians. Increased airline traffic. we believe Indian Hotels’ (IHCL) ‘Ginger’ budget hotel is a step in the right direction which should yield good results in the long run.

Supply overhang unfounded In 2009. The average stay of international tourists increased from 3. which led many companies to announce their expansion/start up plans.0 0.6% CAGR.4 days. new room additions will not be a cause for concern. During the same period. it has. while leisure guests were seen staying around for 2.0) (Passengers.a.6 days. of the total 100. A large supply of rooms has been pushed back due to the global economic slowdown. lacs) 300 200 100 0 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Passengers carried by domestic airlines % growth Source: DGCA. Edelweiss research Note: * 9mFY09-10 data annualised Another positive trend is the increasing average length of stay of domestic and international tourists.0 14.0 28. CRISIL Supply concerns are overdone estimated addition of almost 15.4 days to 2. till 2019. however. Many projects announced by real estate developers are still on the drawing board due to the reasons mentioned above.0 42. 8 Edelweiss Securities Limited 2009-10* (%) . given the current demand-supply mismatch. Similarly.000 five star rooms in 2010 and 2011. In 2007. demand for these rooms is expected to increase by 12. However. while that of domestic tourists stood at 2.0 to 3.000 announced five star deluxe. only 60% is under active development with ~47% under the luxury and first class category.4 days during 2005-06.Hotels & Tourism Chart 6: Increasing airline traffic to translate into more business for hotels 500 400 56. regulatory and construction delays.2% p. we believe. high real estate prices and lack of easy bank credit. As per a report by HVS.200 rooms for the specified period. now reduced this to 6. five star and four star category rooms.6 days. there was a marked increase in the length of stay of business guests from 2.0 (14. WTTC had estimated the T&T demand in India to grow at 8.

5 20.683 1. ORs also improved during the period to ~70% from 63%. Limited supply of premium category rooms during FY04-08 had led to ~50% rise in ARRs during the period.2 168.776 rooms) and Bengaluru (6.9 22.3 415.386 8.2 28.0 60.7 149.0 25. occupancies in excess of 70% are considered to be above normal as only five business days are used for calculations.0 7.000 9.884 3.000 18.0 35. Delhi and Bengaluru to witness the largest addition of rooms addition of ~32.6 2.0 25.2 14.0 31.1 15. Edelweiss research Edelweiss Securities Limited 9 (%) .4 33.948 1. For business hotels.357 4.0 67.4 19.2 39 29 34 32 30 42 21 27 28 26 29 21 27 75.0 52.1 19.7 30.1 199.8 11.0 16.2 29.0 62.0 58.307 8. Ahmadabad (271%) and Chandigarh (229%) could see the largest increase in percentage terms.8 17. ORs of more than 70% witnessed by the hotel industry during FY05-08 is indicative of an even better number for the next few years as business activity in India is rising.771 rooms).0 71.459 4.8 29.006 48.8 194.0 73.1 11.9 213.2 23.3 13.0 0.7 29.1 12.054 20.6 48.5 192.2 382.3 22. Delhi (8. Chart 7: Increased demand with limited supply to push ORs higher till FY12E 45.025 13.7 18.8 16.0 ORs (Rooms) Source: CRISIL.2 8.0 42.0 32.2 16.3 277. more than 85% is likely to get filled which will push ORs to 65% in FY11E and 70% in FY12E.0 48.5 4.1 16.2 11.3 24.4 0.000 36.0 8.889 351 3.254 rooms) are expected to witness the largest absolute addition.373 7.1 24.625 2.8 40.0 55.2 10.5 293. CRISIL expects Mumbai.6 166.560 2. whereas Pune (276%).5 36.2 19.178 5.419 800 3.4 7.0 64.475 Proposed supply 400 3.115 Proposed supply Increase Active Midover five development of Luxury First market Budget Extended years (%) supply (%) (%) class (%) (%) (%) stay (%) 28.3 36.945 16.0 60.761 1.058 10.0 53. Edelweiss research Mumbai (9.9 Source: HVS. Of the expected addition of almost 10.3 2.518 12.1 16.0 53.0 1.025 94.2 75.000 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Room availability Room demand 80.0 31.000 five star hotel rooms in FY10-12.795 2.0 77.Hotels & Tourism Table 1: Distribution of existing and proposed branded hotels by major cities Existing supply Agra Ahmedabad Bengaluru Chandigarh Chennai Delhi (NCR) Goa Hyderabad Jaipur Kolkata Mumbai Pune Other cities Total 1.0 73.4 530.000 rooms in the next five years.000 27.784 1.

0 FY04 FY05 ARRs FY06 FY07 FY08 FY09 FY10E FY11E FY12E ORs Source: CRISIL.000 11. Chart 8: Strong ORs till FY12E – Limited supply and robust demand 10.000 100. Considering the expected demand. In our view. we expect total addition of 7000-8000 rooms in the period. considering the supply of hotels in FY11E and FY12E. Chart 9: Strong ARRs till FY12 14. after rising at 22% CAGR during FY04-09. Including four star rooms. though we believe the actual rise could be much higher.000 2. we expect the existing room count to rise 60%.0 FY04 FY05 FY06 Supply FY07 FY08 FY09 FY10E FY11E FY12E Demand ORs Source: CRISIL. Edelweiss research (Rooms) 6.000 rooms in the next Upcoming international sports events to hold the demand high five years.0 20. we believe the new supply post FY12E to come down for a while as the market will take time to expand.000 4.400 100.0 20.0 60.0 0.0 80.000 8.0 40. We expect ORs to remain strong at 75% in FY11E and decline to 70% in FY12E post the Commonwealth Games.0 80.0 0.Hotels & Tourism Supply scenario in major markets NCR: Commonwealth Games and ICC Cricket World Cup key triggers To serve the anticipated demand of hotel rooms due to the upcoming Commonwealth Games in October 2010 and ICC World Cup in Q4FY11. are expected to fall 15% in FY10. we anticipate a conservative 15% increase in ARRs ARRs to remain firm in anticipation of high demand during FY11 and FY12.600 2.800 0 RevPAR 10 Edelweiss Securities Limited (%) (%) . Edelweiss research (INR) 5.0 60.000 to ~11.0 40. during FY10-11.000 0 ARRs.200 8. supply in the premium category is expected to rise 20% in the National Capital Region (NCR). from 7.

0 20.300 in the premium category.000 8.5 FY05 Others Tour Group 5.9 FY06 Leisure Traveller 4.0 0.0 80.7 FY07 Business Traveller 1.0 14.6 16 80.5 17. In 9mFY10.3 15. On the long-term basis. Edelweiss research Edelweiss Securities Limited 11 (%) .8 13. Chart 11: Limited supply favourable for ORs 10. the city achieved ORs of 59%. Indian and foreign. the current mix may hold. attracts all kinds of travellers.5 FY08 Airline crew 54.0 20.0 (Rooms) Source: CRISIL.000 6. Considering ORs of above 70% between FY04 and FY08. we are confident of our FY11 and FY12 estimates.Hotels & Tourism Delhi. followed by 70% in FY11E. considering the upcoming games.7 5. business and leisure. and 70% in FY12E. Nearly 5.000 4.5 (%) 40.0 40.0 0. In FY08. High land cost is the primary cause behind lesser addition of lower category rooms in the city.000.0 12.000 2.000 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E ORs Supply Demand 100.6 50.2 12. Chart 10: Business and leisure travellers form the majority 100. business and leisure travellers were almost 80% of the total travellers.5 17. being the political and cultural capital of India.2 12.2 Source: CRISIL.0 60.5 52 63. including four star rooms). We expect the percentage of leisure travellers to increase in the short term. We expect ORs of 60% in FY10E.0 60.4 13. taking the total number of rooms to 9.4 10. Edelweiss research Mumbai: Strong economic revival to aid growth Supply in Mumbai is likely to rise 33% between FY10E and FY12E.500 premium category Strong economy revival to boost the business tourism rooms are expected to become operational in the next five years (10.0 6.

0 FY04 FY05 ARRs FY06 FY07 FY08 FY09 FY10E FY11E FY12E ORs Source: CRISIL. Emergence of Bandra Kurla Complex (BKC) as an alternative business destination is expected to shift a lot of business traffic over a period of time to North Mumbai from South Mumbai.5 58.8 11.800 0 RevPAR In Mumbai. Owing to shortage of large vacant land parcels in South Mumbai.6 17.000 11. but believe the proportion of business travellers will rise (considering India is expected to be one of the fastest growing economies in the world for many years). IT/ITeS and diamond.9 5. Strong economic revival.5 FY06 Leisure Traveller 8.7 56.1 FY05 Others Tour Group 6. Chart 12: ARRs to firm FY10E onwards 14. We expect ARRs to increase 15% in FY11 and FY12.9 3.400 100.0 20.3 13.0 40. demand is equally divided among domestic and foreign travellers. though business travellers constitute majority of the demand.5 FY07 Business Traveller 4.0 0.600 2. gives us confidence to expect better ARRs in future. Owing to demand-supply mismatch. along with better prospects of sectors like banking.Hotels & Tourism Limited supply in South Mumbai to keep ARRs firm Till FY13. Going forward. Shangrila (414 rooms) is the only addition expected in South Mumbai. Edelweiss research 12 Edelweiss Securities Limited (%) .0 80. North Mumbai is expected to witness the majority addition.7 8.7 80 5. we expect this mix to remain intact. Chart 13: Business and political travellers drive demand in Mumbai 100 13.200 8.9 56.5 20 6.6 19.1 25 3. ARRs increased 20% CAGR during FY04-09. after declining 20% in FY10E.6 FY08 Airline crew 0 Source: CRISIL.0 60. financial services.5 9. Edelweiss research (INR) 5.6 60 (%) 40 64.

Chart 15: Increase in ARRs till FY12E due to back-ended supply 9. 2.0 60. with its emergence as the main ITes center.0 60.0 0.Hotels & Tourism Chennai: IT and auto sectors to keep ARRs firm Chennai is expected to witness 25% rise in supply between FY10E and FY12E.0 80.800 0 RevPAR Chennai.0 40. and Ashok Leyland. Chennai’s booming manufacturing and IT sectors provide it the essential impetus for economic growth.600 1.500. Edelweiss research (INR) 3. Chennai’s prospects look strong.200 600 0 FY04 FY05 Supply FY06 FY07 FY08 FY09 FY10E FY11E FY12E ORs Demand 100. however. Strong IT and Auto sector revival to keep demand high typically skewed towards the mid market (three and four star hotels) segment.0 (Rooms) Source: CRISIL.800 1.0 80. We expect ORs of 60% in FY10E. with the same accounting for 69% of the total hotel rooms. With increase in demand from IT/ITeS and auto majors like Ford. followed by 65% in FY11E and 70% in FY12E.0 20.100 premium category rooms are expected to become operational in the next five years (3.0 FY04 FY05 ARRs FY06 FY07 FY08 FY09 FY10E FY11E FY12E ORs Source: CRISIL. Further. taking the total number of rooms to 2. including four star rooms). The city is.400 1.200 5. Chart 14: Outlook healthy for ORs 3. TVS. Hyundai.0 20. business travellers form two-third of the total travelers.0 0.615 in the premium category. being one of the main metros. the proportion of foreigners has Edelweiss Securities Limited 13 (%) (%) . we expect a -12% decline in FY10 Back-ended supply to keep ARRs firm followed by increase of 10% in FY11E and FY12E. Edelweiss research After 19% CAGR increase in ARRs over FY04-09.0 40.400 100.000 7.000 2.

0 5. Edelweiss research (Rooms) 960 640 320 0 Demand Kolkata is expected to witness the least decline in ARRs of just 5% in FY10E due to consistent rise in demand in the past few years and very limited supply.400 in the premium category.0 11. Edelweiss research Kolkata: Limited supply to keep ARRs firm Supply in Kolkata is expected to rise 12% between FY10E and FY12E. Total premium category rooms expected to become operational in the next five years are 1. we expect 10% increase in ARRs in FY11E and FY12E.7 10.1 8.2 8. As Chennai is also emerging as a hub for almost all auto majors.500 (2.0 64. Chart 16: Business travellers to continue to form the majority 100.2 13.0 7.0 0.0 16.0 20.0 48.1 62.0 9.4 9. including four star rooms).3 80.5 FY08 Airline crew Source: CRISIL.Hotels & Tourism been rising consistently. Taking advantage of the demand-supply mismatch that is likely to continue till FY12E.1 FY07 Business Traveller 9.0 0.0 Others 65.1 FY06 Leisure Traveller 10.280 80.0 32.7 67.5 60.400.3 9.6 7. we expect this trend to continue.4 7.3 FY05 Tour Group 7.600 1. taking the total Limited supply with consistent demand growth to keep ORs high number of rooms to 1. Chart 17: Healthy ORs till FY12E due to limited supply 1. going forward.0 FY04 FY05 Supply FY06 FY07 FY08 FY09 FY10E FY11E FY12E ORs Source: CRISIL.0 (%) 40. 14 Edelweiss Securities Limited (%) .1 59.4 12.

Edelweiss research Bengaluru: ARRs under pressure due to huge supply Bengaluru is expected to witness 50% increased supply between FY10E and FY12E. Chart 19: Business travellers to continue to form the majority 100. form the majority demand. research and development and engineering sectors.7 4.7 66. ORs were more than 75%.8 65. ITes.0 (%) 40.0 4.0 FY04 FY05 ARRs FY06 FY07 FY08 FY09 FY10E FY11E FY12E ORs Source: CRISIL. better rates going ahead 80.0 48.0 6.643 (6. driven by IT.600 0 RevPAR Kolkata being primarily a financial hub.1 FY08 Airline crew 0.8 15.6 80.3 3.200 1.0 0.3 8.9 8.0 7.5 FY07 Business Traveller 13.5 10. Total premium category rooms expected to become operational in the next five years are 4. We expect ORs to remain constant at 65% till FY11E and then increase to 70% in FY12E. Strong supply to outpace the subdued demand taking total premium rooms to 3.0 32.000 including four star rooms).1 20. Edelweiss Securities Limited 15 (%) .7 FY06 Leisure Traveller 11.0 16. banking.8 8.8 FY05 Others Tour Group 1. along with airline crew.2 8.800 3. Edelweiss research (INR) 4.5 8. We expect this trend to continue in the near future.3 62.0 75.400 Witnessed strong ARRs during 2010. business travellers.725. Owing to an unprecedented increase in demand during FY04-09.0 64.2 8.2 60.000 6.0 Source: CRISIL.Hotels & Tourism Chart 18: Strong ARRs till FY12E 8.

600 90. We expect this trend to continue in future. 16 Edelweiss Securities Limited (%) (%) .400 3.800 9.0 36.0 0.400 1.0 72.0 18. Edelweiss research We expect ARRs to rise 5% in FY11E and FY12E. after declining ~28% in FY10E (decline due to the IT slowdown and new supply of rooms). business and foreign travellers constitute more than three-fourth of the total demand.0 0.200 0 RevPAR With the emergence of Bengaluru as India’s Silicon Valley.0 (Rooms) Source: CRISIL.000 3.600 800 0 FY04 FY05 Supply FY06 FY07 FY08 FY09 FY10E FY11E FY12E ORs Demand 90.0 54.0 FY04 FY05 ARRs FY06 FY07 FY08 FY09 FY10E FY11E FY12E ORs Source: CRISIL.0 72.0 36.0 54.200 2.0 18. Chart 21: ARRs to firm FY11E onwards 16.000 12.Hotels & Tourism Chart 20: ORs to firm post FY12E 4. Edelweiss research ARRs to witness growth only post FY11 (INR) 6.

1 7 1.4 13. Conferencing facilities to drive the growth in demand taking the total number of rooms to 2.0 20.0 36.0 0. Edelweiss research Hyderabad: Conferencing the next big trend Hyderabad is expected to witness 45% increased room supply between FY10E and FY12E.4 1.200 including four star rooms). Chart 23: Demand to catch up with supply post FY10E 3. going forward. after hitting 55% in FY10E.0 (Rooms) Source: CRISIL.000 2.7 FY08 Airline crew Source: CRISIL.800 in the premium category. We expect slight improvement in ARRs FY11E onwards.5 4.5 FY05 Tour Group 8.500 (4.0 72. Edelweiss research We believe. ORs and ARRs are poised to improve. Improved infrastructure already shows the efforts put in by the state government to make Hyderabad a leading business city in India.0 54. Edelweiss Securities Limited 17 (%) .0 0. With likelihood of Hyderabad becoming a major conference city in the South and much better connectivity to the new airport. Number of premium category rooms expected to become operational in next five years is 2.2 11.4 FY07 Business Traveller 6. albeit gradually.5 2.800 1.9 2.4 5. the Hyderabad hotel industry will shape up with the number of conferences happening there.0 (%) 40.0 10.3 FY06 Leisure Traveller 5.5 60.0 5.1 76.1 78.5 4.0 18.6 80.Hotels & Tourism Chart 22: IT/ITes business travellers to continue to form the majority 100.0 Others 76 69.9 9.200 600 0 FY04 FY05 Supply FY06 FY07 FY08 FY09 FY10E FY11E FY12E ORs Demand 90. We expect ORs to improve FY11E onwards.400 1.

6 20.0 0.200 5.0 18.0 12.4 7.000 Strong demand to help ARRs to improve post FY10 90.0 60.4 15.7 62 0. We expect this trend to continue in future.600 1.5 6 60.4 FY06 Leisure Traveller 6 FY07 Business Traveller 5. Edelweiss research 18 Edelweiss Securities Limited (%) .400 (INR) 3.Hotels & Tourism Chart 24: Gradual improvement in ARRs FY10E onwards 9. Chart 25: Proportion of business travellers to rise 100.0 10.5 (%) 40.0 54.0 72.4 58. Edelweiss research 7.0 36.0 0.0 FY04 FY05 ARRs FY06 FY07 FY08 FY09 FY10E FY11E FY12E ORs Source: CRISIL.3 12.5 FY05 Tour Group 68.0 Others 1.0 11 8 13.800 0 RevPAR Proportion of business travellers and airline crew has been going up consistently.8 28. considering the way Hyderabad has come up on the world IT map.8 3.2 8 80.5 FY08 Airline crew Source: CRISIL.

Recent trends show increased demand for hotel rooms in Goa all year round. ITeS and BPO industries. Including four star hotels. ARRs are expected to fall 25% in Long-term positive outlook on demandsupply and ARRs on many Indian cities FY10E and ORs to sub 50% levels. which will eventually drive growth in its hospitality industry. the total supply expected in the next five years is 2.000 rooms over the next five years. ~1. In the premium category.Hotels & Tourism Outlook on other major cities Pune: We expect Pune to add 4. FY04 onwards.000 rooms are expected to come up in the next five years. Tough real estate laws are to be blamed for the slow development of hotels across the city. This is also evident from the fact that ORs. reducing the impact of seasonality on the local hotel market. Likelihood of excess supply in the city is certain to keep the pressure on ORs and ARRs in FY11E and FY12E. IT. taking the total supply close to 3. as we expect domestic travellers to replace the gap left by foreign travellers to some extent. have been moving up consistently.900 rooms. Edelweiss Securities Limited 19 . Goa: The city is expected to register 30% jump in supply till FY12E. Pune has become highly popular because of its biotechnology. pharmaceutical. growing more than 250%. Owing to IT slowdown and the swine flu scare.178 rooms. We expect Goa to witness continuous rise in ARRs during FY11-12E.

We believe that the demand-supply mismatch. 20 Edelweiss Securities Limited . Global economic downturn during FY09 impacted the ORs. Edelweiss research CRISIL estimates 44% of the total new supply coming onstream during FY10-15 to become operational only in FY15. we expect strong demand across segments. reducing them to 64% from 72% in FY08 with flat ARRs.6 0.3 0.Hotels & Tourism Improving ARRs and ORs During 2010-12 During FY11E and FY12E. The 26/11 Mumbai attack and swine flu fever in FY10 severely impacted the already weak numbers. In FY04-08. leaving the demand-supply mismatch favourable till FY12-13.0 Jan Feb 2006 Mar Apr May 2007 Jun Jul Aug 2008 Sep Oct Nov 2009 Dec (mns) Source: CRISIL.1 0. Ministry of tourism. 32% increase in room demand outpaced 21% increase in Improvement in all India ARRs and ORs till FY12 supply. coupled with slow development of planned projects. Improvement in the reported data of past few months and positive body language of the industry players give us confidence that worst for the industry is behind. We see geographically concentrated players at a relatively higher risk against those with a wider footprint. With an increase in the total number of travellers.7 0. we expect ARRs to move up 13% and ORs to improve to 65% and 70% respectively. ARRs tumbled 25% and ORs reduced to just 53%. resulting in 132% increase in ARRs and more than 70% ORs during the same period. In H1FY10. would be a positive for the hotel industry in the medium term.4 0. Chart 26: High seasonality in tourist arrivals 0.

Hotels & Tourism Chart 27: Scenario post FY10 looks promising 12.000 9.800 2.0 18.600 7.0 72.0 0.0 54.400 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Occupancy rate ARR Rev PAR 90.0 (INR) Source: CRISIL.0 36.200 4. Edelweiss research Edelweiss Securities Limited 21 (%) .

