Hotel and Tourism

Manoj Bahety, CFA Manav Vijay
+91 22 6623 3362 +91 22 4063 5413 Edelweiss Securities Limited

manoj.bahety@edelcap.com manav.vijay@edelcap.com
Hotels & Tourism
Executive Summary
Demand-supply economics favourable in India
World Travel & Tourism Council (WTTC) expects travel and tourism (T&T) demand in
India to grow at 8.2% annually till 2019, the highest growth after China in the big
countries league. Owing to various supply bottlenecks, the 13% CAGR growth till FY12E
in demand of premium category rooms is expected to outpace the 10% CAGR growth in
supply; HVS estimates ongoing construction work on only 60% of the 1,00,000
announced rooms. Demand is expected to remain robust as the Indian economy gathers
pace and with many sporting events lined up in the next 12-18 months.
ARRs to rise and ORs to stay firm till FY12

Owing to the increasing demand across many categories/locations, we expect occupancy
rates (ORs) to firm up to 65% and further to 70% in FY11E and FY12E, respectively.
After a difficult H1FY10, when average room rates (ARRs) declined as much as 35-40%
in many locations, marked improvement witnessed by hotel companies in Q3FY10 instills
confidence to estimate an increase of 10% each in FY11E and FY12E. By 2012, we
estimate addition of 9,000-10,000 rooms in the five star and above category. We expect
above 85% of the incremental capacity to be utilised due to better demand.
International hotel chains eye Indian hospitality

According to WTTC, India’s T&T market is expected to grow more than 100% by 2018 to
USD 61 bn against USD 28 bn in 2008. To tap this opportunity, ~25 major international
hotel companies like Accor, Marriott, Claridges, Shangri-la, and Carlson Hospitality are
looking to enter India, either independently or in collaboration with a local party. Also,
GoI’s conscious efforts towards promoting India as a leading leisure destination are likely
to increase the country’s share in the foreign tourist arrivals (FTAs).
Outlook: Good long-term opportunity

Considering that the US offers 40x and China 10x hotel rooms as compared to the
110,000 hotel rooms in India, the Indian hospitality industry has huge potential to grow
structurally. However, high land prices, low FSI, plethora of taxes, and low incentive
from government are some key hurdles for hotel companies in India.
In this report, we have discussed listed hospitality companies. We initiate coverage on

Cox & Kings and EIH with ‘HOLD’ recommendations, and on Hotel Leela with ‘REDUCE’
recommendation. Also featured in this report are Indian Hotels (BUY), Mahindra
Holidays & Resorts India (REDUCE), Asian Hotels (NOT RATED), and TAJ GVK (NOT
RATED).
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Hotels & Tourism
Contents
At a glance ................................................................................................................. 3
Indian Travel & Tourism Industry: Overview ................................................................... 4
Demand-Supply Economics Favourable .......................................................................... 5
Improving ARRs and ORs during 2010-12..................................................................... 20
Global Player’s Indian Venture .................................................................................... 22
Vacation Ownership ................................................................................................... 23
Global Travel & Tourism ............................................................................................. 26
Key Trends ............................................................................................................... 28
Business Analysis ...................................................................................................... 30
Valuation Methodology ............................................................................................... 33
Key Risks ................................................................................................................. 35
Challenges ............................................................................................................... 36
Annexure I ............................................................................................................... 37
Annexure II .............................................................................................................. 38
Annexure III ............................................................................................................. 39
Companies
Cox & Kings ............................................................................................................ 41
EIH .......................................................................................................................... 53
Hotel Leelaventure .................................................................................................... 67
Indian Hotels Company .............................................................................................. 81
Mahindra Holidays & Resorts India............................................................................... 87
Asian Hotels ............................................................................................................. 95
Taj GVK Hotels & Resorts ........................................................................................... 99
2 Edelweiss Securities Limited

