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Indione - Sensitivity analysis
Mar 8, 2006

While the hotel stocks are shooting through the roof (despite the latest flu scare), the common theme is that there has been a sharp spurt in foreign tourist arrivals over the last three years. And the momentum is expected to continue, considering that the ‘India story’ is gaining interest in the global community. But there is another growth theme for the tourism sector i.e. domestic tourists. As compared to the international tourist arrivals of 3.6 m (expected to touch around 4 m by the end of this fiscal year), the domestic tourist base is estimated at 300 m in 2005! While international tourist arrivals are important (forex earnings account for 60% of revenues), we believe that the domestic tourism sector is also a compelling theme, which investors should keep in mind.

Budget Hotel- a new concept
By flagging off the ‘indiOne’ brand of hotel chains, Indian Hotels has been at the forefront to take advantage of this theme. ‘indiOne’ is positioned to meet the need for what it terms 'smart basics' accommodation. Targeted at budget travellers and tourists, indiOne emphases on delivering quality hotel rooms at low cost. Indian Hotels established a wholly owned subsidiary, Roots Corporation, through which ‘indiOne’ expansion is undertaken. Indian Hotels is aiming to have around 5,000 rooms operational under the ‘indiOne’ brand with properties in temple towns and smaller urban centres. The company also has plans to take the brand overseas over the long-term.

The first indiOne property (in Bangalore) opened for business in June 2004 and it has been recording occupancy rates in excess of 80%. Following the success of its first indiOne hotel in Bangalore, Indian Hotels intends to add six additional properties this calendar year (Haridwar, Pune, Durgapur, Panjim, Bhuvaneshwar and Mysore). These would be operational between February and July 2006. The company has plans to open 50 such hotels over the next five years at an investment of around Rs 100 m per property. Following is our calculation of how much this initiative is likely to contribute in the next two years.

indiOne' - Revenue contribution…
(Rs m) FY05 FY06E FY07E FY08E FY09E
No. of properties 1 1 7 17 27
No of rooms 100 100 700 1,700 2,700
Occupancy rate 76% 80% 60% 60% 60%
Room occupied (Nos) 76 80 420 1,020 1,620
Average room rate (Rs) 828 990 990 990 990
Room revenues(Rs m) 20 29 152 369 585
F&B revenues (Rs m) 3 14 46 111 176
F&B (% of room revenues) 13% 50% 30% 30% 30%
Total revenues 23 43 197 479 761
% of Indian hotels consolidated revenues 0.2% 0.3% 1.3% 2.7% 3.7%

Following are our key assumptions:

  1. Apart from the 6 new hotels in the calendar year 2006, the company will expand by 10 each year. The initial target was to expand to 50 properties by FY08, which we believe that an uphill task. The company faced difficulties with respect to the acquisition of the land in the last one and half years as a result of which the expansion is behind schedule. But in the recent analyst meet, the management opined that they have the confidence to expand at by atleast 10 hotels each year.

  2. We have assumed 100 rooms per property. In the recent analyst meet, the company mentioned that it is also looking at 200 room properties and higher in the budget-hotel platform. But our assumptions do not reflect the same.

  3. The average room rate is assumed at Rs 990 per occupied room per day. Given the fact that the company has tasted success with respect to the occupancy rate, if need be, the management will look at increasing room rates in the future. Our assumptions do not reflect the same. However, we are comfortable with our current assumption.

  4. In FY05, F&B income as a percentage of room revenues stood at 13%, which is low. We have assumed 30% F&B income to revenues in our assumption.

  5. As far as the profitability of the project is concerned, in FY05, Roots Corporation posted operating and net margins of –46.1% and –65.0% respectively. Given the fact that the company is expanding fast, the contribution to the consolidated profit of Indian Hotel is likely to be minimal. But again, benefits from the expansion are likely to be long-term in nature.

We believe that this budget format will be the biggest growth area in the long term. We remain confident that Indian Hotels, with its first-mover advantage, is in a position to capitalise on the same.

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