Table 2: Top hospitality chains entering India S. Courtyard US PE fund Emaar-MGF DLF Licensee ITC Phoenix Group Bird Group With the global economy now reviving. Shangri La Intercontinental. Hilton Garden Inn. but service standards of hotels will also rise substantially. Park Inn. they will also increase the size of the market. have announced plans of entering Indian shores either by tying up with an existing domestic hotel chain or with a real estate player and managing them. Homewood Suites Best Western Luxury Collection. Carlson recently signed a Memorandum of Understanding (MoU) to manage a 160key five star deluxe hotel in Gurgaon. No. Holiday Inn Four Seasons Hilton. Aloft Comfort Inn. As 100% FDI is permitted in hotels and tourism through the automatic route. has signed four management contracts for the upcoming hotels there. Country Inn Ritz Carlton. not only ARRs in India will increase over a period of time.Hotels & Tourism Global Players’ Indian Venture With the growing economy and increasing FDI. international hotel companies are revisiting their India plans and are signing deals with realty players for future developments in the country. but in the long run. Undoubtedly. several top international hotel chains. including the likes of Marriott. 22 Edelweiss Securities Limited . international chains will intensify competition for the leading Indian hotel chains like IHCL. there are no obstacles for these companies to launch operations. Also. Group Brand 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Claridges Wyndham Worlwide Le Meridian Carlson Hospitality Marriott International Accor Hilton Corporation Best Western Starwood Hotels Choice Berggruen Hotels Hampshire Hotels Four Seasons Hotels Global Hyatt Shangri la Intercontinental HG Golden Tulip Hospitality Dusit Hotels Meuse Hotels Traders Hotel. Hilton. We believe with the entry of major international players. Marriott. EIH and Hotel Leela. Clarion. Four Seasons. Accor & Intercontinental. Hindustan Construction Company (HCC). For instance. Renaissance. for its township project in Lavasa. Quality Inn Keys USA USA USA Canada USA Hong Kong UK Netherland Thailand Singapore 30-50 6 100 Source: Edelweiss research Origin USA USA USA USA France USA USA USA Planned Hotels 5 10 10 30 24 200 75 100 19 50 38 25 8 15 2 Partner (if any) Royal Orchid Hotels Holiday Inn Express Ramada Le Meridian Regent.

while Australia 1.8 2004 2005 2006 Source: Travel and Tourism – India: Euromonitor International: Country Market Insights.5% (2006) of Indian population as holiday takers. industry growth was led by large.000. Edelweiss research Global timeshare industry: Globally. as a product. and Hyatt.9 2. with a membership base of 6. Customers’ trust in the company to deliver high quality holiday services over an extended period of time drives sales. Ernst & Young (E&Y) puts the US VO industry sales at USD 10. the VO industry is at an early stage in Australia.0 4. Their entry was seen as a sign of legitimacy and quality.5 2.9 3. Consequently. from simple vanilla to high-end products. India is far behind in comparison with the US (85%) and the UK (69%).25. India. VO. of which. With rising income levels and improving lifestyle. South Africa had a membership base of 2.2 in the Indian VO industry (%) 2. on the other hand. Hilton. established players such as Marriott.6 3.50.7 bn in 2007.000 (Source: ATHOC). posted sales of USD 15 bn in 2007. VO has proved to be a difficult product to sell. In 1990s. the US accounted for majority. VO.000 (Source: RCI South Africa) in 2006. Better road connectivity and cheaper air tickets have made more remote places accessible to travellers.5 4.60. where brand equity is the key to growth. and their capital strength allowed them to tap the entire VO value chain. ranks high in terms of value and investment. the product has been slow to pick up as investors had less faith in smaller operators. Africa and Asia.0 2000 2001 2002 2003 Huge untapped potential 3. more Indians want to enjoy holidays.6 2. Chart 28: Holiday takers as % of total Indian population 5. US lead the worldwide VO industry Worldwide.2 2. With just 4.4 3. has a membership base of 2. November 2008. Apart from the US and Europe. Owing to its high value. it assumes a quasi-investment strategy of locking in lifetime vacations in the current period. commonly known as ‘timeshares’.4 3.Hotels & Tourism Vacation Ownership Vacation ownership (VO) is a part of leisure travel.5 mn. Edelweiss Securities Limited 23 .

00. regained some momentum with players adding members at a brisk pace.5 10. undivided interest. which hurt industry prospects. co-operatives and fractional interests are some of the most common forms of deemed ownership.Hotels & Tourism Chart 29: Timeshare sales in the US since 1975 12.5 5.0 (USD bn) 7. As the ownership of the property stays with the buyer. Time period for which members have usage rights is usually long (25-50 years) and could stretch to 80 years as well. According to AIRDA. As per All India Resort Development Authority (AIRDA). with a total membership base of 2. which corresponds to the quantity of time allotments purchased.50. there are 80 operating resorts. We expect India to follow the path of the US. Edelweiss research Timeshare industry in India: In India. Club membership and holiday licenses are some of the commonly followed formats. unit size and time of the year Credibility of the timeshare company Opportunity to exchange other resort locations Industry players Mahindra Holidays & Resorts (MHRIL) is the largest VO company in India with more than 1. As MHRIL entered the industry little late. In the past few years.5 0. the buyer can transfer title to another person. season or time interval for a specified number of years. it offered a fixed price non-deeded flexible product (customer only has right to use the property for a specified period and does not own it) against pure VO 24 Edelweiss Securities Limited . Post the specified years. however.000 members across different schemes. where large and established players are expected to enter the industry at the initial years of growth. the property returns to the developer or to the trust which disposes off the assets and proceeds on a pro rata basis among the members. the company has gained the critical mass to expand on a large scale.0 1975 1980 1985 1990 1995 2000 2005 Source: MHRIL DRHP. some of the most important things to consider while purchasing timeshare ownership interest are: • • • Flexibility with regards to different locations.0 2. some unscrupulous operators duped investors. after an initial good response to the VO concept in 1990s. Vacation ownership industry products Deemed ownership: A purchaser acquires ownership interest in the immovable property. the industry has. Right-to-use products: Allows users to avail accommodation during a specified period.000. Time ownership.500 rooms. With 28 resorts and ~1.

Edelweiss Securities Limited 25 . white and blue seasons as per the membership rates. As MHRIL charges customers upfront to build its resorts. securitization income and interest income. Country Club and Sterling Holiday Resorts are some of the competitors in the listed space. Club Mahindra Fundays (targeting corporate customers) and Mahindra Holidays dominates the Indian VO industry Mahindra Homestays (targeting vacation travellers who prefer to stay with an Indian family). MHRIL charges its members upfront and uses that cash to build its fixed assets inventory. and can use it for the designated holiday period). but their scale and operations are no comparison for MHRIL. red. resort income.00 mn. MHRIL derives its revenues from membership fee. Gypsy (targeting teenagers) and fractional ownership property products (for high-end customers seeking a holiday home). It offers purple. Further.Hotels & Tourism product (customer owns a share of the unit.15 to INR 1. the company plans to launch more schemes like Mahindra Heritage (for senior citizens). annual subscription fee. The company also offers Zest (targeting young urban consumers seeking short breaks). The company gains as ownership of the property stays with it and the member gains over a period of time as the value of membership increases which is transferable. MHRIL offers 25-year 7 nights holidays to its members where membership rates range from INR 0.

accounting for almost 275 mn jobs or 8. It is the leading industry in many countries as well as the fastest growing economic sector worldwide in terms of job Worldwide T&T is a ~USD 8 tn industry creation. T&T is divided into inbound and outbound tourism. 54% Asia and the Pacific. 5% EU and USA dominate the inbound tourism industry with 70% market share America. government spending and exports. In the same year.9% of total GDP. 5% Africa.4% of the total employment worldwide.6 mn (42nd rank) international tourists in 2007. corresponding to an average annual growth rate of 6. accounting for just 0. 48 mn. 484 mn.6% from 2006. the number of international arrivals grew from 25 mn in 1950 to an estimated 763 mn in 2004.5%) and the US (6. Spain (6. 142 mn. Asia and the pacific region were able to increase their share to almost 20% in 2007 against just 15% in 1997. India attracted ~5.Hotels & Tourism Global Travel & Tourism T&T is currently one of the world’s largest economic activities. France (9%). Edelweiss research In Asia. according to the World Tourism Organization (UNWTO). Inbound tourism International tourist arrivals reached 907 mn in 2007. Encompassing all components of T&T consumption.5 mn jobs in the industry. 184 mn.5%. In 2008. T&T is estimated to have generated ~USD 7. equivalent to 9.2% of the total employment worldwide. 16% Europe. WTTC expects T&T economies’ GDP to contract 3. investment. up 6. Rising economic importance of the industry has been fuelled by the large and growing number of international travellers. 20% Source: World Tourism Organization. According to UNWTO.56% of the total traffic. Chart 30: World inbound tourism: International tourist arrivals in 2007 Middle East.890 bn of economic activity. global T&T is expected to have accounted for USD 5.6% in 2009. corning almost 70% of the total traffic. where inbound refers to countries attracting the largest number of tourists and outbound refers to countries from where the largest number of tourist originate. there were 230.892 bn of economic activity worldwide in 2008. 26 Edelweiss Securities Limited . but estimates the overall T&T economy to grow 4% in real terms in the next 10 years. China attracted almost 6% of the total worldwide inbound traffic. 44 mn. making up 8.2%) were the top three tourist destinations worldwide. The EU and US continue to attract maximum number of tourists.

The US (11. with very low ticket taxes and airport charges. The EU and US continue to draw the highest amount of total receipt. China (ranked 5th) was the highest spender from Asia. 22% Europe. USD 189 bn. Germany (USD 82.2 bn). USD 171 bn.Hotels & Tourism Chart 31: World inbound tourism: International tourism receipt 2007 America.9 bn). Spain (6. corning almost 71% of the total receipt. the US and UK are expected to show the highest growth in outbound tourism. Furthermore. Edelweiss Securities Limited 27 . despite government and industry efforts to promote the country abroad (India ranked 4th with regards to tourism fair attendance) and the exposure given to recent promotional campaigns.3%). In Asia. spending almost USD 29.8 bn.6% from 2006.9% of the total international tourism receipt. India ranks 65th in the overall inbound traffic and 7th with regards to the number of world heritage sites. 51% Source: World Tourism Organization. up 5. It is 6th in terms of price competitiveness. USD 28 bn.3 bn) were the top three spenders in 2007.6% in 1997. property rights are indeed well protected and foreign ownership is authorized. With regards to the policy environment. US$34 bn. Edelweiss research International tourist receipt grew to USD 856 bn in 2007.3%) were the top three earners. the US (USD 76.7%) and France (6. India ranked 27th. 4% Asia and the Pacific. 20% Africa. although the stringency of visa requirements places India in a very low 106th position. World Economic Forum). USD 433. and the UK (USD 72. Outbound tourism According to UNWTO. Asia and the pacific region were able to increase their share to almost 22% in 2007 against just 18. Also. China was the highest earner with almost 4. Among the developed countries Australia. the tourism infrastructure in India remains underdeveloped. closely followed by other emerging countries like Mexico and Brazil. 3% Middle East. the assessment of marketing and branding to attract tourists remains mediocre (ranked 59th) (Source: The Travel & Tourism Competitiveness Report 2007.

With lower propensity to spend.0 57.0 (%) 40. Along with this. which will directly and positively affect the Indian hospitality industry. 2. Visa on arrival: GoI has decided to offer visa-on-arrival to a few countries including New Zealand.0 3.0 14. Sources of revenue: Rising ORs have increased the contribution of room revenues.0 2004-05 Other 2005-06 2006-07 2007-08 2008-09 Food & Beverage Rooms Source: HVS.0 15.0 26. ARRs increased at 20% CAGR.0 26. Luxembourg. their perception of money is. We believe the current ratio of room.2% growth of FTAs.0 15.0 17. The decision has been taken to promote Indian tourism and increase the inflow of international tourists. Rise in VO membership of MHRIL to almost 100. companies like Infosys and Wipro have set up their own guesthouses and hotels for accommodating their guests. domestic travellers are willing to spend. It was reluctant to offer this service earlier due to security reasons.500 in FY05 gives us enough evidence that at right price. Singapore and Finland. This. the Indian hotel industry is also witnessing emergence of few key trends: 1. they bargain hard. This trend could be a concern if taken up in other cities as well. 28 Edelweiss Securities Limited . Domestic travellers: Despite growing at 12. Corporate guest houses: Following the steep rise in hotel tariffs in Bengaluru over the past 2-3 years. During the same period. 4. This has been one of the reasons for lower occupancies in premium hotels in the city. many hotel companies have mentioned the important role played by domestic travellers in many leisure destinations.0 80.Hotels & Tourism Key Trends We believe with the resilience shown by the Indian economy since 1997. During H1FY10.0 14. overall business environment in the country is changing.0 25.0 26. In the past few years. Japan. F&B and other revenue will continue as we expect modest increase in ARRs in FY11E and FY12E.0 28.0 59. however. middle class with disposable incomes. Chart 32: Room revenue proportion has been rising 100.0 20. Edelweiss research 57. domestic travellers have long been ignored by the hotels in India.0 0. Owing to the demand-supply mismatch witnessed by the hotel industry during FY04-09.3% CAGR during 1996 and 2008 compared with 7. up from 57% in FY05 to 60% in FY09.0 60. undergoing a tectonic shift with rise in the educated. is driving domestic tourism.0 61.0 60. the increase in F&B per occupied room was much less.000 in FY09 against 28. in turn.

Zest and Smoke House Grill are making marks in small pockets. India needs to successfully replicate the model of HICC to tap the emerging MICE business opportunity. We believe with the growth of science and technology related industries like biotechnology and pharmaceuticals (wherein companies host large conferences). more than 25 leading international hotel names are lined up to have a presence in one of the fastest growing economies. Tetsuma. 7. 6. restaurants like Indigo.Hotels & Tourism 5. Emerging MICE business opportunity: Convention or meetings tourism accounts for over 20% of all international arrivals worldwide. EIH. The Hyderabad International Convention Centre (HICC) is India's only branded (Novotel). although several Asian countries have successfully captured a growing portion of MICE business in recent years. we expect huge scope for the organised sector. five star hotels are expected to face a tough competition going ahead.000 which has been able to attract some business. Tote. and ITDC (government owned) used to dominate the hospitality sector in India. Growth of Indian middle class offers a large consumer base for hotel chains ranging from luxury to budget. ITC. As diners are always ready to test different concepts with fine dining experience. Olives. This is a far cry from 2000 when IHCL. Trishna. Hotel brand growth in India: With the emergence of India as one of the leading T&T destinations worldwide. many more individual restaurants with different concepts and superior interiors will come into India and expand the market exponentially. IHCL is also planning to have a worldclass convention center in Mumbai. With the lower end of the market still in the hands of unorganized players. We believe over a period of time. Food & beverage (F&B) concepts: With the emergence of standalone eating joints selling their own USPs. The US and Europe dominate this space. Edelweiss Securities Limited 29 . large scale convention facility with a capacity of 5.

Hotel Leela.306 3.ARRs .200 rooms under management contract in FY11E and FY12E. On the asset model as well.Hotels & Tourism Business Analysis We have evaluated companies under our coverage on two important parameters: (1) geographical diversification and (2) asset model. EIH.0 702.Mangement contracts Top 3 cities by number of rooms 6.In India . Slow expansion of EIH.905 Source: IHCL.201 1.541 11.504 66. along with diversification in the unrelated areas like printing and car rentals.709 60.Ors (%) .643 24 20 4 10 10 4 Hotel Leela 100 None Planned expansion incl mgmt contract(FY10-12) Owned rooms inventory Rooms inventory (Incl.JVs . 30 Edelweiss Securities Limited .Abroad Property type .0 6. EIH and Hotel Leela perform poorly on this aspect as well. mgmt contracts) No.398 6. IHCL plans to follow the asset-light model aggressively and intends to add 4. High dependence of Hotel Leela on its Bengaluru property for above industry level profits and the heavy investment in the Delhi property makes it one of the most expensive companies in the entire space.Owned & managed (incl those by subs) .610 6 6 5 1 Mumbai Delhi Bengaluru 11. IHCL seems to be better placed as 48 out of its 97 properties are with associates/JV/Management contract. Edelweiss research From the above snapshot. For geographical diversification.430 Revenue components (FY09) . of properties Property Distribution .Owned & managed by associates .546 97 90 7 49 17 15 16 Mumbai Delhi Bengaluru 630 1.085 2. the geographical spread and asset model of IHCL makes it a favourable play. drag down the overall returns. Going forward.610 63. we can see that even though IHCL. EIH and Hotel Leela are dependent on the performance of couple of cities which form majority of their rooms and revenues.540 Bengaluru Mumbai Goa 11. EIH and Hotel Leela are comparable on the ARRs and ORs basis.0 731. with its presence in both India and abroad along with wide coverage of Indian cities is much better placed in comparison to EIH and Hotel Leela. Following is a comparative snapshot of the companies under our coverage: Table 3: Snapshot of major hotel companies General parameters Hotel as % of total revenue Other businesses IHCL 92 Air catering EIH 70 Air catering Printing Car rentals Aviation 1. IHCL.RevPAR 10.

both in India and abroad.334 9.643 Hotel Leela Hotels 1 2 3 6 6 Rooms 409 538 663 1. IHCL is making its maiden venture into China with management contracts for two hotels. leading hotel chains leverage their brand by managing properties and charging a fee for it.056 2. Edelweiss research EIH is spread evenly in terms of number of rooms. In our coverage.458 rooms (including 2000 room abroad). Africa. adding 8. Worldwide. IHCL plans to add 60 more properties in the next 2 years.Hotels & Tourism Geographical spread IHCL. UK and US.490 11. EIH.490 rooms across South East Asia.546 23 32 7 19 81 16 97 East West India Abroad Total Source: IHCL.823 3. This is more than 50% of the total planned expansion of the company. The asset light model. The Delhi property of Hotel Leela is expected to open in Q2FY11E. the hotel owns only 1. Four of its properties located abroad are JVs and their accounts are not yet consolidated. where. IHCL’s international portfolio: This includes 16 properties.748 3. IHCL is planning to add more than 4. is a world-wide followed formula. Edelweiss Securities Limited 31 . Hotel Leela is still a two-city hotel. ‘Vivanta’ in upper upscale.Mumbai and Delhi (accounting for majority of its revenues). catering to both business and leisure travellers. IHCL is present with the ‘Taj’ brand in luxury. IHCL has presence across luxury. with 80% of its rooms located in India and 25% of total revenues coming from international properties.200 rooms through management contract in the next two years. IHCL drives the maximum mileage from its brand image with almost 16 hotels out of 97 under management contract. of the total 5. business leisure and economy segments.000 rooms.610 1.345 298 3. but is concentrated in revenues in two cities . The entire portfolio consists of luxury rooms. Middle East. More than 50% of the room addition is expected to come under the asset light model of management contract. ‘Gateway’ in upscale and ‘Ginger’ in the economy segments.785 rooms. Asset model IHCL is the most diversified asset model company. making use of all available methods to increase the total rooms. with Bengaluru and Mumbai accounting for more than three-fourth of its revenues. Hotel Leela. is the most geographically diversified company in our coverage.610 Hotels North South Geographically IHCL is best spread as compared to its peers Rooms 1. 76. Table 4: Geographical spread Indian Hotels Q3FY10 EIH Hotels 8 4 1 7 20 4 24 Rooms 912 472 213 1. Marriott International is a perfect example.271 628 3. 2. where using the brand the company managing the property extracts a part of top line and bottom line of the hotel from the developer of the property.

372 592 295 FY12E 3. it also has plans to add properties in Dubai. Considering the good economic environment. Edelweiss research EIH also plans to add three properties in Bengaluru and Hyderabad under JV in the next 2-3 years. Although in the next 24 months. Oman. Major international players have also announced their plans to enter the Indian hospitality space. Hotel Leela.201 409 1. business. ~40% of the total addition is coming in the form of management contract. 32 Edelweiss Securities Limited .643 Hotel Leela Hotels 5 1 6 Rooms 1.275 1. EIH. business and leisure travel will increase commensurately.IHCL most aggressive IHCL has the most aggressive expansion plans FY10E Indian Hotels EIH Hotel Leela 1. Abu Dhabi and Morocco.026 440 495 FY11E 5. Hotel Leela added its first property through management contract in 2009 (409 rooms in Gurgaon). EIH. IHCL plans to add 3. Qatar. IHCL plans to double its room inventory.908 2.072 383 3. IHCL has the most aggressive plan in our universe of companies. Dubai.633 2. across luxury. the total planned expenditure is just INR 20 bn. IHCL plans to add more than 30 properties in different cities in India and 8 properties aboard including China. Falaknuma Palace (Hyderabad).617 11. Hotel Leela. Taj Panjim (Goa) Fishcove expansion (Chennai) and Cape Town (South Africa) are expected to become operational in FY10 and FY11.610 IHCL makes the most of asset light model Source: IHCL. EIH.500 493 340 Source: IHCL.082 106 1. Among the many properties to be added by IHCL in FY10. plans to add five properties in India. Investment per room in Ginger is substantially lower than the average costs for a luxury room. we expect IHCL to benefit the most considering its aggressive expansion plans. leisure and economy segments. on the other hand.113 1. for IHCL.500 rooms in next 24 months.546 25 24 17 15 16 97 EIH Hotels 8 1 10 5 24 Rooms 2. properties like Yeshwantpur (Bengaluru). UAE and Morocco. The expansion is planned across the entire asset model. Edelweiss research To hedge against going asset heavy and to leverage the brand image of Taj. Also. With the high GDP growth expected for the Indian economy. FY11 and FY12. under the Ginger brand in the economy segment.000 rooms in the next 24 months. It plans to add ~10. Table 6: Expansion plans . but all these properties are expected to come under its wholly owned subsidiary EIH International where due to its registration status accounts are not merged with the consolidated entity.Hotels & Tourism Table 5: Asset model Q3FY10 Owned Subsidiary Associate JV Management Contract Total Indian Hotels Hotels Rooms 3. Expansion plans We believe that the next few years present good business conditions for the Indian hospitality companies to expand and grow. Hotel Leela plans to add only two properties in Delhi and Chennai in the next 18-24 months.