Financials (INR mn) Growth (%) Valuations (X)
Price Shares O/S Mkt cap Reco Year Revenue EBITDA Net profit EPS Revenue EBITDA Net profit EPS EV/EBITDA PE
Company (INR) (mn nos) (INR mn)
Cox & Kings 488 62.9 30,705 Hold FY07 970 402 297 4.7 53 98 95 175 25.8 89.5
FY08 1,821 730 426 6.8 88 82 115 43 10.6 72.1
FY09 2,869 1,214 628 10.0 58 66 41 47 12.8 48.9
Hotels & Tourism
FY10E 3,684 1,545 1,112 13.3 28 27 33 33 18.0 36.8

At a Glance
FY11E 4,708 1,995 1,312 20.9 28 29 55 57 13.6 23.7

FY12E 5,605 2,381 1,649 26.2 19 19 26 26 10.7 19.1
East India Hotels 124 392.9 48,857 Hold FY07 10,615 3,750 1,999 4.0 31 44 64 65 14.5 30.9
FY08 12,666 4,947 2,245 5.7 19 32 48 43 11.1 21.6
FY09 11,769 4,143 1,701 4.3 (7) (16) (25) (24) 13.7 28.6
FY10E 9,620 2,417 371 0.9 (18) (42) (78) (78) 25.2 131.3
FY11E 13,877 4,463 1,479 3.8 44 85 (299) 299 13.4 32.9
FY12E 15,235 5,196 1,956 5.0 10 16 32 32 11.3 24.9
Hotel Leelaventure 50 377.8 18,777 Reduce FY07 4,156 1,930 1,260 2.3 21 20 20 19 15.9 22.4
FY08 5,146 2,297 1,485 3.9 24 19 76 72 16.6 14.6
FY09 4,522 1,557 1,450 2.4 (12) (32) (39) (39) 28.9 22.9
FY10E 4,041 1,203 600 1.1 (11) (23) (54) (54) 38.1 50.1
FY11E 6,223 2,205 381 1.0 54 83 (8) (8) 22.6 54.6
FY12E 8,571 3,038 348 0.9 38 38 (9) (9) 16.7 59.9
Indian Hotels 103 723.4 74,185 Buy FY07 25,063 7,205 3,707 6.1 36 41 50 44 9.6 15.0
FY08 29,200 8,920 3,593 6.9 17 24 11 12 8.3 13.9
FY09 26,800 5,056 148 0.2 (8) (43) (99) (97) 17.4 462.8
FY10E 24,728 5,051 415 0.6 (8) (0) 520 180 18.6 165.4
FY11E 31,769 8,547 2,252 3.1 28 69 577 442 11.5 30.5
FY12E 39,574 12,549 4,745 6.6 25 47 116 111 7.5 14.5
Mahindra Holidays 540 84 45,426 Reduce FY07 2,413 796 425 5.4 54 81 112 112 52.1 97.6
FY08 3,772 1,442 840 10.7 56 81 98 98 28.9 49.4
FY09 4,421 1,522 798 10.2 17 6 (5) (5) 27.2 52.0
FY10E 5,762 2,097 1,209 14.4 30 38 52 41 20.3 36.9
FY11E 8,168 3,066 1,855 22.0 42 46 53 53 13.5 24.1
FY12E 10,975 4,320 2,662 31.6 34 41 43 43 9.1 16.8
Asian Hotels 560 22.8 12,777 Not rated FY07 4,134 1,830 915 40.1 26 45 61 61 7.6 13.5
FY08 5,135 2,275 1,326 58.1 24 24 45 45 5.7 9.3
FY09 6,415 2,173 942 27.5 25 (4) (29) (53) 6.4 19.7
Taj GVK 157 62.7 9,838 Not rated FY07 2,442 1,152 643 10.3 29 36 39 39 8.6 14.6
FY08 2,584 1,221 704 11.2 6 6 9 9 8.2 13.4
FY09 2,382 1,026 528 8.4 (8) (16) (25) (25) 10.5 17.8
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3
Hotels & Tourism
Indian Travel & Tourism Industry: Overview
In 2010, India’s T&T industry is expected to generate INR 5,533 bn (USD 118 bn) of
USD 42 bn is the
economic activity, according to the World Travel & Tourism Council (WTTC). This will include
estimated size of direct
INR 1,970 bn (USD 42 bn), equivalent to 3.1% of total GDP, as the direct industry
Indian tourism sector
contribution.
Chart 1: Indian T&T industry size

