Buy Indian Hotels

Buy
Price: Rs78

2QFY10 indicate sequential improvement

We attended analyst meet of Indian Hotel (IHCL) last week, post its
standalone 2QFY10 results. The key takeaways are as below:

* 2Q results weak, however improved sequentially: IHCL reported
topline of Rs3.1bn, down 16% YoY, while up 8% QoQ. The topline
decline on YoY basis was mainly on account of lower occupancy and
RevPAR (Revenue per Available Room). EBITDA came in at Rs511mn,
up 48% QoQ, driven largely by higher occupancy and constant staff
cost. Net Profit (before exceptional incomes) came in at Rs66mn vs.
loss of Rs129mn in 1Q10. We note that staff cost is usually the largest
expense head for hotel industry. We believe YoY comparison may not
be appropriate in this case as 1H09 was extraordinarily robust for the
industry.

* Sequential improvement in occupancy in 2Q10: Management
indicated sequential improvement in room occupancy across locations,
except Goa (Exhibit 4). However, ARRs softened QoQ as company
pursued volume growth. With largely stable overheads, RevPAR
improved marginally, except Goa (Exhibit 6).

* Robust Room Inventory and management contracts pipeline:
IHCL expects to increase room inventory at Group level by 4% to
12,027 rooms by end of FY10E. On the other hand, IHCL also has
almost 2,200 and 2,000 rooms in pipeline in domestic and
internationally segments respectively.

* 2Q10 could be the weakest quarter, recovery to be gradual: IHCL
emphatically mentioned that 2Q10 could be the weakest quarter in
FY10E as management expects sequential improvement in performance
in remaining quarters of FY10. However, IHCL also mentioned that the
recovery may not be dramatic as international tourism likely to be
relatively subdued in 2H10E YoY on account of global recession. The
recovery is likely to be stronger in FY11E. Overall, we believe
management sounded optimistic towards coming quarters. Consolidated
net debt as of September’09 was at Rs44.6bn