IHCL’s discount is justifiable to some extent. We believe that at current valuations. Chart 33: Replacement costs – IHCL most attractive in the peer group 7. considering the fact almost 17% of its EBIDTA comes from management contracts that attract higher valuation worldwide.6 4.2 2. there is value in the stock at the current price.4 0. on the other hand. Replacement cost provides the flexibility to compare peers across the market. is trading at 13. Average replacement costs of a luxury room is INR 25-30 mn compared with average replacement costs of INR 8-12 mn for a four star hotel. Global hotel companies are trading at 12x FY11E and 10x FY12E. Edelweiss Securities Limited Oct-09 33 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 .5x FY11E and 12x FY12E. IHCL still has upside left. On EV/EBIDTA basis. and Hotel Leela at 23x FY11E and 17x FY12E.0 (INR mn) Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Jan-05 Jan-06 Jan-07 Jan-08 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Jan-09 EIH Leela IHCL Source: Edelweiss research EIH and Hotel Leela are trading (adjusted for managed rooms) at INR 35 mn per room on the replacement basis against IHCL that is trading at a significant discount of 60%. but we believe given its portfolio diversification. Owing to its portfolio mix across segments.Hotels & Tourism Valuation Methodology Replacement costs (EV/Room) and EV/EBIDTA are the most followed valuation methods to evaluate hotel companies worldwide. EV/EBIDTA is another valuation tool for the hotel industry. This tool finds its utilisation during the periods where there is earnings visibility. IHCL is trading at 10x FY11E and 7x FY12E. it is very important to have different valuation parameters. being a cyclical industry where 4-5 good years are followed by 1-2 bad years worldwide. It also acts as a value barometer in case of bad economic scenarios where earnings are suppressed to a very large extent.0 5. Hotel industry.8 1. EIH.

the stock price also factors in probability of a corporate action. We find Hotel Leela’s valuations too demanding. given its expensive expansion plan and severe pressure on ARRs in Bengaluru. 34 Edelweiss Securities Limited .0 9.Hotels & Tourism Chart 34: IHCL a better bet on EV/EBIDTA 37.0 30.0 (x) 16.0 2.0 FY06 FY07 Indian Hotels FY08 FY09 Hotel Leela FY10E EIH Source: Edelweiss research EIH’s slow expansion and heavy dependence on two cities makes us believe that its current valuations are demanding.0 23.

Hotels & Tourism Key Risks 1. which ultimately increases the overall project costs. Company-specific risks 1. Terrorism acts: Following the event of 26/11. 2. 4. we expect a lot of pressure on hiring and retaining trained manpower. 3. 4. ensuring that the required supply of trained workforce comes through either their own hotel management institutes or through tie-ups with workforce training institutes. shelved in 2008 and 2009 owing to constrained liquidity scenario following a financial slowdown. 5. Indian Hotels: Later–than-expected turnaround in the international portfolio and high debt taken to finance the aggressive expansion of the past few years. Delays in construction. Most leading players are. MHIL: Below estimated member addition. therefore. 2. Most of them were. Hotel Leela: Above expected performance of the Bengaluru property and upcoming Delhi property could help the company to tide over its liquidity constraints. Cox & Kings: Further deployment of working capital in the subsidiaries or for corporate travel business may strain its balance sheet. These destinations pose threat to the Indian leisure hotels. EIH: Better-than-expected performance of the Mumbai market. the largest cost component in the overall cost structure of the hotel industry. Employee cost: Employee cost (as a percentage of total income) is as much as 25%. if the company losses its ongoing case with the IT department. improving the overall profit margins. Integration of acquired companies is another key challenge for the company. Also. however. encouraged by a buoyant economy. are common in India. then it may have to part with a one-time payment of INR 900 mn. many countries issued travel warnings to their citizens. could hit profitability. 3. Edelweiss Securities Limited 35 . advising them against traveling to India.000 rooms in the next five years. Considering the elasticity of demand in this industry. however. along with increase in commission payment to agents. such acts of terrorism impact the sentiments and inflow of tourists into the country. With the estimated supply addition of almost 30. GoI has. many hotels and real estate companies had announced their major plans. started many campaigns like Incredible India to promote India as a leading travel destination. To counter competition. Competition from South Asian countries: Many South Asian countries are now consciously trying to increase their tourism activities by offering world-class facilities at highly competitive prices. any possible land sale and open offer by ITC could provide an upside risk to our call. Cost and time over-runs: In 2007.

We believe the benefit to help the industry in the long-term. the government has included hotels under section 35 AD where any capex (excl. Low FSI + high land costs: A dangerous combination Considering the high costs of prime land in India. hotels were added to the infrastructure list so that the interest received by financial institutions and banks for loans extended to hotels were tax exempted. to start a new hotel in India. Mumbai. Luxury tax in India varies from 5% to 15%.34 in G block of BKC. is levied on the published rates without taking into consideration the discount given on the rack rates and commission paid to agents. Infrastructure bottlenecks Woefully inadequate infrastructure has been one of the biggest problems for India to emerge as the topmost travel and tourism destination. considering the importance of hotel industry to the overall economy and the fact that it doesn’t receive any kind of benefit from the government. sales tax.4. VAT.45 at Nariman Point. In 2010 budget. Considering the state of bureaucracy in India. the time and costs involved in getting the required approvals is quite high. Manhattan allows FSI of 15 for hotels. 2. 2. The higher FSI was redistributed by MMRDA as the FSI in the area was underutilized. the infrastructure in India scores poorly. clearances from roughly 40 agencies and 110 licenses are required. 36 Edelweiss Securities Limited . land. Higher FSI will allow hotels to construct higher number of rooms. Taxes: A complex issue 1. 2007. excise duty. the current permissible FSI for hotels is woefully inadequate.66 in the city and 1 in suburbs. increasing the profitability of the property. We believe that the country needs a single window clearance system. whereas. Mumbai Metropolitan Region Development Authority (MMRDA) recently sanctioned an FSI of 9. in Mumbai it is 3. which is a state level tax. custom duty and service taxes are some of the other issues which the industry has been grappling with. goodwill and financial instruments) incurred post 1. In one of the recent development. Inadequate infrastructure is one of the main reasons why many Indian cities with great potential remain untapped on the world tourism map. In fact. the section itself was discontinued from April 1. The industry has been asking for the tax to be reduced to a maximum of 5%.Hotels & Tourism Challenges Scores of agencies and licenses major hurdle As per ICRA. However. However. then doing the paperwork. We realise that higher FSI will increase the already heavy pressure on the existing inadequate infrastructure facilities. even though the land costs forms a major part of total capex. In comparison to some of the leading tourist destinations of South East Asia. so that the industry can focus on getting the operational issues right. under Section 10 (23) g of the IT Act.2010 is eligible for 100% deduction as investment linked tax incentive in the year of expenditure. in turn. we believe higher FSI is very much needed in India. Section 80 IA (infrastructure status for the hotel industry): The Indian hotel industry was asking for the infrastructure status under Section 80 IA of the IT Act. Luxury tax: Luxury tax. 3.

Dubai Taj Exotica Resort & Spa. Abu Dhabi. Mumbai Moti Mahal.310 72 208 180 337 60 159 150 300 205 123 123 150 125 60 500 262 150 500 300 65 180 4. Bharatpur Taj Residency. China Exotica Resort & Spa.Hotels & Tourism Annexure I Table 7: Properties and rooms to be added by IHCL till FY12 Property details IHCL Taj Falaknuma Palace. Nagpur Taj. Edelweiss research Edelweiss Securities Limited 37 . Gurgaon Taj. Morocco Taj Exotica Resort & Spa.968 3. Delhi Taj. China Taj Palace . Palm island. Mina Zayed. Kochi Navi Mumbai International Contracts Taj Palace temple of Heaven. Bengaluru Taj Lake End. Doha. Delhi Kolkata Raipur Jallunder Kakkanad. Chennai Gateway. Abu Dhabi.684 850 160 250 980 1300 400 3150 2960 350 110 600 1200 12. UAE Taj Hotel. Hainan. Cape Town Fishcove Expansion.209 - Mar-10 - Source: Company. Noida Taj Group of Companies Taj Palace. Coimbatore Taj Santacruz. of rooms Cost Date of completion Mar-10 Dec-10 Sep-10 Mar-10 - 60 331 80 184 175 40 450 72 64 35 225 1. Bannerghatta. Yas Island. UAE Taj Tangiers. Pondicherry Under Gateway Brand: OMR. Bengaluru Ginger Hotels (different locations) Total Management Contracts Under Vivanta Brand: Vivanta by Taj. Udaipur Taj Surya. Chennai Hinjewadi Karkumaduma. Gondia Gateway. Ras Al Khaimah Total No. Bekal Taj. Qatar Taj Mahal. Hyderabad Yeshwantpur. Karkumaduma.

9 79.983 6.0 58.0 79.0 FY09 64.755 7.5 55.407 6.4 62.3 68.4 60.198 5.324 6.2 85.1 62.108 FY09 13.5 61.4 69.054 6.9 58.119 6.0 NA Source: CRISIL.5 58.002 6.0 FY06 77.971 12.1 61.574 FY05 9.5 76.297 4.2 43.8 56.0 64.7 76.081 5.991 4.154 6.331 7.171 11.294 3.4 68.314 8.3 73.5 69.3 60.992 7.881 8.0 FY07 74.655 FY07 14.725 8.149 4.0 51.0 65.0 64.0 64.901 2.324 5.5 72.857 5.3 70.0 9MFY10 61.969 4.465 7.0 FY08 71.7 75.227 3.281 NA Source: CRISIL.564 3.0 68.0 80.085 5.180 5.641 3.515 7.1 68.3 78.5 76.0 63.0 45.0 62.413 9MFY10 9.329 7.0 74.386 7.9 68.480 7.118 4.0 FY05 77.659 9.9 65.5 61.3 75. Edelweiss research Table 9: City wise ORs FY04 Occupancy rate (%) Bengaluru Chennai Hyderabad Kolkata Delhi North Mumbai South Mumbai Pune Agra Goa Jaipur Kerala 82.028 5.730 5.183 6.4 56.8 63.811 3.332 10.311 6.562 4.290 9.781 6.0 59.554 7.0 75.595 2.649 3.1 71.7 87.Hotels & Tourism Annexure II Table 8: City wise ARRs FY04 ARR (INR) Bengaluru Chennai Hyderabad Kolkata Delhi North Mumbai South Mumbai Pune Agra Goa Jaipur Kerala 6.3 67.0 56.441 4.0 74.152 7.461 7.9 63.2 70.473 6.3 77.0 75.044 8.7 81.968 8.5 58.0 62.048 11.949 12.964 3.0 59.873 7.0 55.0 59.9 55.0 75.043 FY06 11.0 67.7 80.9 56.451 3.4 67.0 75.806 3.0 53.6 77.579 2.758 5.307 6.130 5.754 4.272 7.0 62.142 2.1 64.8 72.498 5.818 10.0 73.253 8.719 9.404 4.264 4.200 FY08 13.8 81. Edelweiss research 38 Edelweiss Securities Limited .463 6.741 4.

017 1.658 3.249 6.601 3.045 3.249 6.212 1.380 4.080 534 1.754 1.012 508 1.735 4.128 999 FY07 2.080 534 1.663 1.558 2.207 920 840 FY09 1.716 1.253 FY09 2.892 511 1.018 903 891 Source: CRISIL.194 FY08 2.638 4.601 3.925 1.725 1.452 1.354 2.646 1.382 445 744 1.813 4.430 3.567 1.255 1.450 435 854 2.581 1.541 1.080 508 1.245 1.043 849 4.339 935 843 FY05 1.553 3.541 1.013 1. Edelweiss research Edelweiss Securities Limited 39 .178 394 589 1.302 1.495 1.393 Source: CRISIL.115 842 812 FY08 1.128 843 FY06 1.142 1.602 2.937 1.159 322 977 2.504 2.616 2.418 2.170 3.046 937 5.394 401 995 2.051 3.104 1.109 807 841 5.650 2. Edelweiss research Table 11: City wise room demand FY04 Room demand Bengaluru Chennai Hyderabad Kolkata Delhi North Mumbai South Mumbai Pune Agra Goa Jaipur Kerala 1.563 1.354 2.Hotels & Tourism Annexure III Table 10: City wise room availability FY04 Room availability Bengaluru Chennai Hyderabad Kolkata Delhi North Mumbai South Mumbai Pune Agra Goa Jaipur Kerala 1.998 536 1.534 1.308 528 506 FY05 1.351 1.613 1.455 1.700 1.222 1.244 6.910 1.282 1.341 2.219 2.651 4.431 416 759 1.668 697 531 FY06 1.249 6.646 1.287 864 923 5.832 1.392 1.244 6.017 1.743 1.429 1.249 6.799 1.262 977 931 5.420 1.107 1.547 1.287 960 769 724 4.875 698 629 FY07 1.

Hotels & Tourism THIS PAGE IS INTENTIONALLY LEFT BLANK 40 Edelweiss Securities Limited .

April 1. is geographically diversified for an event risk.3 33.995 1.6 / 683. At CMP of INR 488. 2010 Reuters : COKI.297 63 20.7 9.1 FY12E 5. With its strong brand equity.9 Outlook and valuations: Positive. CNK is likely to generate approximately INR 3. BSE/NSE (‘000) : SHARE HOLDING PATTERN (%) Promoters* MFs. outbound. Japan. respectively.7 Stock over Sensex 5.1 2.4063 5413 manav. Reuters and Factset.611 63 25. the company can negotiate better terms with corporates and in turn reduce working capital deployed. To drive growth further. We expect India to account for just 50% of its FY11E revenues and PAT.9 30.bahety@edelcap. Financials Year to March Revenues (INR mn) Growth (%) EBIDTA (INR mn) Net profit (INR mn) Share outstanding (mn) EPS (INR) EPS growth (%) Diluted P/E (x) ROAE (%) FY09 2. CNK is trading at 23. We expect UK.8 1. 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) Avg. A combination of inbound. we believe.7 15.com.6 55.6 24. and US.India Midcap Research Hotels & Tourism Initiating Coverage COX AND KINGS Making holidays more organised Geographical diversification minimises event risk Cox & Kings (CNK).3 7. FIIs Others * Promoters pledged shares (% of share in issue) RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 5.8 bn of positive operating cash flow in FY11E and FY12E.3 Manoj Bahety. We expect the luxury train and visa processing initiative to contribute 7% to FY11E revenues. and initiate coverage on the stock with a ‘HOLD’ recommendation.0x FY11E and 20. Entry into new segments like rail tourism and visa processing is expected to further enhance revenue diversity. Daily Vol.2 19.0 47.com Edelweiss Research is also available on www.605 19.6x consolidated P/E of FY11E and FY12E. Bloomberg EDEL <GO>.5 0.869 57. Although it is poised to exploit the high growth expected in the worldwide T&T space.0x FY12E P/E. and FlexiHol are some of CNK’s most popular schemes.214 634 28 10. Australia. FIs & Banks : : : : : 63.708 27.381 1.0 36. we arrive at a target price of INR 520. To capture the high end tourist outside India.4 1.9 32. Australia. due to its strong brand equity and vast knowledge of various geographies.4 48.734. the company has made sizable acquisitions in the UK. Thomson First Call. initiating coverage with ‘HOLD’ CNK.1 16. Edelweiss Edelweiss Securities Limited Securities Limited 41 .0 Nil Increasing leisure travel to reduce working capital requirement We expect the additional working capital deployment to dip going forward as the share of leisure travel increases in the overall portfolio.5 18. Bharat Dekho. with operations in 19 countries.8 16.7 FY10E 3. and domestic tourist growth is expected to drive the company’s Indian operations. has created a niche for itself in the T&T space.545 845 63 13.edelresearch.684 28.vijay@edelcap.3 23.2 Consistent innovation and acquisitions driving revenues Innovative product offerings like Duniya Dekho. CFA +91-22. Using the target P/E. We expect the stock to trade at 25.6 1.5 FY11E 4. it has launched a pan-India luxury train in JV with IRCTC along with an ambitious visa processing project. and US to account for almost 75-80% of subsidiaries revenue.4x and 18.8 Stock 10.6623 3362 manoj.BO Bloomberg : COXK IN EDELWEISS RATING Absolute Rating HOLD MARKET DATA CMP : : : : INR 488 505 / 304 62.6 8. Dubai.8 8.com Manav Vijay +91-22. a lot of these expectations are already factored in the share price at current levels.5 1.

Hotels & Tourism

Investment Rationale
Geographical diversification minimises event risk
With operations in 19 countries, CNK is geographically diversified to minimise any event risk. We expect India to account for less than 50% of its FY11E revenues and PAT. A good combination of inbound, outbound, and domestic tourist growth is expected to drive the company’s Indian operations. Entry into new segments like rail tourism and visa processing is expected to further enhance revenue diversity. We expect UK, Japan, Australia, Dubai, and US to account for almost 75-80% of subsidiaries revenue. Chart 1: Foreign subsidiaries minimise impact of an event risk

70.0 56.0

(Revenue %)

42.0 28.0 14.0 0.0 FY08 India FY09 FY10E FY11E Subsidiaries
Source: Company, Edelweiss research

FY12E

Considering that T&T is part of discretionary spending and the first to bear the brunt of any event (terrorist or disease) risk, CNK has diversified its revenue stream across geographies. Main foreign subsidiaries like UK, Japan, Australia, Dubai, and US handle a mix of inbound and outbound traffic and generate outbound tour packages for approximately 55 countries. We discuss CNK’s major revenue generating countries: 1) India: In FY09, India accounted for 55% of revenue and PAT. Indian operations serve the inbound, outbound, and domestic traffic for leisure and corporate travel. Duniya Dekho, Bharat Dekho, and FIT are some of the company’s most popular product offerings. Pan-India luxury train and visa processing facility are expected to increase the gamut of services further.
Foreign subsidiaries reduce the geographical risk

2)

UK (Cox & Kings Travel and ETN Services): Cox & Kings Travel is an outbound tour operator and caters to only the leisure travel market. It concentrates on the upmarket business. ETN Services is an inbound travel wholesaler / ground handling service provider in Europe. Both the subsidiaries accounted for 26% and 27% of FY09 revenues and PAT, respectively.

3)

Japan: This subsidiary generates revenues principally from package consultancy and services for major wholesalers and societies. It has a tour operator class licence from the Overseas Tour Operators Association of Japan (OTOAJ). In FY09, the Japan subsidiary accounted for almost 10% and 9% of revenues and PAT, respectively.

4)

Other subsidiaries: Dubai, Australia, and US act as outbound tour operators and accounted for 9% and 4% of FY09 revenues and PAT, respectively. The Australian subsidiary was acquired in November 2008 and is a specialist in outbound tours. The

42

Edelweiss Securities Limited

Hotels & Tourism

US subsidiary was acquired in April 2009 and is a boutique travel company offering private travel and group travel to high net worth clients.

Consistent innovation and acquisitions driving revenues
Product offerings like Duniya Dekho for outbound travel, Bharat Dekho for domestic travel, and FlexiHol for flexible individual travelers are some of CNK’s most popular
Acquisitions and innovations drive revenue growth

schemes. To capture the high end tourist outside India, the company has made sizable acquisitions in the UK, Australia, and US. In FY07, India accounted for 92% and 100% of revenues and PAT, respectively. Strategic acquisitions in UK (2007), Australia (2008), and the US (2009) along with new companies started in Dubai and Singapore accounted for almost 50% of FY09 revenue. We consider the acquisitions and new starts as innovative steps by the management.

Table 1: Acquired companies are complementary to existing services
Year 2006 2007 2007 Company acquired Clearmine (along with subsidiary ETN Services) Cox & Kings.,UK (along with its subsidiary Cox & Kings Travel) Cox & Kings (Japan) Added services Destination management services for tours to Europe and inbound tours in Europe for other tour operators Outbound specialist tour operator that caters to leisure travel market of Europe Dedictated wholesaler of products and services to other tour operators and offer ground handling capabilities in select geographies Visa processing [appovals from Singapore, Athens (Greece) and Hong Kong] for outsourcing their visa processing activities to C&K Significant part of its business is in European countries

2008

Quoprro Global Services

2008

Tempo Holidays Pty., Australia (along with its sub Tempo Holidays NZ in NZ) East India Travel Company

2009

Selling upmarket tours and travel packages in the US
Source: Company, Edelweiss research

To drive growth, the company has launched a pan-India luxury train in JV with IRCTC. The train will run from September to April and carry 84 passengers per journey for 7-8 nights with fares starting at USD 800 per night and make 16 journeys every year. The service is aimed at the very high end tourist. We expect the initiative to contribute approximately 5% to FY11E revenue. The visa processing initiative is another ambitious project to drive growth. We expect the luxury train and visa processing initiative to contribute 7% to FY11E revenues.

Increasing leisure travel to reduce working capital requirement
We expect the additional working capital deployment to dip going forward as the share of leisure travel in the overall portfolio increases. The company is likely to generate approximately INR 3.9 bn of positive operating cash flow in FY11 and FY12. With its
Reduced working capital going forward

strong brand equity, CNK can negotiate better terms with corporates and in turn reduce the working capital deployed. Meetings, incentives, conferences, and exhibitions (MICE); corporate travel; and forex are the business segments where the company needs to provide credit period to customers. CNK has become selective in taking on the corporate travel business and is ready to forego potential business if the same is coming at an incremental working capital deployment.

Edelweiss Securities Limited

43

Hotels & Tourism

Table 2: MICE and corporate business travel requires working capital Business % of total Average credit revenue days

India - Leisure (Inbound, outbound, domestic) India - Leisure (MICE) India - Corporate / business travel India - Forex Foreign - Leisure

36.1 13.5 2.7 2.7 45

Zero 10 days 20 - 25 days 7 -8 days Zero

Source: Company, Edelweiss research

CNK has also loans and advances and debtors worth INR 2.5 bn that have been extended to various subsidiaries, associates, and group companies. We believe as the subsidiaries attain reasonable size, future fund deployment will be limited in comparison to the past. Management is confident of turning around the working capital cycle and aims to report a positive working capital going forward. One of the stated purposes of IPO proceedings was to invest INR 625 mn into subsidiaries. We believe future deployment of funds post this round of investment will be minimal.

Bulk buying advantage
Due to its strong brand image and geographical reach, CNK gets bulk buying discounts for air travel, hotel accommodations, car rentals, and ground handling. This enables the
Big discounts due to bulk buying

company to offer competitive packages to clients and customers. This bulk buying happens without any capital commitment on the part of CNK. Constant innovation of new schemes helps the company fulfill commitments to hotels, airlines, and other partners involved. In the earlier years, small travel operators earned nearly 80-90% of total revenues from airline ticket bookings where margins were as high as 10%. However, with the emergence of online booking portals like yatra, ezeego, and makemytrip and to some extent with the weak financial condition of airlines, the mom and pop shops are under severe threat. CNK is also active in this space with its associate company Ezeego One Travel & Tours, where it holds 14.98%. Ezeego is a neutral market place which showcases products of all companies including CNK and its competitors and offers customers the flexibility to choose what they deem fit.