Other exports
3%
Visitor exports
8%
Capital Personal travel &

investments tourism
24% 55%
Government
expenditures
1% Business travel
9%
Source: WTTC, Edelweiss research
Personal T&T is expected to contribute 55% to the total industry, followed by capital
investments at 24%. Some related sectors include hotels, airlines, surface transport, basic
infrastructure, and facilitation systems environemnt. Hotels (INR 600 bn in 2007), airlines
(INR 350 bn in 2008), and car rental (INR 10 bn in 2007) are some of the biggest direct
contributors to the industry.
WTTC estimates direct industry GDP in 2020 to increase to INR 6,211 bn, a CAGR of 12%.
Personal T&T, the biggest contributor, is expected to grow 13% over the same period.
The unorganised sector dominates Indian T&T; only hotels, airlines and tour operators are
part of the organised sector. In this report, we have discussed the Indian hotel industry,
vacation ownership industry, and tours and travels industry in detail.
Fig.1 : Major players in the Indian T&T industry

Indian T& T industry
(INR 1970 bn)
Hotels (INR 650 bn) Airlines (INR 400 bn) Tour operators (INR 150 bn)
- Indian Hotels - Air India & Indian Airlines - Kouni
- ITC - Jet Airways - Thomas Cook
- East India Hotels - Kingfisher Airlines - Cox & Kings
- Hotel Leela - Spicejet
- Bharat Hotels - Indigo
- Asian Hotels - GoAir
- Mahindra Holidays - Paramount Airways
Source: WTTC, CRISIL, Industry, Edelweiss research

Hotels & Tourism
Demand-Supply Economics Favourable
Tourism demand on the rise in India

Till 2019, WTTC estimates India’s T&T demand to post 8.2% CAGR, one of the highest in
the world. The Ministry of Tourism (MoT) aims to achieve 10 mn (versus 5.1 mn in 2009)
foreign tourist arrivals (FTAs) and 675 mn (versus 563 mn in 2008) domestic tourists in
Indian tourism set for
2010. Provisional estimates of December 2009 for FTA is 0.65 mn, the highest in the
major growth
past three years, guides to above 6 mn FTAs in 2010. We estimate India’s contribution to
the worldwide T&T growth to rise to 1.9% in 2018 (1.27% in 2009) when global T&T is
projected to grow at 4% according to WTCC. Continuous tourist growth in India is
attributable to factors like media campaigns ‘Incredible India’ organised by GoI, high
level of service standards in the country and great regional diversity. Foreign exchange
earning from T&T has posted 13% CAGR in 1996-2008. Robust GDP growth will aid the
business and leisure travel, implying a positive outlook for the Indian hospitality
industry. Recent jump in ORs across major cities, followed by increased ARRs, gives us
confidence that the industry is set for a major business upturn.
Chart 2: Rise in FTAs to aid growth in organised hospitality
1200 32.0
960 24.0
Revenue (INR bn)
720 16.0
(%)
480 8.0
240 0.0
0 (8.0)
2009-10E
2010-11E
2011-12E
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Hospitality sector size FTAs growth
Source: CRISIL, Ministry of Tourism, Edelweiss research
Within T&T, the hotels segment is likely to grow the fastest. With an expected 10% jump
in ARRs in FY11 and FY12, we expect the share of hotel industry to increase to 22% in
FY12 against 19% in FY09. Limited supply of rooms, along with healthy demand, is
expected to help hotels to post better performance. Healthy growth in both international
and domestic tourists, along with India’s emergence as one of the fastest economies, is
likely to drive its business tourist traffic substantially.
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Hotels & Tourism
Chart 3: Increased ARRs and tourist influx to aid hotel industry

