Home >Money >Worst hit by downturn, hotel industry shows signs of revival

Worst hit by downturn, hotel industry shows signs of revival

Worst hit by downturn, hotel industry shows signs of revival

A strong growth in foreign tourist arrivals (up 21% year-on-year, or y-o-y, in December), which makes up for 65-70% of the demand for premium rooms, heralds the beginning of a revival in the hotel industry that was the worst hit by the economic crisis in 2009.

This is corroborated by the robust uptrend in occupancies and average room rates across properties. We estimate that the supply deficiency in the Indian market will further support the revenue per average room in the coming years. Supply growth has also abated considerably over the past couple of years, tilting the demand-supply equation in favour of the incumbents.

Profitability of operators, such as Indian Hotels Co. Ltd (IH) and East India Hotels Ltd (EIH), which took a big hit over FY09-10, is likely to jump sharply in FY11-12. A pick up in the pace of recovery in the Indian and global economies will add momentum to this turnaround.

Also See | Better Service (Graphics)

Indian Hotels

IH is the largest hotel company in India with a total inventory of 11,546 rooms (March). A part of the Tata group, Indian Hotels owns iconic properties such as the Taj Mahal and Palace, Mumbai. IH is the only Indian company that straddles all the value segments and has significant presence in international markets.

IH operates via brands such as Taj (premium luxury), Vivaanta (upper upscale), Gateway (mid-priced), and Ginger (economy). TajSATS Air Catering Ltd, a subsidiary, is engaged in the airline catering business.

IH has a presence in all value segments in India and has a wide footprint in international markets (about 25% of revenues) further de-risks its profile. Aggressive room expansion will widen IH’s lead over peers in the coming years. IH will benefit from a broad recovery in the Indian economy.

Growth momentum will be supported by the opening of The Pierre, New York and heritage wing of Taj Mahal, Mumbai in FY10, lower losses in its US portfolio, recovery in the US and UK markets, and strong pipeline of management contracts lined up over FY11-12. Strong revenue momentum will drive a sharp turnaround in earnings before interest, tax, depreciation and amortization in the second quarter of FY11 (up 430 basis points y-o-y). We initiate with a buy and a target price of of Rs138.

East India Hotels

EIH is the third largest hotel chain in the country, which is part of the Oberoi Group. EIH operates through two brands— Oberoi (super premium luxury 5D) and Trident (premium business hotel) and manages 1,696 rooms. It is also the manager of 878 rooms of its associate company, EIH Associated, along with 352 rooms in Egypt, Indonesia, Mauritius, and Saudi Arabia. EIH is also engaged in flight catering, managing airport restaurants, travel and tour services, corporate air charter services, etc.

Its presence is restricted to the super premium and premium segment in the domestic market and some management contracts in international markets. We expect EIH’s profitability to reverse in FY11 due to its large exposure (approximately 85%) to metros that are experiencing a strong demand.

The re-opening of its flagship property, Oberoi Mumbai, will be an added boost. We believe EIH will grow earnings at 83% compounded annual growth rate of over FY10-12. We initiate with an add with a target price of Rs156.

Graphics by Ahmed Raza Khan/Mint


Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperMint is now on Telegram. Join Mint channel in your Telegram and stay updated with the latest business news.

My Reads Redeem a Gift Card Logout