Global reach and alliances
CNK has global presence with operations in 19 countries besides India through its subsidiaries, branch and representative offices. In India, it has 255 points of presence covering 164 locations through a mix of 14 branch sales offices, 75 franchised sales
Rooms and revenue lopsided towards Mumbai

shops, and a mix of 185 general sales agents (GSAs) and preferred sales agents (PSAs). As a member of Radius, a global travel company, CNK is connected to a network of 90 Radius members from more than 80 prominent countries with over 3,600 locations and service clients originating through them within India. The company enhances its global presence through a network of GSAs and PSAs covering other countries. Taking advantage of its global network, the company offers outbound travel products to almost 150 countries.

Strong brand equity
CNK has evolved over 250 years and is one of the oldest and recognized holiday brands, catering to the travel requirements of Indian and international travelers. The brand was ranked No. 1 in India and 152 amongst top 1,000 brands in the Asia Pacific region in 2008 by Media Magazine & TNS.

44

Edelweiss Securities Limited

CNK is trading at 23. PE multiple is the right valuation parameter for a company like CNK which is growing fast. we arrive at a target price of INR 520. We expect the stock to trade at 25. and initiate coverage on the stock with a ‘HOLD’ recommendation. we believe acquistions in Australia and US will be value accreavtive on a long term basis. We also believe that the JV with IRCTC for a pan-India luxury train and the visa processing facility will lead to substantial growth in FY11 and FY12. respectively. Using the target P/E. CNK has created a niche for itself in the T&T space. the company is in a sweet spot to exploit the opportunity. At CMP of INR 488.4x and 18. Considering the high growth expected in the worldwide T&T space. Edelweiss Securities Limited 45 . With its strong brand equity and vast knowledge of various countries/geographies.6x consolidated P/E of FY11E and FY12E. taking advantage of the industry’s organic growth and using acquistions as an inorganic growth route. Some of the Asian peers like Hanatours and Huangshan are also trading at similar multiples.0x FY12E P/E.Hotels & Tourism Valuation Considering CNK’s ability to merge an acquistion seamlessly in its existing operations.0x FY11E and 20.

Future acquisitions turning sour Although CNK has the history of integrating acquisitions quite well with existing operations. But going forward also if CNK continues to provide resources to these companies.5 bn in its subsidiaries and group companies as investments. and loans and advances. Also. As the subsidiaries are making efforts to attain suitable size. Also. in 2010 the company needs to get the US and Australian acquisitions correct. as the discount is without any kind of capital commitment from CNK. as the company has raised funds for more acquisitions.. leisure travel can face a big decline. CNK has advanced approximately INR 350 mn to two of its loss making group companies viz. Deployment of further working capital The company has an exposure of INR 2. the investment was necessary. Unforeseen events like war or disease Outbreak of any disease like swine flu on a worldwide basis can affect business severely even though CNK’s revenue stream is diversified in terms of geographies.Hotels & Tourism Key Risks Bulk buying advantage could prove to be transient CNKs ability to deliver volumes to its business partners is the prime reason behind it earning good discounts from hotels. and car rental agencies. The amount is part of the overall INR 2. then its working capital requirement will grow manifold. in the form of investments and advances.5 bn exposure mentioned above. in another promoter owned company Ezeego One Travel & Tours. failure to drive volumes could spell end of this advantage. the company needs to consistently innovate schemes and prices. any uncertainty on this front could prove to be a major dampener. airlines. in case of any unforeseen event. To continue to enjoy the discounts and in turn offer lower prices to customers. As 90-95% of revenue is from leisure travel. Including the above. Tulip Star Hotels and V Hotels. Further assistance by CNK to this entity could add to the existing debt. CNK has advanced approximately INR 900 mn for the losses incurred as Ezeego is writing off the goodwill for a swap of share equity to advertisement space. 46 Edelweiss Securities Limited . debtors.

Outbound operator from US. corporate travel. CNK’s business can be broadly categorized as leisure travel.India Leisure business . contributes 2% of revenue Source: Company. The biggest sub.Foreign Royal Indian Rail Tours Quorprro Global . Yet to commence operations Cox & Kings (Aus)Equity of INR 86 mn.Hotels & Tourism Company Description CNK is one of the largest and widely recognised holiday brands in India and has evolved over 250 years. It provides end to end travel solutions including land. It has presence in 19 countries and in India has 255 touch points covering 164 locations. Fig 1: Business chart Cox & Kings (India) Leisure businessIndia Corporate business . hotel bookings.50:50 JV with IRCTC. second largest sub contributing 10% of total revenues. the company is looking at measures to reduce the deployment of working capital without any adverse impact on existing business. contributes 22% of total revenue). Edelweiss research Edelweiss Securities Limited 47 . in-transit arrangements and various other services. Cox & Kings (Japan) Equity of INR 233 mn. forex and visa processing.For Visa processing. air and cruise bookings. going out of India. As the corporate travel part of the business is capital intensive. Leisure travel dominates the revenue stream and the company has aggressive plans like the Maharaja Express and visa processing to strengthen it.Tour operators and travel organizers for EU. and domestic travelers within the country. In India. contributes 5% of total revenue Royal Indian Rail Tours . Due to its extensive knowledge of various countries and geographies. ETN Services Ground handling unit. the company also caters to travelers originating from any country other than India to any other country. The company caters to overall travel needs of Indian and international travelers. outbound operator contributing 6% of total revenues East India Travel Co. International operations account for almost 50% of total revenue. yet to commence operations Constitutes 50% of net revenue Constitutes 5% of net revenues Constitutes 45% of net revenues Fig. 2: Corporate structure Cox & Kings (India) Cox and Kings Equity of INR 635 mn (Owns Cox & Kings Travel . the company caters to travelers coming into India.

Edelweiss research 48 Edelweiss Securities Limited FY12E EBITDA margins (%) .0 21. growth numbers of FY11 and FY12 are reasonable and are not strictly comparable to the company’s growth rate in FY07 and FY08.400 0 FY07 FY08 Sales FY09 FY10E FY11E FY12E Sales growth 100.0 (INR mn) Source: Company.000 5. Chart 3: Margins to improve in FY11 45. CNK is in a sweet spot to exploit the tremendous growth opportunity in the T&T space.800 1.0 15.0 0.0 40. Chart 2: Sales growth momentum to continue Thrust from inorganic growth going forward 7.0 39. respectively.0 60. Strong margins to continue We expect the company to report approximately 42% and 23% EBIDTA and PAT (adjusted for extraordinary item) margins between FY10 and FY12.200 2.600 4.0 FY08 FY09 FY10E FY11E Net profit margins Source: Company. but we expect all the subsidiaries to be complementary.0 (%) 27. Edelweiss research Given the larger base of FY09.0 33.0 80. It is difficult to predict the synergy benefits of the integration of its subsidiaries.0 20.Hotels & Tourism Financial Outlook Acquisitions and new initiatives to drive revenue growth Acquisitions by CNK in Australia (FY09) and US (FY10) and the starting of luxury train along with the visa processing facility are expected to drive 28% and 33% revenue growth in FY10E and FY11E. respectively. As past acquisitions attain size and the synergies become more evident.

0 bn between FY10E and FY12E.54.600) FY08 FY09 FY10E FY11E FY12E Operating cash flow Source: Company. Edelweiss Securities Limited 49 .600 (INR mn) 800 0 (800) (1. Chart 4: Cash flow from operations to turn positive FY10 onwards 2. Positive operating cash flow due to reduced working capital requirement We expect CNK to report positive cash flow from operations of approximately INR 3.Hotels & Tourism We expect margins to remain strong even though more than 50% of the revenue comes from outside India as CNK primarily caters to the upper end of tourists who are less sensitive to rates. Management is also confident of reducing the working capital requirement going forward. The company is likely to start reporting positive operating cash flows as subsidiaries attain size and its conscious efforts to choose the corporate travel business.400 1. Edelweiss research We expect the incremental fund deployment in subsidiaries to decrease going forward and reduce the working capital strain on the parent company.

8 FY09 57.2 FY08 59.2 24.2 3.8 32.0 13.2 47.1 FY10E 58.118 201 67 983 349 634 634 (6) 628 28 10.297 1.1 8.1 53.8 96.3 33.3 2.6 63 20.3 FY12E 19.139 1.6 2.1 24.2 40.400 1.3 7.3 FY09 57.655 791 865 1.4 FY10E 28.8 29.8 42.9 81.684 2.8 (INR mn) FY12E 5.869 1.6 3.0 40.122 (10) 1.611 1.1 28.112 63 13.2 33.5 28.8 0.5 3.5 47.429 304 137 1.2 24.6 FY12E 57.Hotels & Tourism Financial Statements Income statement Year to March Income from operations Total operating expenses Employee cost Other expenditure EBITDA Depreciation and amortisation EBIT Interest Total other income Profit before tax Provision for tax Core profit Extraordinary income/(loss) Profit after tax Minority interest Profit after minority interest Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted Dividend per share (INR) Dividend payout (%) Common size metrics.2 1.6 30.0 43.680 2.605 3.611 63 25.936 639 1.7 42.2 FY11E 4.313 1.6 63 25.713 1.4 27.091 506 586 730 64 666 59 62 669 217 451 451 (25) 426 16 6.611 1.5 11.5 53.0 42.0 0.381 147 2.2 12.7 27.995 138 1.1 19.821 1.4 115.099 1.6 2.3 28.9 29.3 63 13.5 27.8 3.0 2.7 2.214 96 1.2 29.544 1.234 211 382 2.as % of net revenues Year to March Operating expenses Employee cost Other expenditure Depreciation and amortisation Interest expenditure EBITDA margins Net profit margins Growth metrics (%) Year to March Revenues EBITDA PBT Core net profit EPS FY08 87.0 28 10.2 1.1 3.5 FY09 2.9 22.8 16 6.4 27.224 1.5 66.3 41.9 27.040 1.857 267 347 1.9 5.708 2.7 FY08 1.405 794 1.5 55.4 24.5 30.0 FY10E 3.0 FY11E 27.4 50 Edelweiss Securities Limited .261 416 845 276 1.3 22.297 1.6 27.9 FY11E 57.297 63 20.545 116 1.

618 2.220 384 3.580 199 4.400) 7 FY10E 815 4.925 2.150 860 1.398 (933) (650) (185) (650) 166 FY12E 1.844 (100) 1.843 36 FY10E 629 7.986 26 FY09 279 2.133 1.826) (901) (1.053) FY09 628 96 201 925 (1.492 229 2.066 2.400) 73 (1.796 486 2.625 1.281 7.297 138 267 1.957 77 2.145) (600) 98 (100) 184 Edelweiss Securities Limited 51 .721 22 11.567 9.221 22 11.542 22 5.296 30 2.659 502 794 1.654 3.081 6.050 713 1.457 50 2.400) (2.971 22 12.392) (250) (248) 147 FY11E 1.437 8.940 2.618 168 (INR mn) FY12E 1.110 818 2.836 818 2.338 125 2.843 1.742 229 1.952 39 12.110 457 35 2.992 229 3.457 64 2.363 1.969 (126) 1.282 1.291 125 2.280 2.178 3.940 146 (INR mn) FY12E 629 9.764 298 4.080) (531) (522) (1.327 (5.379 818 3.254 4.702 (304) 1.422 (522) 368 (522) 7 FY09 (901) 2.418 39 5.301) FY10E 1.081 6.197 2.986 852 323 529 25 102 465 41 1.851 15 2.309 128 FY11E 629 8.996 10.611 147 211 1.420 2.609 39 11.400 575 826 125 2.374 (1.112 116 28 1.744 Cash flow metrics Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividend paid FY08 (531) 1.536 2.398 (650) 748 FY08 279 1.322 634 3.254 4.928 3.254 4.Hotels & Tourism Balance sheet As on 31st March Equity capital Reserves & surplus Shareholders funds Secured loans Unsecured loans Borrowings Deferred tax (net) Sources of funds Gross block Depreciation Net block Capital work in progress Intangible assets Investments Inventories Sundry debtors Cash and bank balances Loans and advances Total current assets Sundry creditors and others Provisions Total current liabilities & provisions Net current assets Deferred tax (net) Uses of funds Book value per share (INR) Free cash flow Year to March Net profit Depreciation Others Gross cash flow Less: Changes in working capital Operating cash flow Less: Capex Free cash flow FY08 426 64 59 549 (1.844 (1.380 1.173 459 715 103 1.787 561 1.255 (440) 815 (248) 567 FY11E 1.000 2.745 4.650 818 3.881 6.728 39 11.309 1.072 1.468 3.197 3.

3 52 Edelweiss Securities Limited .9 4 186 302 (111) 2.6 55.3 0.2 63.2 8.1 4.4 25.9 0.4 15.8 0.9 0.3 FY10E 16.5 5 174 285 (106) 2.3 0.5 0.6 2.4 23.8 11.4 0.5 FY12E 16.0 6.5 FY08 24.5 0.9 3.0 19.8 0.3 29.4 12.1 FY12E 28.9 48.8 10.2 0.4 6.1 0.3 2.5 1.9 4.4 0.6 0.6 24.8 7.3 0.0 47.7 0.7 4.7 16.9 FY09 32.8 36.6 FY11E 15.8 0.4 6 256 480 (219) 1.3 3.9 18.4 1.6 1.4 0.6 2.1 2.9 11.1 25.2 2.5 FY12E 25.4 5 220 360 (135) 2.4 0.1 0.1 36.3 5 261 400 (134) 2.5 72.3 33.7 28.4 11.8 43.0 FY09 10.6 4.7 4.2 16.5 FY11E 27.6 4.3 FY08 36.8 1.4 0.6 0.8 3.4 1.7 5.3 32.5 39.7 0.4 FY11E 20.9 5.3 17.5 1.0 FY10E 13.3 51.2 1.0 34.8 15.1 14.7 FY10E 22.7 1.9 13.5 FY09 22.4 6.1 18.7 3.6 13.4 0.8 0.5 0.5 23.8 1.Hotels & Tourism Ratios Year to March ROAE (%) ROACE (%) Inventory (days) Debtors (days) Payable (days) Cash conversion cycle Current ratio Debt/EBITDA Interest cover (x) Fixed assets turnover (x) Total asset turnover (x) Equity turnover(x) Debt/Equity (x) Adjusted debt/Equity Du pont analysis Year to March NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted P/E (x) Price/BV(x) EV/Sales (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%) FY08 6.0 0.6 0.

We expect the stock to trade at 12.9) (26.4x and 11. initiating coverage with ‘HOLD’ At CMP of INR 124. CFA +91-22. Edelweiss Securities Limited Edelweiss Securities Limited 53 .2 4.9 / 1. and Morocco. Daily Vol. in the absence of no major project in the pipeline for the next 12-18 months. 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : 48.1) 44.2 Avg.8 298. The BKC property (first major addition after four-five years) opened in Q3FY10 after a delay of almost four-five quarters. we believe value of this investment is not reflected in financials.479 393 5.6623 3362 manoj. the company reports only miniscule dividend income on the INR 1. FIs & Banks FIIs Others : : : : : 46.5 2.9 (78. Thomson First Call.1) 4.8 5. the company’s earnings growth is dependent on increase in average room rates (ARRs) and occupancy rates (ORs).BO Bloomberg : EIH IN EDELWEISS RATING Absolute Rating HOLD MARKET DATA CMP : : : INR 124 154 / 86 393.3) 2. April 1.245 393 4.4 1.4 13.0 Insufficient expansion a long-term negative EIH’s project pipeline is insufficient compared to the robust expansion plans of other players.com Edelweiss Research is also available on www.463 371 393 3.6 12. 12 months Financials Year to March Revenues (INR mn) Growth (%) EBIDTA (INR mn) Net profit (INR mn) Share outstanding (mn) EPS (INR) EPS growth (%) Diluted P/E (x) ROAE (%) FY09 11.8 71. respectively.417 1. a 10-15% premium to peers. Oman.5 0.701 393 0. EIH is curtailing its earnings expansion and not leveraging on its brand image.6) Outlook and valuations: Expensive. BSE/NSE (‘000) : SHARE HOLDING PATTERN (%) Promoters* MFs. Post the launch. a 436-room property.8 (11. respectively.com. whereas the North Mumbai market is expected to remain challenging due to 20% increase in supply. We expect further capital to flow to this subsidiary due to the current expansion plans in Dubai.4 Stock over Sensex (3.7 32.877 44.vijay@edelcap.3 24.9 12.3 (24. EIH is trading at 13. Bloomberg EDEL <GO>.5 263.2) 131. much is dependent on the performance of the Mumbai hotel market. we arrive at a target price of INR 120.bahety@edelcap.082. 2010 Reuters : EIHO.8 FY10E 9.0x FY12E EV/EBIDTA.4063 5413 manav.3x consolidated EV/EBIDTA of FY11E and FY12E.6 FY11E 13. Although we expect 45% and 15% jump in FY11E and FY12E revenues.0 FY12E 15.3 Manoj Bahety. and initiate coverage on the stock with a ‘HOLD’ recommendation. Mumbai will account for 60% of East India Hotels’ (EIH) total owned rooms inventory and approximately 50% of total FY11E revenues.196 1.620 (18.8 bn investment.3 2. Also. as the management of properties under the subsidiary is not with EIH.0 Stock 1. with a slow expansion programme. similar to its peers as the advantage of low leverage is set off by insufficient expansion. Using the target EV/EBIDTA and EV/room and valuing the international operations at 2x of investments. Reuters and Factset.7 International operations not reflected in financials Due to British Virgin Islands regulations where EIH’s international subsidiary is registered.9 10.0 32.0x FY11E and 10.India Midcap Research Hotels & Tourism Initiating Coverage EAST INDIA HOTELS Priced to perfection Banking on Mumbai with 60% rooms inventory and 50% FY11E revenue With opening of the Trident in Bandra Kurla Complex (BKC).769 (7.7 37. We believe.5) 28.143 2.com Manav Vijay +91-22.edelresearch.7) (11.235 9. * Promoters pledged shares (% of share in issue) RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 5. The South Mumbai market is expected to be robust in FY11 and FY12.

we expect Mumbai to account for 60% (1.Hotels & Tourism Investment Rationale Banking on Mumbai with 60% rooms inventory and 50% FY11E revenue With the opening of the Trident.000 during FY05-09.000 287 160 263 287 1. North Mumbai is expected to add 2. Nariman Point will lose its premium tag over a period of time. North Mumbai: Banking and financial services are the primary demand generaters for North Mumbai. as BKC is fast developing as an alternative business destination. although these hotels if not take away the traffic. Ample supply is expected to keep ARRs soft. which had jumped 230% to INR 11. performance of the Mumbai hotel market is critical for the company. While limited supply is expected to keep the South Mumbai market robust. will atleast affect sentiments. taking the total to 7.000 160 263 160 263 1. in December 2009 and the expected reopening of the Oberoi. BKC.500 60 2. but due to ample supply of rooms we expect ARRs and ORs to be soft in the next 12-18 months. Chart 1: Highly concentrated in few cities 2.310 287 160 263 287 Rooms and revenue lopsided towards Mumbai (Rooms) 1. Thus. We are not including any effect of 4-star hotels which are coming up in that part of town. We believe. in Q4FY10.310 rooms out of 2.310 874 874 1. 54 Edelweiss Securities Limited .000 rooms by 2013. Nariman Point. Edelweiss research Outlook on Mumbai hotel market South Mumbai: South Mumbai commands one of the highest ARRs in the country due to the location advantage and limited room supply. the North Mumbai market is expected to remain soft due to 20% increase in supply in the next two years.000 rooms.192 rooms) of EIH’s total owned room inventory and approximately 50% of total FY11E revenue.500 500 0 Mumbai 2008 Kolkata NCR 2009 Bengaluru 2010ERanthambore 2011E Udaipur Rajgarh Source: Company.

000 54 47 40 Sep-08 Dec-08 Nov-08 May-09 Aug-09 Sep-09 Feb-09 Mar-09 Apr-09 Oct-08 Jan-09 Jun-09 ARRs ORs Source: CRISIL. Rajgarh with 60 rooms is expected to come up in FY11E. Nariman Point. Edelweiss Securities Limited Oct-09 Jul-09 55 (%) 10.600 2.600 75 68 (INR) 8. sales growth during the previous good business cycle would have been much higher.800 900 0 FY07 FY08 Owned rooms FY09 Total rooms Source: Company. Chart 3: Slow expansion limits earnings growth No major expansion post Trident.500 3. and launching of the Trident. Edelweiss research (Rooms) FY10E FY11E Slow expansion in rooms has led to revenue CAGR of just 17% from FY04-09 with ARRs increasing at 15% CAGR during the same period.200 61 . Apart from these. Post BKC. majority of it accounts from the reopening of the Oberoi. few other properties are lined up for FY11 and FY12. BKC 4.700 1.000 11. respectively. Edelweiss research Insufficient expansion a long-term negative The 436-room BKC property is the only addition after almost four-five years. BKC.400 6. but mostly under management contract (MC).Hotels & Tourism Chart 2: ARRs and ORs struggling in North Mumbai market 13. Oberoi.800 7. Had the company aggressively expanded its rooms inventory. Although we expect 45% and 15% increase in revenues in FY11E and FY12E.

