Indian Hotels- 1HFY11 results adversely affected; outlook improving:: JPMorgan

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Indian Hotels Overweight
IHTL.BO, IH IN
1HFY11 results adversely affected by one-offs, but
outlook is improving



• 1H FY11 results adversely impacted by one-offs: Indian hotels reported
standalone 1H FY11 EBITDA of Rs900MM (up 5% Y/Y), below our
estimate of Rs1.3B. While revenues of Rs6.6B (up 20% Y/Y) were broadly
in line with expectations, the EBITDA margin at 14% was adversely
affected by (a) pre-operating losses related to the opening of the Taj Palace
wing in Mumbai; (b) one-off costs on re-branding exercise bringing 19 Taj
hotels under the new Vivanta brand; and (c) refurbishment costs for a few
properties during the lean period. 2Q FY11 results included exceptional loss
of Rs86MM (MTM loss on investment in subsidiary). Adjusted for
exceptionals and forex gains, the net loss for 1H FY11 stood at Rs20MM.
• However, the outlook is improving: Overall occupancy in the domestic
portfolio remained healthy at 62% (up 600bp Y/Y) in a seasonally weak
quarter. More importantly, management guided to occupancies recovering
to the 2007 peak (>80%) and an imminent increase in ARRs as we get into
peak season in 3Q. This is quite encouraging given the ARR rise comes
after a hiatus of almost over two years. Management said Sep-Q marks the
end of turbulent times and guided to a buoyant 2H outlook on the back of
positive foreign tourist arrival trends (+10% YTD), stabilization of Taj
Palace Wing in Mumbai (opened mid-Aug), and healthy room additions.
• International portfolio trends are encouraging with Pierre operating at a
62% occupancy rate and the rest of the markets (Boston, SFO, London)
showing decent improvement (occupancy +7-15% Y/Y, ARR +0-10% Y/Y).
• IHCL’s board approved a preferential allotment of 36MM shares and 48MM
warrants to the promoters (Tata Sons) subject to shareholder approval. This
implies a dilution of 12% on outstanding shares and will increase promoter
shareholding to 38% from c30%. Overall this should result in an inflow of
Rs8.5B over FY11/12 to be used primarily for debt repayment.
• Investment view: IH meaningfully underperformed the index (by 20%
YTD) as well as its local and global peer group (by 15%-25%) despite
improvement in operational trends. Further, stock underperformance against
the backdrop of a strong Rupee (+6% YTD) is surprising given its positive
historical correlation with the US$/Rs FX rate. Stabilization of marquee
properties (Taj Palace Wing & Pierre hotel) and ARR rises in the upcoming
peak season should aid share price performance, in our view. Maintain OW.