300 25.0
240 20.0
Revenue (INR)
180 15.0
(%)
120 10.0
60 5.0
0 0.0
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10E
2010-11E
2011-12E
Total mkt size Hotel industry as a % of total T&T demand
Source: CRISIL, Ministry of Tourism, Edelweiss research
FTAs on the rise; past 0.6 mn in December 2009

India has had positive FTA growth in 11 out of the past 14 years. After a -3.4% growth
in 2009, 2010 should be a healthy year for the industry if FTA growth for December 2009
is any indicator. Arrivals crossed 0.6 mn in December 2009, a record high in the past 36
Upcoming sports events months. Though MoT target of achieving 10 mn foreign tourists in 2010 looks unlikely (in
to aid FTA growth view of the current trends; target was set in 2008), probability of a substantial jump
over 2009 is certainly not ruled out. Events like 26/11, swine flu and travel warnings are
certainly cause for certain. However, GoI’s sincere efforts at promoting India as a leading
travel destination are likely to grow FTAs, going forward. Also, upcoming events like
Commonwealth Games, ICC World Cup Cricket, World Cup Hockey and Formula 1 are
certain to attract a lot of sports fans from across the world to India.
Chart 4: FTAs to rise substantially

6.0 32.0
4.8 24.0
(FTA, mn)
3.6 16.0
(%)
2.4 8.0
1.2 0.0
0.0 (8.0)
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008P
2009P
Foreign tourists % Growth
Source: Ministry of Tourism, Edelweiss research
We estimate FTAs in India to grow 15% during 2011 and 2012, similar to the 2003-07
levels. We also expect foreign exchange earnings to grow much faster than the overall
FTAs growth as overall fee from tourism earned in 2003-08 grew 25% every year.

Hotels & Tourism
Moreover, what has helped improve India’s image on the world tourism map is its
improving infrastructure that has connected the remotest of the places within the
country. Further, low-cost airlines, highway development and better power situation
have buoyed India’s tourism prospects.
Domestic travel in 2008 at all time high

With increasing purchasing power, rising job opportunities and comfortable GDP/saving
ratio, more and more Indians are taking holidays. Domestic travellers in 2008 were at all
Expanding economy is time high of 563 mn - 12.3% CAGR since 1996. We expect the economy segment to
driving the growth of register faster growth at 15-20% CAGR over 2010-12, driven by demographic and
domestic tourist lifestyle changes in India. According to MoT, domestic tourism is expected to touch 675
mn by 2010.
Chart 5: Domestic tourism is expected to do well
600 20.0
480 16.0
360 12.0
(FTA, mn)
(%)
240 8.0
120 4.0
0 0.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008P
Domestic tourists % Growth
Source: Ministry of Tourism, Edelweiss research
Given the value proposition seeking habit of Indians, we believe there is likely to be
considerable demand for the three star and four star category hotels. Explosive growth in
the telecom industry and low-cost carriers has proved that at the right price, the
burgeoning Indian middle class is ready to spend. Hence, we believe Indian Hotels’
(IHCL) ‘Ginger’ budget hotel is a step in the right direction which should yield good
results in the long run.
Increased airline traffic, average length of stay yield more business

During 1999 and 2008, the emergence of low-cost carriers expanded the overall airline
traffic by 17% CAGR. In December 2009, domestic air traffic was 45 mn, the highest
Increasing airlines traffic ever number achieved by the industry. After a decline of 11% during 2008-09, 15% Y-o-
translates into higher Y growth in the first three quarters of FY09-10 shows that demand is coming back with
hotel business improved business confidence. Increasing ORs and better ARRs of Q3FY09-10 across
major business and leisure destinations indicate that corporates are raising their travel
budgets.