Mashobra Resort: Uncertainty continues Due to the ongoing dispute with its JV partner.4 mn as many of the company’s initiatives did not yield the desired results. The company is expected to end FY10 with flat growth and No growth in flight catering business profitability is likely to be under stress considering the doddering financial condition of the airline industry. the estimated top line for the business was INR 860 mn and the company expects similar performance in H2FY10 as well. Through EIH International. increasing its total rooms to approximately 1. due to regulations. the resort has been losing money. its impact on return ratios is not significant. EIH is also planning to increase its presence internationally by adding properties in Dubai. In the meantime. on sales of INR 776 mn. although we expect MC to contribute 7% to the consolidated EBIDTA. Mauritius. and Oman. the real effect of this is not visible. Although the inherent value of these properties is high. EIH caters to only foreign airlines. has presence in Indonesia. it posted a negative PBT of INR 73. wherein the latter holds one third equity. the company also does not report any MC income from them. In FY10. The dispute in regard to cost over runs and EIH’s subsequent request to convert its debt into equity is with the high court. EIH’s consolidated numbers do not reflect actual performance of these properties. In FY09. This has created uncertainty over EIH’s total investment of INR 1.67%) and printing press businesses as non core areas and believe the total investment of approximately INR 2 bn in them to be overall dilutive for profitability. We expect further flow of funds to this subsidiary due to the current expansion plans. Abu Dhabi. Morocco. EIH. the Government of Himachal Pradesh.26 bn in equity and INR 1. EIH recognises only dividend income from it. a wholly owned subsidiary of EIH. In H1FY10. with an investment of INR 1.600. International operations go unaccounted EIH International. and Egypt and No income from international operations across four properties has approximately 300 rooms. As the management of these properties is not with EIH or EIH International. Since properties in which investments are made through EIH International are not considered as an associate or subsidiary. Due to the registration of this subsidiary in the British Virgin Islands. Airport and flight services: Tepid growth Oberoi Flight Services (OFS) and Oberoi Airport Services (OAS) with an estimated annual revenue of INR 1. the company continues to pay the debt and interest obligations. Printing and car services business: The minions We consider EIH’s car rental (Mercury Car Rentals. We believe it is difficult for these segments to generate the hotel business EBIDTA margin of 25-30%. Growth in the business has been tepid and the company is not enthusiastic to pursue the business.13 bn in loans and advances). holds stakes in various international properties. through EIH International.8 bn. EIH holds 66.4 bn (comprising INR 0. EIH is expected to provide another INR 100 mn in FY10E towards the interest and the principal due to banks. the company 56 Edelweiss Securities Limited . Substandard returns from printing and car rental businesses The car rental business is a JV with Avis of Europe. The dispute has resulted in Mashobra losing INR 482 mn in the past five years on net basis. In FY11E.000 rooms through MC. EIH plans to add approximately 1.9 bn (16% of consolidated revenue of FY09) in FY09 is not showing any signs of growth.Hotels & Tourism Till FY12.8-1.

Haryana). the business operated out of Maiden Hotels in Delhi.Hotels & Tourism is expected to post marginal profits. EIH generated revenue of INR 500 mn from the printing business where approximately 20% of the business is in house. both due to improved business conditions and measures to cut loss making segments. but we believe its overall profitability is not more than 10-15%. Till 2008. In FY09. Edelweiss Securities Limited 57 . The company has aggressive plans for this business. the company invested INR 1 bn to expand and shift the business to Manesar (close to Gurgaon.

0x and 10. Disappointment on any of these fronts can adervsely impact stock sentiments.3 5. Although it is less than its Insufficient expansion to affect the earnings growth historical P/B of 4.4x and 11. At CMP of INR 124. respectively.2x FY11E P/B.8 13.1 4.0 5.3x consolidated EV/EBIDTA of FY11E and FY12E.1 9.4 4.57 75% 5.53 75% 10. EIH is currently trading at 3.9 70% 4. EIH has better chances of increasing overall ARRs.8 12. which adds another INR 10 to our target price.0x their EV/EBIDTA of FY11E and FY12E. EV/sales. As we don’t have any light on the financial details of its overseas company.6 5. We initiate coverage on the stock with a ‘HOLD’ recommendation. This is considering the fact that 60% of its owned rooms are located in Mumbai.3 12. the stock fully factors in better business performance.9 6. we believe the 10-15% current premium over other comparables is not justified and expect EIH to trade at similar multiple as peers. the company would be trading at EV/EBIDTA of 11. Table 1: Sensitivtiy of EV/EBIDTA – FY12E ORs ARR increase 5% 10% 15% 20% 60% 13. while its global peers are trading at 12.4 70% 11.7 11.3 5. and DCF to value EIH. P/B. which is a 10% premium than peers. we have valued the investments at 2x.3 65% 4.8 11. The sensivity table clearly demostrates that even with ORs of 70% and 15% growth in ARRs in FY12E.0 4. With a target price of INR 120.3 10. respectively.2 Source: Edelweiss reserarch We have assumed 70% ORs and 15% growth in ARRs for calculations.2 11.6 4.3x.5 10.9 10.8 Source: Edelweiss research Table 2: Sensitivity of EPS – FY12E ORs ARR increase 5% 10% 15% 20% 60% 3.7 5.1x over FY06-09.7 12.Hotels & Tourism Valuation We have used valuation parameters like EV/EBIDTA. we believe at the current price.9 10. Our sensitivty analysis for the main valuation parameters like EV/EBIDTA and EPS also shows a limited upside to our estimates. The stock is currently available at 13.7 4.4 65% 12. 58 Edelweiss Securities Limited .5 3.

98%. As contribution of the international subsidiary is currently minimal due to the registration regulation.Hotels & Tourism Key Risks Further stake increase by ITC With ITC’s stake in EIH at 14. Even though ITC has been holding this stake for the past five-six years. Monetisation of international operations Efforts to monetise the value of EIH International may provide the much needed clarity on international operations. Edelweiss Securities Limited 59 . As the company’s balance sheet is not highly leveraged. further acquisition of shares by the former through the open offer route will increase its involvement in the company. Announcement of major projects An aggressive expansion plan by the current management can propel the current slow expansion to a fast track. We do not have exact details of its land bank. any open offer will affect the share price. it is possible for EIH to increase its rooms inventory under the ownership structure. Sale of land bank Sale of any land parcels by EIH may give access to substantial cash. we have assumed investment under the same only at its book value.

airport restaurants.1% interest) Oberoi Kerala Hotels & Resorts .) Mashobra Resort equity of INR 260 mn. Fig. It manages more than 3. the group also owns a printing press.500 rooms across India and the international market.equity of INR 45 mn (100% interest) Source: Company. In 2007. Post the break up.67% interest) EIH Flight Services . founded in 1934. The group’s portfolio includes hotels and operations in flight catering. Besides hotels. the company decided to call off the arrangement as Hilton itself was increasing its presence in India. loans of INR 1. It is the largest company in the Oberoi Group.equity of INR 596 mn (36.071 rooms 10 owned hotels Airport and flight services Printing press Car rental Constitutes 64% of net revenue Constitutes 8% of net revenues Constitutes 17% of net revenues Constitutes 5% of net revenues Constitutes 6% of net revenues Fig. Edelweiss research 60 Edelweiss Securities Limited . The group. manages more than 3.000 rooms across 19 properties in India. 2: Corporate structure East India Hotel EIH International .equity of INR 22 mn (80% interest) Mercury Car Rentals .79% interest) Mumtaz Resort equity of INR 394 mn (60% interest) EIH Associated Hotels . all eight hotels were re-branded as Trident. and corporate air charters. the group entered into a strategic alliance for Trident hotels with Hilton International to cover eight hotels with approximately 1. project management. In 2003. travel & tour services. the third largest hospitality company in India after Indian Hotels and the ITC Welcome Group.Hotels & Tourism Company Description EIH.9 bn (Owns interest in 4 international properties.13 bn (78.900 rooms across India under the Trident Hilton brand.086 rooms 9 owned hotels Mgmt contract/ associate 1. The company also operates luxury cruisers in India. owns and manages luxury hotels across five countries under the Oberoi and Trident brands.equity of INR 10 mn (66.not clubbed in the con no’s.equity of INR 1. 1: Business flow chart East India Hotel Owned rooms 2. car rentals.

0 40.000 3.0 30. we believe higher proportion of villa properties in the portfolio will delay recovery as foreign tourist arrival is still weak due to the global slowdown.000 10. earnings growth is dependent on improvement Margins are dependent on growth in ARRs and ORs in ARRs and ORs.500 7. In the absence of any major addition of rooms post the Trident. Although we expect EIH to post sales growth of 45% and 15% in FY11E Mumbai is essential for sales growth and FY12E. Chart 4: Robust sales growth FY11 onwards 17. BKC.500 0 FY08 FY09 Sales FY10E FY11E FY12E 45% 30% 15% 0% -15% -30% (INR mn) Sales Growth Source: Company.0 FY07 FY08 FY09 FY10E FY11E FY12E EBIDTA Margin Net Profit Margin Source: Company. Edelweiss research Edelweiss Securities Limited 61 (%) .0 10.500 14. Edelweiss research Margins to remain subdued Though we expect EIH’s profitability to improve with revival of the tourism industry. return ratios will still be lower than those in FY07 and FY08. respectively. business and leisure travel is picking up at a slow pace. FY11 recovery is dependent on recovery of the Mumbai market as the same will account for almost 60% of owned rooms in FY11.0 (%) 20. Chart 5: Margins to improve in FY11 50.0 0.Hotels & Tourism Financial Outlook Revival of Mumbai market essential for sales growth With the general revival in economic conditions.

0 (%) 10.0 5. we expect the company’s RoE and RoCE to improve FY11 onwards. BKC.Hotels & Tourism Return ratios to improve. Chart 6: Slow improvement in return ratios 25.0 0. The average returns generated by the printing and car rentals businesses should also keep overall returns ratios below historical ones. but at a slower pace as the Trident. 62 Edelweiss Securities Limited . We expect returns to remain muted considering the investment made in EIH International and the loss making Mashobra resort. investment will start contributing only FY11 onwards.0 FY07 FY08 FY09 ROE Return ratios to remain below average FY10E ROCE FY11E FY12E Source: Company.0 15.0 20. but at slower pace With improvement in sales and operating margins. Edelweiss research EIH’s return ratios are likely to improve FY11 onwards.

120 2.319 353 3.4 8.196 1.726 822 700 3.6 47.504 1.9 0.4 9.023 1.1 (INR mn) FY12E 15.483 1.3 34.469 967 902 4.9 43.877 9.1 39.7 (298.3 1.2 7.1 393 5.1 13.394 953 333 2.3 FY09 (7.1 18.4 FY10E 74.9 19.207 286 562 191 371 393 0.774 1.719 2.1 FY10E 9.3) (24.8 43.0 FY09 64.7 FY12E 65.8 1.417 934 1.0 29.947 653 4.518 5.7 34.4 8.2 84.666 7.679 1.3 FY08 60.1) (16.5 62.2 27.2 33.479 393 3.8 23.625 2.295 904 288 3.241 762 1.414 3.7) 298.4) (24.162 3.027 990 4.463 1.7 6.203 2.3 34.4 34.8 Edelweiss Securities Limited 63 .2) (78.620 7.517 963 698 3.3) (41.1 FY11E 13.5) FY10E (18.as % of net revenues Year to March Operating expenses Employee cost Other expenditure Depreciation and amortisation Interest expenditure EBITDA margins Net profit margins Growth metrics (%) Year to March Revenues EBITDA PBT Core net profit EPS FY08 19.1 1.2 14.009 1.1 35.143 749 3.0 32.0 31.7 12.245 393 5.8 16.9 28.2 10.0 29.6 298.221 3.2 28.2) FY11E 44.1 3.9 23.5 32.986 393 5.Hotels & Tourism Financial Statements Income statement Year to March Income from operations Total operating expenses Employee cost F&B Power & fuel Other expenditure EBITDA Depreciation and amortisation EBIT Interest Total other income Profit before tax Provision for tax Profit after tax Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted Dividend per share (INR) Dividend payout (%) Common size metrics.0 5.541 4.301 1.975 1.5 25.387 327 2.9 393 0.4 10.7) (79.400 2.076 4.7 8.0 8.9 FY11E 67.074 1.039 3.2 FY09 11.7) (78.3 31.7 393 5.0 FY08 12.377 4.9 28.3 393 4.769 7.7 FY12E 9.235 10.701 393 4.7 1.8 37.8 25.8 393 3.742 716 625 3.6) (25.

085 4.399 10 11.108 35.016 21.985) (834) FY09 2.087 951 3.909 (766) 4.967 (1.268 7 4.656 7 3.732 694 3.152 7 5.198 32.897) (562) FY10E 2.454 15.040 2.887) (2.722 12.348 (1.558 27.038 776 17 23.595 273 2.967 (2.659 345 1.139 27.659 354 1.705 749 108 748 3.651 13.777 7 5.372) (1.409 317 1.510 374 1.814 2.794 (173) 3.224 653 133 784 3.909 339 1.970 2.000) (230) FY11E 4.457 14.623 8.786 186 3.065 186 3.128 (5.415 287 2.850) 2.355 2.Hotels & Tourism Balance sheet As on 31st March Equity capital Reserves & surplus Shareholders funds Secured loans Unsecured loans Borrowings Minority interest Deferred tax (net) Sources of funds Gross block Depreciation Net block Capital work In progress Intangible assets Investments Inventories Sundry debtors Cash and bank balances Loans and advances Other current assets Total current assets Sundry creditors and others Provisions Total current liabilities & provisions Net current assets Misc expenditure Uses of funds Book value per share (BV) (INR) Free cash flow Year to March Net profit Depreciation Deferred tax Others Gross cash flow Less: Changes in working capital Operating cash flow Less: Capex Free cash flow Cash flow metrics Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividend paid FY08 3.081 4.108 42 (INR mn) FY12E 1.175 26.872) FY11E 1.348 (3.198 694 3.128 2.399 10 15.241 15.936) 330 (2.273 6.000) (2.691 15.210 32.243 15.985) 981 FY09 1.545 32.438 694 3.270 (2.231) 596 (1.098 186 3.062 789 3.159 322 1.156 36 FY11E 786 14.174 20.090 3.892 1.221 114 1.189 125 9.563 (5.210 27.314 250 1.500) 2.897) (627) FY10E 371 934 110 1.175 39 (INR mn) FY12E 786 15.102 23.101 5.508 9.337 26.270 996 (2.659 439 1.847) (2.175 34.899 10 13.287 673 2.409 272 1.860 6.403) (712) (5.016 36 FY10E 786 13.824 FY08 786 11.153 3.308 468 1.210 31.162 115 1.132 1.865 16.500) (553) 64 Edelweiss Securities Limited .123 7.156 32.674 (1.376) (400) (1.310 1.215 2.172 77 3.649 7 4.171 186 2.125 11.714 31.848 FY12E 4.000 2.296) (217) (2.339 14.174 32 FY09 786 13.409 294 1.986 1.399 10 15.479 1.674 (1.426 1.394 4.292 185 2.402 54 4.521 694 3.210 32.846 2.850) (460) FY08 2.240 15.

5 0.4 FY11E 3.4 21.7 32.8 13.5 2.5) 6.7 23.9 19.0 FY12E 12.3 13.5 FY09 4.6 0.5 14.Hotels & Tourism Ratios Year to March ROAE (%) ROACE (%) Inventory (days) Debtors (days) Payable (days) Cash conversion cycle Current ratio Debt/EBITDA Interest cover (x) Fixed assets turnover (x) Total asset turnover (x) Equity turnover(x) Debt/Equity (x) Adjusted debt/Equity Du pont analysis Year to March NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted P/E (x) Price/BV(x) EV/Sales (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%) FY08 5.3 1.8 0.7 0.5 1.8 FY12E 5.9 0.3 25.3 11.9 11.8 3.1 0.4 0.1 34.0 0.2 28.7 3.2 4.1 1.1 FY09 14.2 6.8 15.8 0.5 0.3 3.5 2.3 2.3 3.1 10.6 3.6 0.8 298.9 10 36 91 (45) 0.6 5.7 FY09 12.2 2.8 0.8 Edelweiss Securities Limited 65 .6 FY11E 10.3 0.5 1.2 0.8 0.9 0.1 13.0 0.9 12.2 13.9 3.4 6.5 0.0 FY12E 13.1 FY11E 10.4 2.9 4.6 3.5 0.1 11 37 110 (62) 0.3 8.1 2.0 9 35 108 (64) 0.9 3.8 0.3 131.7 1.4 1.0 0.3 7.0 1.6 1.5 FY08 19.7 0.5 0.5 2.9 (78.1 21.4 0.0 11.0 FY10E 0.9 0.6 1.9 4.7 6.7 9 32 100 (59) 0.6 0.7 13 42 126 (71) 0.3 2.3 NA 1.8 FY10E 3.2 24.2) 3.8 FY10E 2.4 4.0 FY08 17.3 (24.5 1.7 43.4 11.9 1.3 1.0 12.

Hotels & Tourism THIS PAGE IS INTENTIONALLY LEFT BLANK 66 Edelweiss Securities Limited .

7 FY11E 6.6% margin posted in FY08.8 / 416.com Edelweiss Research is also available on www.203 416 378 1. and DCF methodology.com.1 (54.7) 66.2 mn FCCB at 125.223 54.5 0.1) 160.0 2.edelresearch.8% in FY10E.9% in FY08.BO Bloomberg : LELA IN EDELWEISS RATING Absolute Rating REDUCE MARKET DATA FCF likely to be negative till FY11. HLV is trading at 23.4 Avg.5 12.5% and 15.396.038 348 378 0. and initiate coverage on the stock with a ‘REDUCE’ recommendation. we arrive at a target price of INR 25.6) 1. we expect HLV’s debt/equity to be at 3. Post 35% dip in ARRs in H1FY10 over H1FY09. 1 month 3 months 12 months RELATIVE PERFORMANCE (%) Sensex 5. April 1.205 381 378 1.8 FY10E 4. compared to 28. respectively.4% in FY11E over 29.0 FY12E 8. we expect the stock to trade at industry level valuations.com Manav Vijay +91-22. CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : : INR 50 52 / 18 377. and shifting of the airport to the outskirts of the city are expected to limit upside on ARRs for Hotel Leelaventure’s (HLV) Bengaluru property.6 Margins likely to be at par with industry going forward With the Bengaluru property generating industry average profits going forward.5 4. Edelweiss Securities Limited 67 Edelweiss Securities Limited .4x consolidated EV/EBIDTA of FY11E and FY12E. high interest costs as the Delhi and Chennai properties become operational by July 2010 and December 2010. Reuters and Factset.8 71.522 (12.6x and 17.7) (1. Thomson First Call.557 909 378 2. 35% margin likely in FY11E IT slowdown.4) 60.6623 3362 manoj. Daily Vol. FIs & Banks FIIs Others * Promoters pledged shares (% of share in issue) : : : : : 52.8 18. equity raising is the likely option as operations continue to remain weak due to business slowdown. CFA +91-22. highest in the industry. respectively. Bloomberg EDEL <GO>. a premium of more than 70% to other listed players.2 Outlook and valuations: Expensive. initiating coverage with ‘REDUCE’ At CMP of INR 50. 2010 Reuters : HTLE.8) 25. we expect an overall 25% decline in FY10 over FY09 in this property’s ARR. high leverage a concern Adjusted for the revaluation reserve. BSE/NSE (‘000) : SHARE HOLDING PATTERN (%) Promoters* MFs.bahety@edelcap.2% in FY11E and FY12E.0 Stock 4. although HLV has already passed a resolution to raise equity of up to INR 7.India Midcap Research Hotels & Tourism Initiating Coverage HOTEL LEELAVENTURE Expensive on all counts Era of super normal profits a thing of past. Using the target EV/EBIDTA.0 2. Likely redemption of EUR 39.4 (38.5 Manoj Bahety.15 bn of exchange losses in FY10 and FY11 are likely to lead to PAT margins of 16. Financials Year to March Revenues (INR mn) Growth (%) EBIDTA (INR mn) Net profit (INR mn) Share outstanding (mn) EPS (INR) EPS growth (%) Diluted P/E (x) ROAE (%) FY09 4.5x in FY11E. With INR 5 bn of likely capex in FY10E and FY11E for the upcoming Delhi and Chennai properties.0 24.7 3. EV/room.7 5.vijay@edelcap. We are not factoring in any FCCB buyback or equity dilution.1) 1. As the company is likely to generate industry level margins going forward. ample supply of new rooms.2 Stock over Sensex (0.5% of the principal amount will also keep liquidity pressure on the company. respectively.571 37.9) 89.7 (1.2) 55. We expect FCF to be negative till FY11 as the company continues to remain in heavy capex mode.5 bn.041 (10.2 3. considering the high existing leverage.2 37. and the amortisation of INR 1.6 5.0 (8. it will be substantially low compared to over 44.7 7.9 (8. Although we expect the company’s EBIDTA margin to improve to 35.4063 5413 manav.

68 Edelweiss Securities Limited (%) . and shifting of the airport to the outskirts of the city are expected to limit upside on ARRs for HLV’s Bengaluru property.000 18. While Bengaluru is expected to add 2.0 74.000 premium category rooms in the next five years. During H1FY10.000 12.4% in FY11E over 29. the city is expected to add 6. We expect this property’s ARRs to decline by 25% in FY10E.000 16.6% margin posted in FY08. we expect Bengaluru property’s overall contribution to dip to ~35% and ~26% in FY10E and FY11E. Taking an optimistic view. Even with new properties we do not expect the company to report all time high EBIDTA margin of 45-46% reported during FY06 and FY08 as the new properties will become operational in highly competitive areas.000 FY06 Leela ARRs FY07 City ARRs FY08 Leela ORs FY09 80. 35% margin likely in FY11E Slowdown in IT.300 rooms including four star hotels (Source: HVS). as new properties like Udaipur and Delhi also start contributing to sales. Edelweiss research With severe decline in ARRs. ARRs dipped 35% over Era of abnormal ARRs in Bengaluru is over H1FY09. respectively. We believe with the doubling of rooms between FY09 and FY14 in Bengaluru. ample supply of new rooms. it is low compared to the over 44.8% in FY10E. HLV was able to charge on an average 25% more than its peers in the city with almost same ORs.0 City ORs (INR) Source: Company.0 50. ARRs are likely to remain under pressure till FY12 because of major upcoming supply.0 56.0 68. we expect 10% increase in ARRs in both FY11E and FY12E with 65% and 70% ORs during the same period.000 10.0 62.000 14. Although we expect the company’s EBIDTA margin to improve to 35.Hotels & Tourism Investment Rationale Era of super normal profits a thing of past. The location advantage of Leela Bangalore worked in its favor as the company was able to charge much higher ARRs than prevalent in the city. Though we expect a reasonable growth in demand. growth in the company’s ARRs is likely to be muted. IT boom along with limited supply of rooms had led to unprecedented increase in ARRs in Bengaluru with an almost 127% jump between FY04 and FY07. CRISIL. Chart 1: HLV has enjoyed better than average ARRs in the past 20.

