The Indian tourism and hospitality industry exhibited weak signals in Q3’09, in accordance with our expectations.
The recent terror attacks in Mumbai compounded the woes of the industry, which was already reeling under the adverse impact of the global slowdown.
This was reflected in Indian Hotels Company Limited (IHCL)’s Q3’09 performance when it witnessed a 17% yoy decline in revenue—one of its weakest peak period performances in the last few years.
The terrorist attack in Mumbai in November 2008 not only disrupted operations but also inflicted heavy damage to the flagship 565-room Taj Mahal Palace & Tower (TMPT) in Mumbai, resulting in the loss of revenue and profits and burdening it with additional CAPEX, although IHCL states that it is adequately insured for both.
Moreover, at the industry level, the attack has further hit the tourist inflow, which is likely to magnify the fall in occupancies and average room rates (ARRs).
As a usual trend, the company revised its ARRs upwards at the beginning of Q3’09. However, ARRs during April–December 2008 recorded a lower growth of 6% y-o-y as against 18% during the same period last year.
Moreover, the occupancy rate stood at 65% for April–December 2008, as against 71% for the same period in 2007. As a result, IHCL was not able to capitalize on the peak season benefits and revenue declined 17% y-o-y.
Foreign tourist arrivals during January–December 2008 grew at a slower rate of 6% to 5.37 mn, as against 12% last year.
This reiterates our belief about the worsening prospects for the tourism and hospitality industry due to the global economic crisis.
We believe that the worst is yet to come for the industry and expect the widening effect of the global economic crisis to lead to a further drop in the occupancy rates to the extent of 7–8% and in ARRs by 12–15% in FY10.
We have downwardly revised our target price on account of the added pressure on the hotel industry due to the recent terror attacks, as well as some deferment in the launches of new projects by IHCL and the consequent delays in revenue flow.
Our revised DCF-based fair value estimate of Rs37 reflects a potential downside of 6.6% from the current market price. Hence, we maintain our SELL rating.