Hotels & Tourism
Chart 6: Increasing airline traffic to translate into more business for hotels
500 56.0
400 42.0
(Passengers, lacs)
300 28.0
(%)
200 14.0
100 0.0
0 (14.0)
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10*
Passengers carried by domestic airlines % growth
Source: DGCA, Edelweiss research

Note: * 9mFY09-10 data annualised
Another positive trend is the increasing average length of stay of domestic and
international tourists. The average stay of international tourists increased from 3.0 to 3.4
days during 2005-06, while that of domestic tourists stood at 2.6 days. Similarly, there
was a marked increase in the length of stay of business guests from 2.4 days to 2.6 days,
while leisure guests were seen staying around for 2.4 days.
Supply overhang unfounded

In 2009, WTTC had estimated the T&T demand in India to grow at 8.2% p.a. till 2019,
which led many companies to announce their expansion/start up plans. In 2007, CRISIL
Supply concerns are
estimated addition of almost 15,000 five star rooms in 2010 and 2011; it has, however,
overdone
now reduced this to 6,200 rooms for the specified period. A large supply of rooms has
been pushed back due to the global economic slowdown, regulatory and construction
delays, high real estate prices and lack of easy bank credit.
However, given the current demand-supply mismatch, we believe, new room additions
will not be a cause for concern. Many projects announced by real estate developers are
still on the drawing board due to the reasons mentioned above. As per a report by HVS,
of the total 100,000 announced five star deluxe, five star and four star category rooms,
only 60% is under active development with ~47% under the luxury and first class
category. During the same period, demand for these rooms is expected to increase by
12.6% CAGR.

Hotels & Tourism
Table 1: Distribution of existing and proposed branded hotels by major cities

Proposed supply
Increase Active Mid-
Existing Proposed over five development of Luxury First market Budget Extended
supply supply years (%) supply (%) (%) class (%) (%) (%) stay (%)
Agra 1,419 400 28.2 75.0 25.0 - 75.0 - -
Ahmedabad 800 3,058 382.3 71.0 8.2 39 35.2 10.3 7.2
Bengaluru 3,889 10,784 277.3 58.0 23.8 29 16.0 22.7 8.4
Chandigarh 351 1,459 415.7 55.0 11.3 34 25.1 29.2 -
Chennai 3,307 4,945 149.5 67.0 36.7 32 12.4 11.8 7.0
Delhi (NCR) 8,625 16,560 192.0 53.0 18.2 30 33.7 16.3 1.5
Goa 2,795 2,178 77.9 31.0 14.0 42 30.8 13.4 -
Hyderabad 2,761 5,884 213.1 73.0 42.1 21 17.8 19.1 -
Jaipur 1,683 3,357 199.5 53.0 16.1 27 40.5 16.1 -
Kolkata 1,373 4,025 293.2 62.0 24.2 28 36.3 11.1 -
Mumbai 7,948 13,386 168.4 73.0 29.9 26 24.8 15.2 4.4
Pune 1,518 8,054 530.6 52.0 22.3 29 29.6 19.2 -
Other cities 12,006 20,025 166.8 60.0 2.5 21 48.0 28.1 0.6
Total 48,475 94,115 194.2 60.0 20.2 27 31.2 19.0 2.9
Source: HVS, Edelweiss research
Mumbai (9,771 rooms), Delhi (8,776 rooms) and Bengaluru (6,254 rooms) are expected
to witness the largest absolute addition, whereas Pune (276%), Ahmadabad (271%) and
Chandigarh (229%) could see the largest increase in percentage terms. CRISIL expects
Mumbai, Delhi and addition of ~32,000 rooms in the next five years.
Bengaluru to witness the
largest addition of rooms Limited supply of premium category rooms during FY04-08 had led to ~50% rise in ARRs
during the period. ORs also improved during the period to ~70% from 63%. For business
hotels, occupancies in excess of 70% are considered to be above normal as only five
business days are used for calculations.
Of the expected addition of almost 10,000 five star hotel rooms in FY10-12, more than
85% is likely to get filled which will push ORs to 65% in FY11E and 70% in FY12E. ORs
of more than 70% witnessed by the hotel industry during FY05-08 is indicative of an
even better number for the next few years as business activity in India is rising.
Chart 7: Increased demand with limited supply to push ORs higher till FY12E
45,000 80.0
36,000 64.0
27,000 48.0
(Rooms)
(%)
18,000 32.0
9,000 16.0
0 0.0
FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Room availability Room demand ORs
Source: CRISIL, Edelweiss research