Assuming the minimum RBI allowed discount of 15%. Following are the details of capex for FY10 and FY11: 1. In a recent development.8x in FY11E. highest in the industry. We expect capex of INR 3 bn in FY10 and FY11 on this property. The redemption premium payable was 46. Edelweiss Securities Limited 69 .Hotels & Tourism Chart 2: Bengaluru hotels—Rooms availability and demand 5.2 mn FCCB outstanding liable to retire or convert by September 2010. Edelweiss research FCF likely to be negative till FY11. We expect capex of INR 2 bn in FY10 and FY11 on this property.000 1. high leverage a concern Adjusted for the revaluation reserve. we believe equity raising is the likely option as operations continue to remain weak due to business slowdown. there is an exceptional gain of approximately INR 200 mn.5% of the principal amount will also keep liquidity pressure on the company. With INR 5 bn of likely capex in FY10 and High leverage to continue due to ongoing capex and debt repayments FY11 for the upcoming Delhi and Chennai properties.3 bn. In case of redemption. Chennai hotel: The 340-rooms Chennai hotel is expected to become operational by December 2010. we expect HLV’s debt/equity to be at 3.5 bn.000 (No. although HLV has already passed a resolution to raise equity of up to INR 7. The company has EUR 39. we expect the company to pay INR 3. Delhi hotel: The 290-rooms hotel in Delhi is expected to become operational in July 2010. The conversion price is INR 47 and the redemption will happen at 125.000 2. of rooms) 3.23.2 mn FCCB at 125.0-4. before the start of the Commonwealth Games in October 2010.61%. Due to tight liquidity conditions.5 bn on construction.0-5.5 bn.5% of the principal amount. this transaction only reduces the overhang of outstanding FCCBs to some extent. As conversion makes sense to the FCCB holder only if the market price goes beyond INR 60. We are not factoring in any FCCB buyback or equity dilution. considering the high existing leverage. Likely redemption of EUR 39.000 4. 2.5 bn. HLV has repurchased FCCBs of USD 25 mn due in 2012 at a steep discount. Total cost is expected to be INR 5. The company’s FCF is likely to be negative till FY11 as it continues to remain in heavy capex mode. As the payment has been refinanced with another bank loan. we do not expect any conversion.000 0 FY07 FY08 FY09 FY10E FY11E FY12E FY13E Rooms availability Rooms demand Source: CRISIL. HLV has put this project on a slow track. Apart from the land cost of INR 6. the company is expected to spend INR 4. we believe.

0 20. the company is doubling its total rooms to almost 2. we do not expect above industry margins from the company.0 26. the company is converting the project into normal office space. of rooms) 1. Chart 4: Normal EBIDTA margins going forward 50. With the expected continuous pressure on ARRs in Bengaluru and normal Only normal industry margins going forward 30-35% operating margins from other properties.000 (No. Chart 3: Total rooms availability 2.500 1.35 mn sq ft adjacent to the Chennai hotel at an estimated capex of INR 700 mn. as was the case earlier.247 in FY12E from 1.000 500 0 FY08 FY09 FY10E Rooms availability Source: Company.4% in FY07.0 FY08 FY09 FY10E EBITDA margins Source: Company.Hotels & Tourism 3.0 44.500 2. Edelweiss research FY11E FY12E Margins likely to be at par with industry going forward 45% decline in ARRs in the Bengaluru property since FY07 along with decline in ORs are the primary reasons for the decline in EBIDTA margins to 34. Edelweiss research FY11E FY12E 70 Edelweiss Securities Limited . The decision of leasing or selling has still not been taken.119 in FY09.0 38. With the addition of properties mentioned above. Initially it was to be an IT park. but with the slowdown in the sector.0 (%) 32. Office space in Chennai: HLV has constructed an office space of 0.4% in FY09 compared to 46. We expect revenue from this property to start from FY11.

Due to the high land cost of INR 6.Hotels & Tourism As Leela Bangalore has lost its locational advantage. Edelweiss Securities Limited 71 . we expect the hotel to generate normal industry EBIDTA of 30-35% and PAT margins of 15-18%.200 rooms including budget rooms in the next five years. In this light. Introduction of Sec 80 ID of Income Tax Act in the NCR region. Investment of approximately INR 11 bn for 290 rooms in New Delhi is one of the largest investments ever done by the company. it would be difficult for the property to charge above average ARRs. 3. and 4 star hotels.8x in FY09 compared to 1. With the opening of the Delhi property in July 2010 and Chennai property in December 2010. 2. We believe given the latter’s rich heritage.5 bn. respectively. We believe success of the Delhi property is essential for HLV to reduce its high leverage as going forward the Bengaluru property is not expected to generate above normal profits. HVS expects Delhi to add 8. we expect the revenue contribution of the Bengaluru property to dip to approximately 35% and 25% in FY10E and FY11E. is expected to put pressure on ARRs. HLV’s D/E ratio has jumped to 3. management intends Major investment in the upcoming Delhi property to offer only high class club rooms with an expected ARR of INR 20. HLV plans to pitch the hotel as an alternative to the Imperial Hotel.000. Upcoming Delhi hotel: Too much at stake To finance the upcoming Delhi hotel. where a five-year tax holiday has been extended to 1.5x in FY07. it would be difficult for HLV to draw a comparison.

We initiate coverage on the stock with a ‘REDUCE’ recommendation.0x and 10. At a target price of INR 25. while its global peers are trading at 12. Although it is less than its historical P/B of 4.4x consolidated FY11E and FY12E EV/EBIDTA.6x and 17. 72 Edelweiss Securities Limited . At CMP of INR 50. there is no reason for it to trade at substantial premium to other listed players.0x over FY06-09. with the hotel likely to generate normal profits going ahead. HLV is currently trading at 3. EV/sales. respectively.Hotels & Tourism Valuation We have used valuation parameters like EV/EBIDTA. The stock is currently available at 23.4x FY11E P/B. we believe there is significant downside in the stock considering the high leverage and absence of above average industry profits going forward. P/B. respectively. and DCF to value HLV.0x their FY11E and FY12E EV/EBIDTA.

As of now HLV plans to lease the space. Though the company plans to develop hotels on all these properties. we believe the probability of this event is quite low. it could ease some of the excess leverage concerns on the company.5 lakh sq ft office space in Chennai.Hotels & Tourism Key Risks Better-than-expected improvement in Bengaluru ARRs Better-than-expected improvement in Bengaluru ARRs can improve the overall EBIDTA margins substantially. if the company decides to sell these land bank(s) to reduce leverage. Sale of land bank HLV has land banks in Agra (7 acres. and Pune (6 acres). Edelweiss Securities Limited 73 . adjacent to its upcoming hotel. but an outright sell can fetch approximately INR 4 bn. A sale is likely to reduce leverage concerns to some extent. close to Taj Mahal). Considering the demand-supply economics of the city. Hyderabad (4 acres). Sale of Chennai general office space The company has built a 3. ARRs similar to FY07 and FY08 can easily push the overall EBIDTA margin beyond 40% for HLV.

In 2009. the company plans to increase presence.617 rooms. With rapid growth in room demand. across six locations in India. Compared to other hotel chains in the country. but it has prominent presence in cities where it operates. both through ownership and management contract routes. a chain of luxury resorts and business hotels. 74 Edelweiss Securities Limited . and Pune. It is the flagship company of the Leela Group. Hyderabad. HLV is small. The company caters to both business and leisure travelers. HLV has a marketing alliance with Kempinski for its properties in India. operates 1. where it plans to build hotels in the future. Five properties with 1.Hotels & Tourism Company Description Hotel Leela Venture (HLV).205 rooms are owned by the company and 409 rooms are under management contract. HLV added its first property in Delhi through the management contract route. It also holds land parcels in Agra. where promoters’ holding is 55%.

Hotels & Tourism Financial Outlook Margins to be at par with industry going ahead We expect HLV’s operating and net profit margins to decline 25% and 80% in FY11E and FY12E.0% and RoCE of 3.0 15. Edelweiss research FY12E Heavy leverage taking its toll on return ratios With the ongoing capex of INR 15 bn on Delhi and Chennai properties.0 0. Edelweiss research FY12E Edelweiss Securities Limited 75 . over the base of FY08 as the above average profits of the Bengaluru property cease.0 0. Chart 5: Peak profits are behind 50.8% in FY11E.0 10.0 5.0 30. We expect RoE of 5. Channelisation of MTM loss of INR 1.0 (%) 20. Chart 6: High leverage to affect return ratios 25. respectively.0 FY08 FY09 Net profit margins FY10E FY11E EBITDA margins Source: Company. respectively.3 bn as of FY09 will affect return ratios. we believe hotel CWIP of INR 9. We also expect profitability to come under further pressure as the entire CWIP block shifts to fixed assets and the P&L starts reflecting the actual interest payable.0 (%) 10.0 FY08 FY09 FY10E ROAE FY11E ROACE Source: Company. The improvement in ratios from FY10 is primarily due to the expected opening of the Delhi property and general improvement in the business scenario.04 bn through P&L will further erode profitability. which will become High leverage reducing return ratios operational only by FY11E and FY12E.0 20.0 40.

we expect the D/E to remain at 3.5% of reported PBT. recognised in earlier years. Revaluation reserves aggregate INE 12.0 mn were adjusted in fixed assets and “foreign currency monetary translation difference account” respectively. 4. ~ 59. courtesy revaluation of land. we expect FCF to remain negative till FY11. debt equity ratio decreased moderated by 90bps to 1.8 bn. • Exchange loss aggregating INR 1. Fresh borrowings (net) aggregate INR 1.5 mn). FY08 charge aggregates INR 256. Delhi and Chennai properties become operational.3 bn.4 bn). ~ 33. Borrowing cost (ex FCCB) decreased 290bps to 1. INR appreciated ~ 11.1 bn (20.5%). • Premium on redemption of FCCB’s and FCCB issue expenses are charged to securities premium account. However.4 bn. gain (discount) on buyback of FCCB’s aggregating INR 646. we expect a positive FCF. PAT for the year is higher by INR 2.9x increase in project related creditors aggregating INR 427.2 bn and restatement of borrowings at depreciated INR aggregate INR 2. As a result. • Exchange gains. and general business environment improves. Sundry creditors increased 1.4% of PBT.0 mn). • Freehold and leasehold land rights on properties situated in Mumbai. ~ 63. • Post March 2009.3x (FY08: 2. Key highlights from 2009 annual report • Hotel Leelaventure availed the option of capitalising/deferring foreign exchange difference on long-term monetary items provided by Accounting Standard 11.1 mn) due to 5.8% vis-à-vis the USD and a substantial portion of the MTM losses on outstanding derivative positions and the unrealized exchange loss on foreign currency denominated borrowings could be recouped.7 mn) and will be amortised over the next two financial years or earlier.6x to INR 703.9 mn (FY08: INR 335. • • • 76 Edelweiss Securities Limited .5x in FY11E. Exchange losses aggregating INR 1.2x) due to higher equity base.5x of reported PBT. Derivative exposure on March 31.5 bn in FY10E and FY11E.5 mn (FY08: INR 78. 2009 is not disclosed.0%) to INR 24. Provision for losses on derivative positions aggregate INE 81.5% (FY08: 3.1 bn are accumulated in “foreign currency monetary translation difference account” (net of FY09 amortisation aggregating INR 104. is recognised in the income statement. • Borrowings increased by INR 4.8 bn are added to fixed assets and would be depreciated over the life of related assets.0 mn. As the cash generated from operations will not be sufficient for the ongoing capex. Goa and Kovalam were revalued during the year by INR 10. • Interest expenditure decreased 29. ~ 1. • Losses on derivative positions recognised during the year aggregate INR 29. Exchange gains recognised during the year aggregate INR 87. Bangalore.3 mn (net of taxes and redemption premium on FCCB’s bought back during the year).0% of total borrowings are denominated in foreign currency.9% of net worth. as the capex slows down. Consequently.9 bn.4 mn.4 mn. In FY12E.0 mn).4 mn and INR 112. However.8 mn (FY08: INR 62.7 mn (FY08: INR 275.0% to INR 237.Hotels & Tourism Negative FCF to continue till FY11 With an estimated capex of INR 5. aggregating INR 227.5 bn (FY08: INR 20.

1 463 0.4 12.4 6.6) (22.8 0.3 34.485 378 3.1) (32.8 (8.034 2.838 1.8) (38.8 (INR mn) FY12E 8.0 83.5 35.7) (49.0 52.759 3.205 842 1.949 2.485 1.485 1.1 FY12E 67.1) (8.2 13.1 5.9 FY09 4.3 29.2 11.800 3.7) (8.960 5.307 2.363 1.1 FY10E 70.4) FY12E 37.2 11.008 267 653 1.1 75.5 23.4 8.8 25.4 4.011 2.041 889 1.4 20.1 FY08 5.233 747 1.4 FY11E 6.245 2.7) FY08 55.8 0.6 12.2 FY10E 4.8 6.9 34.5 35.223 1.522 884 2.464 669 568 188 381 381 381 378 1.4 FY09 (12.0) (54.5 63.7) (8.9 0.393 485 909 542 1.4 (20.571 1.9 72.9 483 3.146 815 2.3 FY11E 68.0 0.849 2.6 Edelweiss Securities Limited 77 .9 44.0 463 0.as % of net revenues Year to March Operating expenses Depreciation and Amortization Interest expenditure EBITDA margins Net profit margins Growth metrics (%) Year to March Revenues EBITDA PBT Net profit EPS FY08 23.557 549 1.297 453 1.4 463 2.8) FY10E (10.6) (38.965 1.5 14.843 356 745 2.203 694 509 458 660 711 295 416 184 600 600 378 1.Hotels & Tourism Financial Statements Income statement Year to March Income from operations Employee costs Other expenses Total operating expenses EBITDA Depreciation and amortisation EBIT Interest expenses Other income Profit before tax Provision for tax Core profit Extraordinary items Profit after tax Profit after minority interest Shares outstanding (mn) EPS (INR) basic Diluted equity shares (mn) EPS (INR) diluted Dividend per share (INR) Dividend payout (%) Common size metrics.2) (37.2) (54.450 1.8 19.2 17.8 10.9 FY09 65.1 0.450 378 2.4) (8.028 2.2) FY11E 54.938 4.6 28.187 678 519 171 348 348 348 378 0.7 37.038 1.9 463 0.081 2.1 7.

323 20.577 15.316 (8.715 5.301 12.870 4.034 53.078 27.874 2.495 1.545 9.933 1 704 657 709 3.055 (49) 3.325 (647) 1.833 (9.006 50.547) (177) FY10E 968 497 (1.887 1.659 28.280 20.571 13.958 2.336 2.129 2.108 11.972 (6.744 508 2.046 4.510) 687 (2.762 34.571 25.186 6.675 6.000) (1.871 20.370 38.010) (423) (3.6 FY11E 756 19.406 933 1.000) 1.495 1.221 666 44.688 48.547) (4.972 891 (5.345 44.453 1 332 310 445 3.011 0 1.357 914 30.188 (9.531 3.058 26.000) (221) 78 Edelweiss Securities Limited .231 1 420 315 306 2.367 508 2.713 1.320) (221) FY09 1.167 4.911 7.159 25.508 3.027 1 511 477 23 3.004 50.032) FY11E 381 842 0 973 2.575) FY10E 600 694 0 (216) 1.495 1.9 (INR mn) FY12E 756 19.500) (1.715 6.985 34.643 51.225 1 387 386 2.196 513 1.104 (908) (1.517 2.885 9.697 3.933 0 48.485 453 199 (293) 1.898 38.515) (2.684 (3.246 4.034 14.659 30.500) (133) FY12E 3.Hotels & Tourism Balance sheet As on 31st March Equity capital Reserves & surplus Shareholders funds Secured loans Unsecured loans Borrowings Deferred tax liability (net) Sources of funds Gross block Depreciation Net block Capital work in progress Total fixed assets Investments Inventories Sundry debtors Cash and equivalents Other current assets Total current assets Sundry creditors and others Provisions Total CL & provisions Net current assets Uses of funds Adjusted BV per share (INR) FY08 756 8.078 110 968 (2.782 48.870 3.446 5.104 FY08 1.320) (8.845 657 1.104 (2.252 2.846 3.399 18.326) 139 (2.004 44.508 3.131) FY09 1.816) (INR mn) FY12E 348 1.450 549 90 (764) 1.309 24.035 26.000) (44) FY11E 1.653) (6.336 5.115 19.836 2.345 45.218 915 46.671) 2.577 55.134 1.0 Free cash flow Year to March Net profit Depreciation Deferred tax Others Gross cash flow Less:Changes in WC Operating cash flow Less: Capex Free cash flow Cash flow metrics Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividend paid FY08 1.061 4.027 0 48.370 14.258 1.898 13.364 22.344 30.643 19.004 51.445 20.995 1.188 10.684 904 (3.9 FY09 756 18.5 FY10E 756 19.004 46.711 1.

3 2.2 (8.9 10.3 6.0 29.5 FY10E 5.2 17.5 (100.3 (80.7 10.8 (54.8 0.0) 1.2 1.1 148.8 FY12E 0.6 4.3 0.0 Y-o-Y growth (%) CEPS Diluted P/E (x) Price/BV (x) EV/Sales (x) EV/EBITDA (X) EV/EBIDTA (x)+1 yr forward Dividend yield (%) 53.9 25.8 FY12E 4.6 (8.7 3.9 24.2 0.1 5.3 21.2 6.8 FY09 12.7) 1.1 0.3 3.1 5.5 30.2) 1.7 23.4 23.6 26.2 220.4) 3.9 13.4 39.2 FY09 20.3 25.1 FY09 2.4 FY11E 5.2 4.0 26.3 32.0) 1.0 28.9 5.2) 2.4 11.0 (36.1 0.7) 3.9 55.5 3.1 3.5 5.8 FY08 28.8 FY10E 10.7 1.2 (76.2 60.5 3.9 17.2 3.5 34.0 0.9 40.9 0.1) 3.1 6.0 1.6 66.3 0.7 3.6 7.1 131.3 12.1 6.9 0.6 17.1 21.1) 3.9 0.0 Edelweiss Securities Limited 79 .5 28.4 8.4 5.2 8.8 3.4 1.6 21.0 3.2 (158.8 0.2 130.1 0.1 0.2 3.0 FY10E 0.6 3.8 (102.5 FY08 21.1 16.3 162.9 FY11E 0.8 24.0 FY12E 4.2 3.2 15.3 5.Hotels & Tourism Ratios Year to March ROAE ROACE Inventory days Debtors days Payable days Cash conversion cycle Current ratio Debt/EBITDA Interest coverage Fixed assets t/o (x) Debt/equity Du pont analysis Year to March NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuation parameters Year to March Diluted EPS (INR) FY08 3.1 8.1 0.1 0.7 FY11E 6.

Hotels & Tourism THIS PAGE IS INTENTIONALLY LEFT BLANK 80 Edelweiss Securities Limited .

7 Manoj Bahety.9 (3. CFA +91-22.9 13.1 442.5 8. management is committed to complete the ongoing capex within the time schedule and budget. ARRs registered a healthy increase of 28% Q-o-Q and we expect them to firm up from these levels going forward.5 28.547 2.056 51 723 0.2) 5.7 FY12E 39.76 bn between coupon and YTM has been adjusted against the securities premium account. Bloomberg EDEL <GO>.8 71.2 (97.7) 5.2 / 1. respectively.4063 5413 manav. Financials (Consolidated) Year to March Revenues (INR mn) Growth (%) EBIDTA (INR mn) Net profit (INR mn) Share outstanding (mn) EPS (INR) EPS growth (%) Diluted P/E (x) ROAE (%) FY09 26.bahety@edelcap.7 178.574 24. BSE/NSE (‘000) : Low coupon cumulative bond.85% YTM for an average seven years to retire offshore debt in its international subsidiaries. The SPV has raised INR 6.769 28.6 179. With revival in the tourism industry. Thomson First Call.India Midcap Research Hotels & Tourism Company Update INDIAN HOTELS COMPANY Better outlook going ahead Strong ORs and growth in ARRs going forward In Q3FY10.800 (8. IHCL has the option to take the asset back after 37 months which we believe will happen at principal + interest.4 Better cash flows due to investment linked benefits We expect IHCL to save INR 2 bn over FY11E and FY12E due to the inclusion of hotels in Sec 35 AD of the Income Tax Act.549 4.6 12.6) 85.2 32. April 1.1 Avg.7 Outlook and valuations: Business turning around.728 (7.051 318 723 0.3 28. maintain ‘BUY’ With improvement in ARRs and ORs. signaling a healthy turnaround in the industry. we expect the company to start paying MAT FY11 onwards.6 110. interest cost to skirt P&L IHCL shifted the ownership of Sea Rock to an SPV where it holds 20% (the balance is held by other TATA Group companies and third parties).com Manav Vijay +91-22.4 1. We believe the transaction will have no positive impact on adjusted profitability.8) 156. To effectively manage liquidity. We maintain our ‘BUY’ recommendation on the stock.edelresearch.6 13. Daily Vol.BO Bloomberg : IH IN EDELWEISS RATING Absolute Rating BUY Sea Rock restructuring akin to REPO.9 6.com.6 0.155 723 3. MARKET DATA CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : INR 103 109 / 39 723.5 : 74. FIs & Banks FIIs Others * Promoters pledged shares (% of share in issue) : : : : : 29.6 1.0 Stock 8.643.4 (4. 2010 Reuters : IHTL. shifting of Sea Rock to a SPV and dedicated efforts to turnaround the US portfolio. We expect ORs of 67% and 70% in FY11E and FY12E. The difference of INR 3. reserves to take a hit The company raised INR 4 bn at 2% coupon and 9. Edelweiss Securities Securities Limited 81 Edelweiss Limited .5 0. we believe the next 18-24 months present a conducive business environment for the company. we believe the company is on a revival path.6 2.756.0 FY11E 31.com Edelweiss Research is also available on www. the Indian Hotels Company (IHCL) posted its highest ORs of 70% in the past eight quarters.2 FY10E 24.vijay@edelcap.7 15. cost containment exercise.6623 3362 manoj.8 bn and paid that money back to IHCL.648 723 6. Reuters and Factset.0) 499. SHARE HOLDING PATTERN (%) Promoters* MFs. With its ongoing capex. RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 12 months 5.7 Stock over Sensex 3.

the stated transaction will get the interest liability down for the next 37 months.8 bn zero coupon money on the strength of its assets and paid that money back to IHCL. 82 Edelweiss Securities Limited . Low coupon cumulative bonds: Reserves to take a hit IHCL raised INR 4 bn at 2% coupon and 9.8x from the current 1. hotels have been included in Sec 35 AD of the Income Tax Act where investment linked benefits have been extended for any new hotel coming up anywhere in India. Although. the balance 80% is held by other TATA Group companies and third parties. The aforesaid accounting practice will result in keeping yearly interest cost of ~ INR 500 mn off P&L and. The SPV has raised INR 6. the debt/equity for FY10E will increase to 1.5% YTM for an average period of seven years. IHCL has the option to take the asset back after 37 months. to pay off the debt of its international subsidiaries. hence.Hotels & Tourism Sea Rock restructuring akin to REPO. These funds are being utilised to retire USD 95 mn of Samsara Properties (Orient Express stake) and USD 90 mn of IHMS US (for the Boston and NYC property). We expect the company to pay MAT due to the heavy ongoing capex.5x. Our analysis suggests that with this transaction. IHCL shifted the Sea Rock property to an independent SPV where it holds 20%. We expect IHCL to save approximately INR 2 bn over FY11E and FY12E due to its ongoing capex. interest cost to skirt P&L To manage the current liquidity crisis in the company. The premium on redemption of INR 4 bn debenture has been adjusted against the securities premium account. The company plans to add another INR 3 bn in March 2010 with similar terms. will result in higher reported profits (no impact on adjusted profits). it just pushes back the liability without actually reducing it. Better cash flows due to investment linked benefits In 2010 budget.

