Kotak Securities downgrades Indian Hotels to REDUCE

Kotak Securities downgrades Indian Hotels to REDUCE

We believe the recent tragic events at Hotel Taj Mahal and Trident (Oberoi) in Mumbai will be a setback for Indian hospitality sector in the near-to-medium term.

The sector is likely to see a cascading effect of reduced foreign travel to India on top of an already declining business from worldwide economic slowdown.

Taj Mahal Palace & Towers, the key property of IHCL in Mumbai and one of the focal points of the attack, will lose some revenues since the property, which suffered extensive damage, may need to remain shut partly for restoration.

We have fine-tuned our revenue and earning estimate for FY09 and FY10 on account of recent tragic event.

We now expect 6.5% and 20.7% consolidated revenue and earning CAGR over FY08-10E.

In FY09, we expect revenue growth of 2.9% to Rs30.5 billion and net profit de-growth of 3.6% to Rs.3.02 billion while in FY10 we expect revenue growth of 10.2% to Rs33.6 billion and net profit growth of 51% to Rs4.56 billion.

We expect consolidated EPS of Rs4.9 and Rs6.5 in FY09E and FY10E, respectively. We believe that ensuing quarters will witness weakness in earnings due to sharp decline in occupancy led by terrorist attack and deteriorating macro scenario.

In our estimates we have not taken cost of restoration work for damaged property due to lack of clarity, which could be significant in FY09 and FY10.

At current markets price Rs40, the stock is trading at 8.2x FY09 and 6.2x FY10 earning estimates.

We remove IHCL from our preferred stock in hotel sector. We downgrade stock to REDUCE from our earlier Buy recommendation because of the expected slowdown in the near-to-medium term.