Hotels & Tourism
Supply scenario in major markets

NCR: Commonwealth Games and ICC Cricket World Cup key triggers
To serve the anticipated demand of hotel rooms due to the upcoming Commonwealth
Games in October 2010 and ICC World Cup in Q4FY11, during FY10-11, supply in the
premium category is expected to rise 20% in the National Capital Region (NCR); we
expect the existing room count to rise 60%, from 7,000 to ~11,000 rooms in the next
Upcoming international five years. Including four star rooms, we expect total addition of 7000-8000 rooms in the
sports events to hold the period.
demand high
We expect ORs to remain strong at 75% in FY11E and decline to 70% in FY12E post the
Commonwealth Games. In our view, considering the supply of hotels in FY11E and FY12E,
we believe the new supply post FY12E to come down for a while as the market will take
time to expand.
Chart 8: Strong ORs till FY12E – Limited supply and robust demand
10,000 100.0
8,000 80.0
6,000 60.0
(Rooms)
(%)
4,000 40.0
2,000 20.0
0 0.0
Supply Demand ORs
ARRs, after rising at 22% CAGR during FY04-09, are expected to fall 15% in FY10.
Considering the expected demand, we anticipate a conservative 15% increase in ARRs
during FY11 and FY12, though we believe the actual rise could be much higher.
ARRs to remain firm in
anticipation of high
Chart 9: Strong ARRs till FY12
demand
14,000 100.0
11,200 80.0
8,400 60.0
(%)
(INR)
5,600 40.0
2,800 20.0
0 0.0
ARRs RevPAR ORs

Hotels & Tourism
Delhi, being the political and cultural capital of India, attracts all kinds of travellers,
Indian and foreign, business and leisure. In FY08, business and leisure travellers were
almost 80% of the total travellers. We expect the percentage of leisure travellers to
increase in the short term, considering the upcoming games. On the long-term basis, the
current mix may hold.
Chart 10: Business and leisure travellers form the majority

100.0
12.5 17.8 17.5 13.7
5.6
80.0 14.2
12.4 10.3
16
12.2 15.5
60.0 13.4
(%)
40.0
54.6 50.5 63.2
52
20.0
0.0 6.5 5.9 4.7 1.5

FY05 FY06 FY07 FY08
Others Tour Group Leisure Traveller Business Traveller Airline crew

Mumbai: Strong economic revival to aid growth

Supply in Mumbai is likely to rise 33% between FY10E and FY12E, taking the total
number of rooms to 9,300 in the premium category. Nearly 5,500 premium category
Strong economy revival to rooms are expected to become operational in the next five years (10,000, including four
boost the business star rooms). High land cost is the primary cause behind lesser addition of lower category
tourism rooms in the city. We expect ORs of 60% in FY10E, followed by 70% in FY11E, and 70%
in FY12E. In 9mFY10, the city achieved ORs of 59%. Considering ORs of above 70%
between FY04 and FY08, we are confident of our FY11 and FY12 estimates.
Chart 11: Limited supply favourable for ORs

10,000 100.0
8,000 80.0
6,000 60.0
(Rooms)
(%)
4,000 40.0
2,000 20.0
0 0.0
Supply Demand ORs

Hotels & Tourism
Till FY13, Shangrila (414 rooms) is the only addition expected in South Mumbai. Owing
Limited supply in South
to shortage of large vacant land parcels in South Mumbai, North Mumbai is expected to
Mumbai to keep ARRs
witness the majority addition. Emergence of Bandra Kurla Complex (BKC) as an
firm
alternative business destination is expected to shift a lot of business traffic over a period
of time to North Mumbai from South Mumbai.
We expect ARRs to increase 15% in FY11 and FY12, after declining 20% in FY10E.
Strong economic revival, along with better prospects of sectors like banking, financial
services, IT/ITeS and diamond, gives us confidence to expect better ARRs in future.
Owing to demand-supply mismatch, ARRs increased 20% CAGR during FY04-09.
Chart 12: ARRs to firm FY10E onwards