Domestic tourism is also on a great revival path and with more Indians ready to take holidays. Edelweiss Securities Limited 83 . the segment is expected to perform well in the years to come. The company can continue to earn negative returns on its international investments due to longer-than-expected turnaround of international operations and the stake of Orient Express. Investment Theme With the revival of ARRs and ORs across India. It has also entered into the budget hotel segment with a new brand. We also expect international operations to turnaround and start contributing significantly to overall margins. ‘Ginger’ and has also gone into the adventure business with wildlife lodges. Key Risks Economic slowdown is the biggest risk for the company as travel and tourism takes the first knock in uncertain times. which contributes 6-7% to total sales. With India emerging as one of the fastest growing economy.Hotels & Tourism Company Description IHCL is the largest hotel operator in India with presence in luxury. business and leisure hotel segments. the hotel industry is looking for better times ahead. We expect IHCL’s Indian portfolio (almost 80% of total sales) to post healthy growth with the revival of domestic ARRs and ORs. Unexpected events like terrorist attack or swine flu also affect the industry badly as many countries advise their citizens against traveling to affected regions. FTAs of both business and leisure are expected to pick up.243 (103 properties) across India and international locations. both in India and abroad by using ownership and asset light model of management contract. IHCL also runs airline catering business under the brand of Taj SATS. The company manages 12. The company has aggressive expansion plans.

745 723 6.3 27.856 3.3 FY11E 73.957 2.0 31.7 7.711 1.0 10.3 26.2 28.055 3.6 46.5 26.6) (97.6 11.281 3.051 2.4 7.061 2.200 20.2 FY10E 79.360 7.690 9.5 58.5 FY09 (8.5 69.9 1.2) (43.549 2.111 1.2 442.9 Common size metrics.651 5.7 110.728 19.603 764 3.677 8.252 723 3.9 603 6.195 2.244 2.678 8.7 84 Edelweiss Securities Limited .8) 520.769 23.4 FY09 26.1 1.025 10.9 13.636.2 FY12E 24.5 12.743 5.593 603 6.520 51 51 (97) 148 723 0.547 8.6 723 0.1 723 3.7 FY09 81.426 3.9 6.155 2.6 723 6.648 4.4) (98.744 8.9 (INR mn) FY12E 39.5 23.644 2.571 1.491 6.2 28.2 7.7 20.7) (0.4 5.3) (74.393 1.648 (97) 4.7 115.Hotels & Tourism Financial Statements Income statement Year to March Income from operations Total operating expenses Employee cost F&B Power & fuel Other expenditure EBITDA Depreciation and amortisation EBIT Interest Total other income Profit before tax Provision for tax Core profit Extraordinary income/(loss) Profit after tax Minority interest Profit after minority interest Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted Dividend per share (INR) Dividend payout (%) FY08 29.177 1.574 27.8 9.7 11.6 1.216 1.8 FY12E 68.5 30.938 2.8 115.9 0.106 6.747 9.155 (97) 2.1) (69.3 179.0 FY11E 31.307 8.2 723 0.2 577.289 4.194 2.7 FY11E 28.2 1.885 3.800 21.6 7.4 1.0) FY10E (7.179 (414) 3.1 FY10E 24.568 646 6.782 1.147 2.547 2.203 1.9 0.5 133.473 1.920 1.676 7.720 (542) 3.872 12.056 1.4 10.1 18.5 6.8 31.1 29.9 8.3 25.223 9.6 0.1 31.as % of net revenues Year to March Operating expenses Employee cost Other expenditure Depreciation and amortisation Interest expenditure EBITDA margins Net profit margins Growth metrics (%) Year to March Revenues EBITDA PBT Core net profit EPS FY08 16.8 11.1 30.2 577.859 3.018 3.6 33.171 2.7 FY08 69.772 1.9 32.177 10.552 2.018 8.8 15.012 475 157 318 318 (97) 415 723 0.280 7.

465 11.970 15.582 1.850 5.979 26.165 19.662 8.612 19.116 977 89.134 17.812 (8.273 3.596 19.612 24.583 2.883 7.665 46.628 651 2.932 7.662) FY11E 8.417 51.825 1.873 52.668 2.711 3.353 34.200 34.450 (362) 10.273 3.035 76 83.134 (8.200 30.586 15.176 3.271 45 (INR mn) FY12E 723 1.596 19.741 11.431 1.628 542 1.015 6.000 (2.469 2.619 1.397 4.678 11.041 40.352 2.200 31.623) 416 FY10E 4.872) (5.596 19.Hotels & Tourism Balance sheet As on 31st March Equity capital Preference share capital Reserves & surplus Shareholders funds Secured loans Unsecured loans Borrowings Minority Interest Deferred tax (net) Sources of funds Gross block Depreciation Net block Capital work In progress Intangible assets Investments Long term deposits Inventories Sundry debtors Cash and bank balances Loans and advances Total current assets Sundry creditors and others Provisions Total current liabilities & provisions Net current assets Misc expenditure Uses of funds Book value per share (BV) (INR) Free cash flow Year to March Net profit Depreciation Others Gross cash flow Less: Changes in working capital Operating cash flow Less: Capex Free cash flow Cash flow metrics Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividend paid FY08 7.570 7.752) 805 (6.694 3.727 51.015 7.787 5.350 1.088 22.741 1.165 20.825 1.664 2.056 32.438 72.419 1.676 1.116 977 89.628 641 1.044) 719 (2.691 16.230 (19.144 4.690 3.576 3.500) 8.612 21.865 14.852 2.812 (2.874 7.710 32.612 13.500) - Edelweiss Securities Limited 85 .873 46.491 2.015 7.322 8.021 5.316 6.790 53.252 2.321 35.469 2.015 8.596 19.071 13.116 977 86.820) 403 FY09 148 1.669) (541) (7.280 76 89.820 1.200 31.877 29.334 (16.435 61.623) (5.267 92 61.421 533 2.271 69.215 FY11E 2.312 FY12E 10.222 (6.000 (7.605 5.235 46.013 4.036 20.165 19.273 3.867 12.602 83.485 61.874 30.950) FY08 3.015 10.146 76 86.612 19.144 (79) 7.489) FY10E 415 2.877 (3.873 50.222 10.049) (2.079 2.435 44 FY11E 723 1.469 2.885 2.536 17.778 3.950) 50 FY08 603 22.195 2.786 33.077 1.637 76 89.820) (163) FY09 3.790 44 FY10E 723 1.469 2.619) 746 (8.722 861 6.924 13.297 3.628 609 2.556 2.873 49.809 1.665 31 FY09 723 1.770) 291 (3.953 36.662) 1.593 1.675 (325) 8.951 32.438 49 (INR mn) FY12E 4.397 520 4.790 13.273 3.726 2.877 184 (4.316 18.745 2.

3 0.Hotels & Tourism Ratios Year to March ROAE (%) ROACE (%) Inventory (days) Debtors (days) Payable (days) Cash conversion cycle Current ratio Debt/EBITDA Interest cover (x) Fixed assets turnover (x) Total asset turnover (x) Equity turnover(x) Debt/Equity (x) Adjusted debt/Equity Du pont analysis Year to March NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted P/E (x) Price/BV(x) EV/Sales (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%) FY08 6.3 0.5 1.6 178.1 442.5 6.6 13.7 6 26 93 (61) 1.3 86 Edelweiss Securities Limited .2 1.0 7 22 83 (54) 2.7 FY08 17.0 4.8 15.0 19.1 16.1 FY09 0.9 2.1 8.8 0.0) 2.0 6.6 2.3 12.6 0.5 FY09 0.5 17.5 FY11E 6.4 2.9 11.5 FY12E 6.6 0.7 0.9 3.2 FY10E 1.5 8.3 3.0 1.7 14.6 1.6 2.2 (97.8 1.9 FY09 0.6 110.3 2.8 10.3 3.2 0.3 0.6 32.8 0.5 1.0 8 26 95 (60) 1.5 8.8 0.0 15.4 FY10E 1.6 2.0 0.4 1.8 0.3 1.3 2.1 2.3 1.8 499.0 1.2 1.5 1.5 2.7 8.7 0.6 9 26 97 (62) 2.7 0.4 1.7 0.2 0.3 3.1 1.3 1.6 1.7 6.7 9.2 6.7 3.7 11.5 0.2 FY10E 0.9 9.5 1.7 FY08 12.0 3.7 1.7 0.4 2.9 2.2 6.7 FY12E 11.4 1.6 179.3 15.4 18.3 3.4 2.5 1.4 1.7 10.3 4.5 18.0 FY11E 6.2 6 23 84 (55) 2.8 0.5 FY11E 3.6 FY12E 13.

6 FY12E 10.India Midcap Research Hotels & Tourism Company Update MAHINDRA HOLIDAYS & RESORTS INDIA Rich valuations.662 84 31. Thomson First Call.1 38.vijay@edelcap. 2010 Reuters : MAHH.6 37. Daily Vol.421 17.bahety@edelcap.3 2.097 1.4 40. Considering the future liability of its expenses to serve current members.0) 53.5% as the scope and scale of future liabilities is still not clear. Coorg.522 798 78 10.4 / 1. We expect the company to add minimum 500 rooms every year.2 (5. Edelweiss Securities Limited 87 Edelweiss Securities Limited .3 Nil Outlook and valuations: Positives priced in.4 14.4 24.5 4.855 84 22.2 FY11E 8.5 Manav Vijay +91-22.1 FY10E 5. Since we have explicit assumptions only till FY12 and we had valued the company on DCF basis assuming 20% growth rate of FCF for the next 10 years beyond FY12. Although we are positive on the business model and concept.BO Bloomberg : MHRL IN EDELWEISS RATING Absolute Rating REDUCE MARKET DATA CMP 52-week range (INR) : : : INR 540 574 / 306 84.9 37.6623 3362 manoj. downgrade to ‘REDUCE’ At CMP of INR 540.2 1.8 3.0 47.0-2. Reuters and Factset.7 404.2 Addition of star properties and more rooms a must We expect MHRIL to aggressively add a few star properties to resume the sale of its ‘purple’ membership which was stopped a few quarters ago. we expect Mahindra Holidays & Resorts (MHRIL) to incur ~INR 300-350 mn on RM expenses in FY14-15E.com Manoj Bahety. FIs & Banks FIIs Others * Promoters pledged shares (% of share in issue) : : : : : 83.1 4. Bloomberg EDEL <GO>. we arrive at a fair price of INR 420 using the DCF approach. Post the disappointing Q3FY10 results. little room for upside Back-end and maintenance expenditure to increase going forward We expect the repairs & maintenance (RM) expenses to rise substantially in the future as properties come of age. We downgrade our recommendation on the stock to ‘REDUCE’ from ‘HOLD’.168 41. April 1.6 43. RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 5. The primary reason behind stopping this membership was the heavy demand for some properties like Goa. and Munnar which were running at almost peak capacity.762 30.5 35. we are now revising our numbers down 2. Share in issue (mn) M cap (INR bn/USD mn) : 45.209 84 14. we believe the price fully factors in all the good news flow. severe decline in the stock shows that expectations are high from the company.5 Avg.com. CFA +91-22.4 4.5 0.5 17.320 2.0 53.975 34.4063 5413 manav. MHRIL needs to be aggressive in adding rooms.edelresearch. we are concerned about the rich valuations.066 1. BSE/NSE (‘000) : SHARE HOLDING PATTERN (%) Promoters* MFs.9 15.8 Financials Year to March Revenues (INR mn) Growth (%) EBIDTA (INR mn) Net profit (INR mn) Share outstanding (mn) EPS (INR) EPS growth (%) Diluted P/E (x) ROAE (%) FY09 4.1 8.com Edelweiss Research is also available on www. because the company knows in advance how many new members will have to be serviced in the next 12 months.8 Stock 21.006.6 Stock over Sensex 16. With an expected capex of INR 2-3 bn every year for the next 3-4 years.

similar to a hotel company. as the number of members grows. we believe this number could be at a serious risk if this problem is not addressed early. While MHRIL recognises the entire admission fees as current year’s revenues. Revenue recognition method to lead to income expenditure mismatch Membership fee comprises non-refundable admission fee (60% of membership fees) and entitlement fee (40% of membership fees) which is refundable.Hotels & Tourism Back-end and maintenance expenditure to increase going forward We expect the RM expenses to rise substantially in the future as the properties come of age. We expect the company to add minimum 500 rooms every year for 25% membership growth. Coorg. we are reducing our FCF growth rate to 17% from 20% earlier beyond FY12E for 10 years. and Munnar which were running at almost peak capacity. In FY09. to resume the sale of its purple membership which had been stopped a few quarters ago. together with higher maintenance expenditure. the liability of servicing them will also grow manifold. on total GFA of INR 4. We have considered WACC of 12. members often complain of non-availability of rooms during the desired period.7%. has actually oversold higher class memberships.5% as the scope and scale of future liabilities is still unclear. Owing to the heavy rush at the most popular properties. We believe rise in back-end expenses to serve the existing members. we believe this income will be inadequate to meet future expenses of existing members. will reduce FCFF growth assumption by ~3%. Our revised DCF assumption considers 25% growth in membership and 7% increase in membership fee for FY11 and FY12.0-1. The primary reason for stopping them was the heavy demand for some of the properties like Goa. The current cash flow fully recognizes the company’s cash collection procedure without putting due emphasis on expenses which are back ended. Addition of star properties and more rooms a must We expect MHRIL to aggressively add properties along with some star properties. we are now revising our numbers down 1. We believe the company. 88 Edelweiss Securities Limited . As almost 33% of its members come from referrals. We believe with its cash flows. We believe there is little scope for positive surprise to the above assumptions. entitlement fee is recognised linearly over the balance period of membership. MHRIL needs to be aggressive in adding rooms. followed by 17% growth in FCFF for the next 10 years beyond FY12E and 5% terminal growth rate. Based on the reasons mentioned above. With an expected capex of INR 2-3 bn every year for the next 3-4 years. in its attempt to sell memberships. we believe 40% of membership fees will not be sufficient for servicing existing members for the next 24 years. As the company is just 12-13 years old and has attained size in the past 4-5 years.3 bn. As MHRIL recognises significant portion of membership fee upfront. leading to an income expenditure mismatch. Although the company charges its members an AMC which is indexed to the Urban Consumer Price Index published by RBI. MHRIL is likely to incur ~INR 300-350 mn RM expenses in FY14-15E. more so because it knows in advance how many new members will have to be serviced in the next 12 months. Growth in back ended expenditure to hit the profitability in later years Since we have explicit assumptions only till FY12 and have valued the company on DCF basis assuming 20% growth rate of FCF for the next 10 years beyond FY12E. the company incurred INR 100 mn on RM. which we believe is not the correct representation of future as we expect expenses to rise as old properties start needing more maintenance work.

Hotels & Tourism No Sec 35 AD benefit The Union Budget 2010 has extended the benefit of Sec 35AD of the Income Tax Act to all new hotels coming anywhere in India post 1. However. we expect the company to continue to pay full corporate tax rate of 33%. This is not strictly disadvantageous for the company. it may lose its ongoing tax dispute of INR 900 mn with the department.2010. As MHRIL is not classified as a hotel company.4. if the company makes a case before the IT department to get classified as a hotel company. Edelweiss Securities Limited 89 .

singles and corporates. With almost 100. The company has different schemes for families.000 members spread across different membership schemes. the future expenses to serve the existing members is not getting properly accounted. we believe only 5-10 years down the line we will have the visibility of its full scale expenses. increase in overall average membership fee are some of the factors that could provide risk to our estimates.Hotels & Tourism Company Description MHRIL was started in 1997 and offers a unique vacation ownership model to Indian consumers with resorts spread across India. Settlement of ongoing Munnar property and IT dispute can also provide upside risk to our estimates. We are not assigning any value to the change in valuations once the cycle of 25 years of membership ends as the same resorts can again be re-used for new members considering the resorts would also be attracting lumpy capex which we have not taken in our assumptions. Key Risks Launching new schemes. restart to sell the Purple membership. 90 Edelweiss Securities Limited . but we are concerned with the accounting treatment of the income and expenditure done by the company. With its resorts located across India. although MHRIL is in a sweet spot to exploit the growth in the Indian travel & tourism sector. Investment Theme With its unique business model. Due to the limited history of its operations. We believe with its aggressive income recognition principle. the company plans to aggressively expand its reach both in terms of members and new resorts. the company uses the upfront membership fee charged from members to build resorts.

as % of net revenues Year to March Operating expenses Sales promotion and comission Other expenditure Depreciation and amortisation Interest expenditure EBITDA margins Net profit margins Growth metrics (%) Year to March Revenues EBITDA PBT Core net profit EPS FY08 56.1 0.0) (5.329 33 1.0 84 22.4 FY12E 34.2 5.4 18.117 1.1 4.633 2.6 (0.4 25.2 78 10.732 62 140 2.3 81.320 426 3.4 53.5 40.Hotels & Tourism Financial Statements Income statement Year to March Income from operations Total operating expenses Employee cost Sales promotion and comission Other expenditure EBITDA Depreciation and amortisation EBIT Interest Total other income Profit before tax Provision for tax Profit after tax Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted Dividend per share (INR) Dividend payout (%) Common size metrics.209 84 14.0 34.7 51.284 486 798 78 10.4 FY10E 5.6 19.6 3.9 43.1 3.3 26.8 37.3 FY08 3.9 38.9 18.066 334 2.5 20.0 27.6 84 31.662 84 31.5 22.4 84 14.855 84 22.8 19.149 2.4 53.772 2.975 6.421 2.0 FY10E 63.8 42.8 23.032 1.8 1.9 32.5 43.2 22.254 1.6 97.102 1.1 36.810 955 1.762 3.135 1.9) (5.4 23.2 93.4 FY09 4.8 3.168 5.6 1.655 1.4 3.330 474 882 975 1.6 25.0) FY10E 30.2 97.8 46.097 264 1.862 4.1 FY11E 8.5 (INR mn) FY12E 10.371 2.9 0.7 78 10.0 FY11E 62.832 623 1.6 39.354 70 1.3 37.2 3.7 28.2 4.522 168 1.644 2.833 62 60 1.0 4.5 43.3 FY09 65.296 456 840 78 10.894 62 200 4.9 FY11E 41.664 908 1.7 1.6 4.4 24.6 FY09 17.899 608 1.6 26.442 113 1.215 3.174 1.2 Edelweiss Securities Limited 91 .4 40.6 34.0 0.5 FY08 61.2 53.7 FY12E 60.6 19.622 2.4 21.

239 7.Hotels & Tourism Balance sheet As on 31st March Equity capital Reserves & surplus Shareholders funds Secured loans Deferred tax (net) Sources of funds Gross block Depreciation Net block Capital work In progress Investments Inventories Sundry debtors Cash and bank balances Loans and advances Total current assets Sundry creditors and others Advance from member facilities Provisions Total current liabilities & provisions Net current assets Uses of funds Book value per share (BV) (INR) Free cash flow Year to March Net profit Depreciation Deferred tax Others Gross cash flow Less: Changes in working capital Operating cash flow Less: Capex Free cash flow Cash flow metrics Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividend paid FY08 466 9 (492) (17) (732) (87) FY09 1.021 (2.996 1.188 1.462 2.573 865 9.874 (566) (3.617) 5.806 513 3.131 1.729 1.584 (1.410 306 7.750) (436) FY08 840 113 34 (825) 163 (303) 466 (732) (266) FY09 798 168 59 1.300) 2.652 513 0 53 4.633) (140) FY10E 2.604 (838) 1.500 73 5.494 94 (INR mn) FY12E 2.584 (183) (1.018 513 2.237) 736 (1.300) (388) FY11E 3.734 479 2.459 2.825 171 5.826 328 665 5.500 25 FY10E 829 3.867 2.512 6.574 FY12E 4.121) 6.867 18 FY09 770 1.430 201 236 1.494 10.300) 696 FY11E 1.239 3.871 821 6.864 14.825) 8.593 905 5.034 76 621 4.510 926 1.536 (1.985 4.209 264 2.485 2.026 8.040 5.787) 509 (2.127 1.961 1.286 837 765 6.996 (2.953 247 294 8.124 7.500 4.725 4.000 93 7.542 247 295 5.958 247 295 2.599 1.343 1.665) 2.247 306 9.779 (3.664 8.411 8.540 4.255 450 0 35 4.287) 1.429 11.458 1.084 6.300) (485) 92 Edelweiss Securities Limited .490 (518) (2.740 FY08 764 666 1.633) (50) FY10E 1.594 965 13.766 609 4.714 4.411 70 (INR mn) FY12E 829 7.786 306 16.149) 251 (1.855 334 2.868 247 295 6.874 (2.300 (3.658 1.578 (2.490 (1.044 306 12.662 426 (1) 3.000 113 9.643 1.688 513 1.084 54 FY11E 829 5.750) 1.955 (3.293 641 3.

