Indiabulls Securities puts SELL on Indian Hotels

Indiabulls Securities puts SELL on Indian Hotels

For the quarter ended September 2008, the standalone revenue of Indian Hotels Company Ltd (IHCL) increased 8% y-o-y to Rs3,678.2 million, but the EBITDA margin declined 459 bps to 24.4%.

Reported net profit declined 4.8% y-o-y to Rs506.6 million; however, adjusted PAT increased 21.7% y-o-y to Rs600.6 million.

The deepening global credit crisis and the consequent slowdown in the world economy is expected to lead to a considerable slowdown in the Indian tourism sector, which will have a cascading effect on the Indian hospitality industry.

Corporates as well as leisure travellers would seek to cut their travel expenditure as earnings slow down.

During the quarter, IHCL’s occupancy rate decreased 2-3% yoy due to seasonal fluctuations, whereas ARRs increased 10-15% y-o-y.

With the onset of the peak season, ARRs were revised upwards recently. We expect the occupancy rates and ARRs to remain stable for the remaining quarters of FY09, in contrast to the general trend.

In FY10, we expect the ARRs and the occupancy rate to take a hit due to the widening effect of the slowdown.

IHCL has hotels across various segments and geographies. Currently, the luxury segment contributes a majority of the revenue.

However, there is a growing trend towards mid- and lower-priced hotels, which are comparatively less susceptible to the fall in the occupancy rate and the ARRs.

The company has planned aggressive capacity expansions for its Ginger Hotels chain, the budget hotel segment, and has launched the Gateway brand, which is positioned between Ginger and ICHL’s luxury chain.

Our DCF-based fair value estimate of Rs40 reflects a downside of 19% from the current market price. Hence, we downgrade our rating to SELL.