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Indian Hotels: Terror impact

Dec 1, 2008

The Indian hotel industry, which was already facing tough times due to the credit crisis now has one more burden to bear. And a very big one at that. The iconic hospitality landmarks like the ‘Taj Mahal Palace and Tower Hotel’ and the ‘Oberoi Trident’ in Mumbai were targeted by the terrorists. Many believe that this will change the landscape of the already struggling hospitality sector due to the country now becoming a relatively unsafe destination. Infact, US, Europe, New Zealand and Australia have already issued travel warnings to India

Built in 1903, The Taj Mahal Palace & Tower (TMPT), Mumbai has created its own unique history. Apart from being Indian Hotels’ (IHCL) prime property, it was a monument structure and the face of the hotel industry. It has 565 rooms, 11 dining restaurants and 11 banquet halls.

The second half of the year is normally the peak season for the hotel industry. As per our estimates, the 565 rooms of TMPT will not be available for the last four months of FY09 and for the full year in FY10. TMPT formed 16.5% of the standalone rooms of IHCL and 5.2% of the consolidated rooms. Located in prime location in India’s commercial capital, it commanded higher occupancy and room rates.

An assessment of the revenue impact is done below.

Negative impact on the top-line

We have assumed 65% occupancy for the last four months (higher than 60% seen in 1HFY09, lower than 68% seen in FY08). The average room rates are assumed at Rs 12,349 (same as 1HFY09). Thus, adding F&B and other service revenues, the total loss of revenues is likely to be in the region of Rs 932 m for FY09E, which is 5.3% of our earlier FY09 standalone estimates.

The property will not be available for the whole of FY10E. This would lead to a revenue loss of Rs 2.8 bn for FY10E, assuming 65% occupancy and room rates of Rs 12,349, which amounts to 13.8% of the standalone estimated revenues.

Impact on profits

IHCL on the standalone basis earned net profit margins of 21% in FY08 and 15% in 1HFY09. Considering 16% net margins ( assuming slowdown in the economy), the company will face a profit shortfall of Rs 177 m during FY09 and 12.9% margins in FY10E, the net loss would be Rs 534 m in FY10E (13.7% of standalone profits) as compared to our previous estimates due to the non-operation of TMPT.

Overall impact

North America and Europe are the two largest inbound tourist contributors to India. With these countries already fighting economic slowdown, bookings had taken a hit. These attacks have worsened the already grim situation as countries around the globe have started sending out travel advisories asking their citizens to avoid travelling to India. As per the industry, the attack took place just before the peak season and would affect the business and leisure travel segments. The industry that grew 22% last fiscal is likely to register a flat growth or even negative growth this year.

Considering the changed scenario, we have revisited our assumptions and have taken into account lower occupancy and room rates. Profitability will be under pressure with lower occupancy and pressure on room rates.We had earlier assumed occupancy levels of 70% for 2HFY09 and FY10. We now have factored the same at 65% and 67% respectively. In case of room rates, we had assumed a growth of 5% earlier, which we now expect it to remain at FY08 levels.

Impact on IHCL's financials

Consolidated revenues (Rs m) FY09E FY10E FY11 E
Actual estimates 29,646 32,656 36,770
New estimates 26,107 27,665 32,202
% change -11.9% -15.3% -12.4%
Consolidated profits ( Rs m) FY09E FY10E FY11 E
Actual estimates 3,178 3,652 3,965
New estimates 2,494 2,331 2,813
% change -21.5% -36.2% -29.1%

While the management has not yet chalked out a plan on the capex, there are estimates available in the public domain which suggests that the expenditure to rebuild TMPT could be close to Rs 5 bn which is what we have assumed as well. No details are available on what is the amount TMPT would recover on account of the insurance that is in place. The recovery would reduce the funds that TMPT would have to arrange to fund the capital expenditure. This would mean an upside as the interest outgo would reduce. Considering all these factors, the NAV value for IHCL stands at Rs 108 from FY11 perspective, down around 8% from our earlier target of Rs 117.

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