INDIAN HOTELS Subdued performance due to one offs; outlook good :: Edelweiss,

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INDIAN HOTELS
Subdued performance due to one offs; outlook good



􀂄 Subdued sales growth; ARRs to increase from November 1
Indian Hotels Company (IHCL) posted sequentially flat sales of INR 3.28 bn in
Q2FY11 as the expected income from the CommonWealth Games (CWG) did not
materialise. Due to the negative publicity around the sporting event, the hotel
business before and during the games was subdued. Y-o-Y, sales jumped 15% if
the loss of profit (LOP) adjustment is done. ORs improved during H1FY11 to 62%
compared to 56% in H1FY10 and ARRs increased 4% during the period to INR
7,968. The company has already taken an ARR hike effective November 1, 2010,
across all its domestic hotels and is looking for ORs of 75-80% in H2FY11.
Increased revenues on all accounts during H1FY11 over the previous year like
room revenue (19% increase), F&B (23% increase), other operating income (12%
increase) and management contract income (18% increase) points to a much
better H2FY11.
􀂄 Weak EBIDTA margins; improvement going forward
IHCL reported 11.2% EBIDTA margins in Q2FY11 against 17.9% in Q2FY10 and
16.9% in Q1FY11. Margins were under pressure due to a one time charge of INR
160 mn to the re-branding of 19 hotels under the ‘Taj by Vivanta’. With majority
of the expenses for the exercise already behind, we expect operating leverage of
the model to start playing from Q3FY11. With increased ARRs, higher ORs and
room inventory back to normal, we expect the company to come back strongly on
the EBIDTA front in H2FY11.
􀂄 Preferential allotment to promoters; international operations improving
The company has decided to issue 36 mn shares and 48 mn warrants to
promoters, raising ~INR 8.5 bn (~INR 4.8 bn in FY11 and INR 3.7 bn in FY12).
With international operations doing much better along with controlled capex, we
expect the strain on balance sheet to ease further in FY12.
􀂄 Outlook and valuations: Positive; maintain ‘BUY’
With improvement in ARRs and ORs, cost containment exercise and dedicated
efforts to turnaround the US portfolio, we believe IHCL is on a revival path. With
limited capex and equity infusion of INR 8.5 bn by promoters over the next 18
months, we anticipate the coverage ratio to improve, going forward. We continue
to value IHCL at EV/EBIDTA of 13x for FY11E and 9x for FY12E with a target price
of INR 120. We maintain ‘BUY’ recommendation on the stock.