Hotels & Tourism

Ratios Year to March ROAE (%) ROACE (%) Inventory (days) Debtors (days) Payable (days) Cash conversion cycle Current ratio Debt/EBITDA Interest cover (x) Fixed assets turnover (x) Total asset turnover (x) Equity turnover(x) Debt/Equity (x) Adjusted debt/Equity Du pont analysis Year to March NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuation parameters Year to March Diluted EPS (INR)
Y-o-Y growth (%)

FY08 76.9 94.0 4 301 79 226 0.9 0.1 40.3 1.8 2.6 3.5 0.1 0.1

FY09 47.1 62.0 5 366 90 281 0.8 0.2 19.3 1.5 2.0 2.6 0.1 0.1

FY10E 37.2 60.3 6 320 92 235 0.7 0.1 29.7 1.2 1.5 1.8 0.1 0.1

FY11E 35.6 68.4 6 277 88 195 0.8 0.1 44.3 1.3 1.4 1.6 0.0 0.0

FY12E 38.5 78.6 6 276 90 191 0.8 0.1 63.1 1.4 1.5 1.6 0.0 0.0

FY08 22.3 2.6 1.3 76.9

FY09 18.0 2.0 1.3 47.1

FY10E 21.0 1.5 1.2 37.2

FY11E 22.7 1.4 1.1 35.6

FY12E 24.3 1.5 1.1 38.5

FY08 10.7
97.6

FY09 10.2
(5.0)

FY10E 14.4
40.9

FY11E 22.0
53.4

FY12E 31.6
43.5

CEPS (INR) Diluted P/E (x) Price/BV(x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%)

12.6 50.3 29.6 11.2 29.4 0.3

13.1 53.0 21.6 9.5 27.7 0.6

17.5 37.6 10.0 7.5 20.7 0.7

26.0 24.5 7.7 5.2 13.7 0.8

36.6 17.1 5.7 3.7 9.3 0.9

Edelweiss Securities Limited

93

Hotels & Tourism

THIS PAGE IS INTENTIONALLY LEFT BLANK

94

Edelweiss Securities Limited

India Midcap Research Hotels & Tourism

Company Profile

ASIAN HOTELS
Waiting for clarity

Company Description
Asian Hotels (AHL) was established in 1980 and is the fourth largest listed 5-star hotel company in India. It has over 1,100 rooms across three properties in the country viz., Delhi, Mumbai, and Kolkata. While the Delhi property is owned by AHL, Hyatt International operates the hotel and provides marketing, branding, and management services. Delhi accounts for 44% of total rooms and almost 48% of total revenue. Mumbai accounts for 34% and Kolkata for 22% of the total 1,150 rooms.

April 1, 2010
Reuters : ASHT.BO Bloomberg : AHOT IN

EDELWEISS RATING Absolute Rating NOT RATED

MARKET DATA

Key Highlights
With three different groups as promoters, AHL has decided to trifurcate the company. The Jatia Group will take over the Delhi property and the company will be renamed Asian Hotels. The Saraf Group will take over the Kolkata property along with development rights in Bhubaneshwar, Regency Convention Center and Hotels and appropriate cash to form Vardhaman Hotels. The Mumbai property along with the development options of Bengaluru will go to the Gupta Group and will be named Chillwinds Hotels. The company’s restructuring aims to give higher flexibility to promoters to expand their businesses, resulting in higher growth prospects in the future.

CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn)

: : : :

INR 560 590 / 207 22.8 12.8 / 283.1 21.0

Avg. Daily Vol. BSE/NSE (‘000) :

SHARE HOLDING PATTERN (%) Promoters* MFs, FIs & Banks FIIs Others * Promoters pledged shares (% of share in issue) : : : : : 63.6 3.7 0.8 32.0 4.9

Key Risks
With the Delhi property accounting for close to 50% of AHL’s total revenue, the company is heavily dependent on a single market for its performance. Delay in finalisation of the restructuring process could be a negative as the exercise is already under process since a long time.

Financials Year to March Revenues (INR mn) Rev. growth (%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) EPS growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) 22.5 11.7 18.5 1,258 567 23 24.9 FY06 3,290 FY07 4,134 25.7 1,830 915 23 40.1 61.3 14.0 7.8 12.2 FY08 5,135 24.2 2,275 1,326 23 58.1 44.9 9.6 5.9 9.8 FY09 6,415 24.9 2,173 942 34 27.5 (52.7) 20.4 6.7 NA
Manoj Bahety, CFA +91-22- 6623 3362 manoj.bahety@edelcap.com Manav Vijay +91-22- 4063 5413 manav.vijay@edelcap.com

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Edelweiss Securities Securities Limited 95 Edelweiss Limited

0 10 28 FY08 5.1 51.7 16.8 38.9 4.8 38.4 5.3 61.9 FY09 24.1 23 40.290 2.035 709 1.242 902 3.049 14 1.8 4.860 863 1.8 FY09 66.2 24.3 61.9 17.063 192 871 304 567 567 567 23 24.032 668 1.830 295 1.5 NA 1 3 96 Edelweiss Securities Limited .5 1 2 (INR mn) FY09 6.535 593 942 942 942 34 27.5) (24.3 FY08 24.8 20.415 4.6 33.9) (52.3 40.2 31.275 246 2. other income Net interest PBT Provision for taxation Core PAT Profit after tax Profit after minority interest Equity shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) fully diluted CEPS (INR) DPS Dividend payout ratio (%) Common size metrics .623 174 1.997 2.4 6.3 41.7 15.340 2.7) FY06 61.5 66.326 23 58.as % of net revenues Year to March Cost of materials Administrative and other expenses Selling costs Depreciation Net interest expenditure EBITDA margin EBIT margin Net profit margin Growth metrics (%) Year to March Revenues EBITDA PBT Net profit EPS FY07 25.029 220 2.304 653 1.5 4.9 40.9 23 24.Hotels & Tourism Financial Statements Income statement Year to March Net revenues Total operating expenses Empolyee expenses Other expenses EBITDA Depreciation EBIT Other income EBIT incl.7 45.326 1.9 44.9 5.1 73.2 44.1 52.1 14.1 6.4 14.9 (4.830 221 1.2 44.759 71 1.8 39.2 FY07 55.3 39.1 23 58.363 1.9 22.3 38.9 27.7 FY06 3.5 25.3 4.651 1.173 414 1.6) (28.135 2.1 FY08 55.326 1.5 34 27.609 13 1.258 210 1.134 2.249 214 2.4 44.2 10 46 FY07 4.449 534 915 915 915 23 40.

393 2.993 15.366 73 2.253 1.030) (165) 77 (175) 360 FY07 1.410 14.024 16.543 997 5.326 246 104 1.366 (108) 1.272 (1.160 2.993 659 (INR mn) FY09 342 3.653 1.935 2.836 1.016 619 397 2.688 1.550 135 11.097 FY07 915 221 27 203 1.594 16.841 3.780 (3.275 3.909 263 235 1.707 11.691 1.171 91 222 3.820 1.134 (137) 1.020 1.796 14.550 6.016 2.498 2.546 107 662 80 96 39 447 766 446 320 (104) 5.385 1.078 486 14.343 552 791 90 14.023 458 5.592 15.653 688 20.093 1.474 573 900 FY08 1.947 6.023 2.184 13.360 2.131 98 162 455 3.474 (826) (792) (144) (573) 261 FY08 1.078 2.162 1.963 1.208 20.510 14.069 2.433 83 133 342 876 1.828) (33) (619) 56 FY06 567 210 141 217 1.416 2.498 15.401 18.281 401 287 4.498 523 FY06 228 FY07 228 FY08 228 200 14.385 589 16.272 175 1.Hotels & Tourism Balance sheet As on 31st March Equity Capital Pref Share capital Reserves Shareholders' funds Secured loans Borrowings Deferred tax (net) Sources of funds Gross block Less depreciation Net fixed assets Capital work in progress Investments Current assets Inventories Sundry debtors Cash and bank balance Loans and advances Current liabilities Liabilities Provisions Working capital Uses of funds BV (INR) Cash flow statement Year to March Net profit Depreciation Deferred tax Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow Cash flow metric Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid FY06 1.107 715 1.594 533 (INR mn) FY09 NA NA NA NA NA NA NA NA NA FY09 NA NA NA NA NA NA Edelweiss Securities Limited 97 .

4 0.6 FY09 27.9 73.5 FY09 NA NA NA NA NA NA NA NA NA NA NA 98 Edelweiss Securities Limited .1 0.7 5.5 FY07 22.4 1.0 14.1 9.1 61.3 FY08 9.6 FY08 0.0 FY08 58.9 22.6 (65) 0.8 0.2 0.1 2.6 5.4 0.2 16.6 (132) 0.7 24.2 22.8 18.0 1.5 7.8 40.9 2.2 9.5 FY06 24.1 10 7 150 2.2 FY08 25.4 0.1 44.1 14.6 0.4 FY09 NA NA NA FY06 18.2 10 7 119 1.1 3.9 1.9 58.5 18.Hotels & Tourism Ratios Year to March ROAE ROACE Debtor days Inventory days Payable days Current ratio Debt/EBITDA Cash conversion cycle days Debt/Equity Adjusted debt/equity Interest coverage (x) Operating ratios Year to March Total asset turnover Fixed asset turnover Equity turnover Du pont analysis Year to March NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted P/E (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Basic EPS (INR) Basic P/E (x) 40.3 1.5 FY07 12.1 (101) 0.6 1.0 0.8 FY09 NA NA NA NA FY06 0.7 27.3 6.8 13.6 1.2 0.4 1.5 (52.1 9.3 12.3 0.1 FY07 0.1 1.1 0.3 51.5 11.9 11 9 85 0.7 0.5 4.2 9.4 FY06 17.2 4.7) NA 20.5 9.6 0.5 20.9 FY07 40.

FIs & Banks FIIs : : : : : 75.0 15. holds 25.8 1. and addition of nearly 190 rooms at Begumpet.1 5.com Edelweiss Research is also available on www. Edelweiss Securities Securities Limited 99 Edelweiss Limited .4063 5413 manav. It is also contemplating Jaipur.0 38.com.442 29. The expansion involves 180 rooms in its existing property at Taj Deccan.0 7.6 160.382 (7. Daily Vol. Bloomberg EDEL <GO>.6 10. Reuters and Factset.3 231.894 FY07 2.3 848 463 63 7. 2010 Reuters : TAJG. April 1. These locations include Hyderabad.7 9.0 8.India Midcap Research Hotels & Tourism Company Profile TAJ GVK HOTELS & RESORTS Regional play Company Description Incorporated in 1999.BO Bloomberg : TAJG IN EDELWEISS RATING Absolute Rating NOT RATED MARKET DATA Key Highlights To take advantage of its land bank.vijay@edelcap.0 1.3 12.3 39.5 acre plot in Bengaluru for future expansion. Indian Hotels Company (IHCL).000 sq ft retail expansion at its Taj Krishna property which is expected to be operational by Q1FY11.8 71.com Manav Vijay +91-22.221 704 63 11. Delay in execution of its projects along with oversupply of premium category rooms in Hyderabad are the main concerns for the company.9 21. Kodaikanal. the company is running a capex programme of INR 2.bahety@edelcap.52% and other promoters hold 49.4 (25.6 Avg.6 34. Others * Promoters pledged shares (% of share in issue) RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 12 months 5.5 bn.4 FY06 1.0) 18.8 / 217.9 FY08 2. The Tata Group company. IHCL is a strategic investor in the company. Chennai.3 31. Thomson First Call.3 9.4 14.2 9.9 294.3) 4. and Amritsar for expansion. It has also acquired a 6. The company is also planning a 12. the dependence on a single city is high.8 1.7 Stock over Sensex (3.0 Stock 2.0 FY09 2. CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : : INR 157 168 / 46 62. growth (%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) EPS growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) 21.edelresearch.8 Nil Key Risks Taj GVK receives more than 75% of its revenue from three hotels located in Hyderabad. and Chandigarh with Hyderabad accounting for majority of the rooms and revenue.8) 1.6623 3362 manoj.152 643 63 10. Taj GVK Hotels & Resorts is a joint venture of the Taj and GVK groups.026 528 63 8. Although the company has diversified by opening hotels in Chennai and Chandigarh.1 Manoj Bahety.5 0.7 Financials Year to March Revenues (INR mn) Rev.47% of the company. CFA +91-22. BSE/NSE (‘000) : SHARE HOLDING PATTERN (%) Promoters* MFs.4 15. a block of 43 room service apartments at Taj Krishna.584 5. The company currently operates five premium properties totaling 900 rooms.

4 63 8.8 39.045 271 774 848 109 739 739 40 700 237 463 463 463 63 7.3 2.2 13.0) (23.039 31 1.8 2.4 22.3 40.894 1.356 453 903 1.1 2.2 42.3 42.1 7.6 26.382 1.4 2.0) FY06 55.085 381 704 704 704 63 11.291 319 971 1.6) (25.5 34 FY08 2.4 11.0 37.8 6.5 0.9 19.008 365 643 643 643 63 10.4 9.1 39.152 112 1.8 27.4 FY09 (7.3 63 10.584 1.0 39.0 FY08 5.8 4.9 5.026 137 890 890 62 828 301 528 528 528 63 8.0 24.2 63 11.1 37.as % of net revenues Year to March Cost of materials Administrative and other expenses Selling costs Depreciation Net interest expenditure EBITDA margin EBIT margin Net profit margin Growth metrics (%) Year to March Revenues EBITDA PBT Net profit EPS FY07 29.6 33 (INR mn) FY09 2.1 FY06 1.8 13.3 FY08 52.7 14.9 5.4 FY07 52.8) (16.2 FY09 56.1 4.221 115 1.7 38.Hotels & Tourism Financial Statements (Consolidated) Income statement Year to March Net revenues Total operating expenses Empolyee expenses Other expenses EBITDA Depreciation EBIT EBIT incl.0 28 100 Edelweiss Securities Limited .7 2.6 9.0 31 FY07 2.106 1.442 1.8 47.4 63 7.0 35. other income Net interest PBT Provision for taxation Core PAT Profit after tax Profit after minority interest Equity shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) fully diluted CEPS (INR) DPS Dividend payout ratio (%) Common size metrics .7 44.362 379 984 1.2 14.3 47.4 9.3 12.6 43.0) (25.2 2.039 1.0 39.1 44.6 1.106 21 1.

276 37 (INR mn) FY09 125 2.258) 234 Edelweiss Securities Limited 101 .391 1.674 29 FY08 125 2.258 (406) FY09 852 314 (1.710 1.090 300 1.390 133 4.258) (92) (1.276 2.516 706 150 856 65 2.928 1.674 2.581 644 1.437 24 FY07 125 1.631 891 3.937 760 619 31 60 253 276 669 402 267 (50) 27 2.932 207 140 627 25 73 140 389 507 352 155 120 38 2.734 1.860 684 50 734 81 2.585 2.233 43 (INR mn) FY09 528 137 33 85 782 (70) 852 1.740 694 327 45 64 21 197 544 395 149 (218) 17 4.686 759 1.204 2.386 503 39 54 113 297 559 298 261 (56) 18 3.541 609 1.233 4.437 2.329 505 240 745 202 3.Hotels & Tourism Balance sheet As on 31st March Equity Capital Reserves Shareholders' funds Secured loans Unsecured loans Borrowings Deferred tax (net) Sources of funds Gross block Less depreciation Net fixed assets Capital work in progress Investments Current assets Inventories Sundry debtors Cash and bank balance Loans and advances Current liabilities Liabilities Provisions Working capital Misc expenditure Uses of funds BV (INR) Cash flow statement Year to March Net profit Depreciation Deferred tax Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow Cash flow metric Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid FY06 571 27 (469) 128 (469) 64 FY07 717 (258) (349) 110 (349) 141 FY08 792 (200) (732) (139) (732) 219 FY06 463 109 19 (31) 559 (11) 571 469 102 FY07 643 112 16 (337) 434 (283) 717 349 368 FY08 704 115 9 99 926 134 792 732 61 FY06 125 1.

4 102 Edelweiss Securities Limited .3 FY07 26.9 0.9 FY08 27.3 7.9 8.3 FY06 7.7 FY07 38.3 15.4 (25.1 FY06 0.0 10.3 1.7 9 7 83 0.5 21.2 FY08 34.4 FY08 0.4 0.3 1.2 8 6 79 0.2 1.7 10.4 4.4 18.6 3.4 13.2 14 5 98 1.3 32.0 1.6 0.5 38.0 1.9 1.1 23.2 9.3 4.0 FY09 22.4 21.3 39.3 6.5 12.6 FY06 24.0 37.6 18.0 (79) 0.6 (85) 0.3 0.9 FY06 31.4 33.3 15.4 34.8 10 5 100 0.1 18.2 14.6 0.3 1.4 (68) 0.8 1.2 9.0 4.3 FY08 11.9 0.6 1.4 FY07 10.7 5.6 11.5 14.6 1.0 12.3 5.9 41.0) 11.2 14.9 FY09 21.2 FY09 0.8 0.3 51.9 1.7 4.1 0.5 0.4 21.2 FY07 1.0 1.8 1.1 8.Hotels & Tourism Ratios Year to March ROAE ROACE Debtor days Inventory days Payable days Current ratio Debt/EBITDA Cash conversion cycle days Debt/Equity Adjusted debt/equity Interest coverage (x) Operating ratios Year to March Total asset turnover Fixed asset turnover Equity turnover Du pont analysis Year to March NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted P/E (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Basic EPS (INR) Basic P/E (x) 9.0 FY09 8.6 31.2 0.4 0.6 (65) 0.

(INR) (INR) (INR) 340 380 420 460 500 14 28 42 56 70 0 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Jan-10 300 Dec-09 Jul-09 Aug-09 Sep-09 Oct-09 Buy Buy Hold Feb-10 Mar-10 (INR) 120 102 84 66 48 30 35 65 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Indian Hotels Cox & Kings Hotels & Tourism Hotel Leelaventure Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Mahindra Holidays & Resorts India 300 EIH 360 (INR) 125 155 185 95 420 Buy Dec-09 Jan-10 480 Buy Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 Feb-10 Mar-10 540 600 Edelweiss Securities Limited 103 .

directly or indirectly related to specific recommendations or views expressed in this report. of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. where such distribution. is or will be. Nevertheless. copied.maheshwari@edelcap.edelresearch. The investment discussed or views expressed may not be suitable for all investors. availability or use would be contrary to law. state. Edelweiss is under no obligation to update or keep the information current.com +91 22 2286 4246 +91 22 2286 4206 +91 22 6623 3411 Research Coverage group(s) of stocks by primary analyst(s): Hotels Indian Hotels and Mahindra Holidays & Resorts India Recent Research   (INR) 1.Bloomberg EDEL <GO>.Hotels & Tourism Edelweiss Securities Limited. Express Towers. any such restrictions. We and our affiliates.com . have long or short positions in. agents or representatives shall be liable for any damages whether direct. All rights reserved Edelweiss Research is also available on www. Nariman Point.150 950 750 550 350 150 Buy Date 04-Dec-09 Company Indian Hotels Mahindra Resorts & Buy Buy India Title Time to check-in. Reuters and Factset. Initiating Coverage Membership-led growth. Email: research@edelcap. and persons in whose possession this document comes. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. country or other jurisdiction. 104 Edelweiss Securities Limited Edelweiss Securities Limited . or use by. This report is not directed or intended for distribution to. Board: (91-22) 2286 4400. group companies. and employees may: (a) from time to time. for any purpose. This information is strictly confidential and is being furnished to you solely for your information. Thomson First Call. Initiating Coverage Price (INR) Recos 88 Buy 12-Oct-09 346 Buy Distribution of Ratings / Market Cap Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Edelweiss Research Coverage Universe Buy Hold Buy Hold Reduce Reduce Total Total 169 128 < 10bn < 10bn 13 15 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Rating Interpretation Rating Buy Hold Reduce Expected to appreciate more than 15% over a 12-month period depreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period Rating Distribution* 101 56 9 Rating Distribution* 53 43 29 * 3 stocks under review * 3 stocks under review > 50bn Between 10bn and 50 bn > 50bn Market Cap (INR) Market Cap (INR) 103 72 Between 10bn and 50 bn 53 41 Access the entire repository of Edelweiss Research on www. persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. in whole or in part.edelresearch. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. any person or entity who is a citizen or resident of or located in any locality. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information.com nischal.com This document has been prepared by Edelweiss Securities Limited (Edelweiss). Analyst holding in the stock: no. Our research analysts and sales persons provide important input into our investment banking activities. employees.com Naresh Kothari Vikas Khemani Nischal Maheshwari Co-Head Co-Head Head Institutional Equities Institutional Equities naresh. Neither Edelweiss nor any of its affiliates. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). Past performance is not necessarily a guide to future performance. should inform themselves about and observe. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities. publication. Edelweiss Securities Limited generally prohibits its analysts. directors. Edelweiss. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. its holding company and associate companies are a full service. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved). This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published. group companies. portfolio management and brokerage group.kothari@edelcap. but we do not represent that it is accurate or complete and it should not be relied on as such. and buy or sell the securities thereof. Edelweiss reserves the right to make modifications and alterations to this statement as may be required from time to time. Edelweiss is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. integrated investment banking. Mumbai – 400 021. The information contained herein is from publicly available data or other sources believed to be reliable. and no part of his or her compensation was.khemani@edelcap. 14th Floor. and should consult his own advisors to determine the merits and risks of such investment. indirect. special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. The distribution of this document in certain jurisdictions may be restricted by law. However. regulation or which would subject Edelweiss and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The user assumes the entire risk of any use made of this information. This information is subject to change without any prior notice. directors.com vikas. officers.

Edelweiss Value Scanner 2 .

Sign up to vote on this title
UsefulNot useful