14,000 100.0
11,200 80.0
8,400 60.0
(%)
(INR)
5,600 40.0
2,800 20.0
0 0.0
ARRs RevPAR ORs

In Mumbai, though business travellers constitute majority of the demand, demand is

equally divided among domestic and foreign travellers. Going forward, we expect this
mix to remain intact, but believe the proportion of business travellers will rise
(considering India is expected to be one of the fastest growing economies in the world
for many years).
Chart 13: Business and political travellers drive demand in Mumbai

100
13.6 17.6 19.1
25
3.9
80 3.7 5.8
11.9
13.5 9.7 5.3
8.6
60
(%)
40 64.5 58.7 56.9

56.5
20
6.1 6.5 8.5 4.6

0
FY05 FY06 FY07 FY08

Hotels & Tourism
Chennai: IT and auto sectors to keep ARRs firm

Chennai is expected to witness 25% rise in supply between FY10E and FY12E, taking the
total number of rooms to 2,615 in the premium category. Further, 2,100 premium
category rooms are expected to become operational in the next five years (3,500,
including four star rooms). We expect ORs of 60% in FY10E, followed by 65% in FY11E
and 70% in FY12E. With increase in demand from IT/ITeS and auto majors like Ford,
Hyundai, TVS, and Ashok Leyland, Chennai’s prospects look strong. The city is, however,
typically skewed towards the mid market (three and four star hotels) segment, with the
Strong IT and Auto sector
same accounting for 69% of the total hotel rooms.
revival to keep demand
high
Chart 14: Outlook healthy for ORs
3,000 100.0
2,400 80.0
1,800 60.0
(Rooms)
(%)
1,200 40.0
600 20.0
0 0.0
Supply Demand ORs
After 19% CAGR increase in ARRs over FY04-09, we expect a -12% decline in FY10
followed by increase of 10% in FY11E and FY12E. Chennai’s booming manufacturing and
Back-ended supply to
IT sectors provide it the essential impetus for economic growth.
keep ARRs firm
Chart 15: Increase in ARRs till FY12E due to back-ended supply

9,000 100.0
7,200 80.0
5,400 60.0 (%)

(INR)
3,600 40.0
1,800 20.0
0 0.0
ARRs RevPAR ORs
Chennai, being one of the main metros, business travellers form two-third of the total
travelers; with its emergence as the main ITes center, the proportion of foreigners has

Hotels & Tourism
been rising consistently. As Chennai is also emerging as a hub for almost all auto majors,
we expect this trend to continue, going forward.
Chart 16: Business travellers to continue to form the majority

100.0
7.4 12.2 9.2
13.4
7.0 8.7
5.0 9.3
80.0 11.6 7.4 10.5
9.3
60.0
(%)
40.0 65.7 67.1 59.1 62.1
20.0
8.3 7.1 10.1 9.5

0.0
FY05 FY06 FY07 FY08
Kolkata: Limited supply to keep ARRs firm

Supply in Kolkata is expected to rise 12% between FY10E and FY12E, taking the total
Limited supply with number of rooms to 1,400 in the premium category. Total premium category rooms
consistent demand growth expected to become operational in the next five years are 1,500 (2,400, including four
to keep ORs high star rooms).
Chart 17: Healthy ORs till FY12E due to limited supply

1,600 80.0
1,280 64.0
960 48.0
(Rooms)
(%)
640 32.0
320 16.0
0 0.0
Supply Demand ORs
Kolkata is expected to witness the least decline in ARRs of just 5% in FY10E due to
consistent rise in demand in the past few years and very limited supply. Taking
advantage of the demand-supply mismatch that is likely to continue till FY12E, we expect
10% increase in ARRs in FY11E and FY12E.

Hotels & Tourism
Chart 18: Strong ARRs till FY12E

8,000 80.0
6,400 64.0
Witnessed strong ARRs
during 2010, better rates
going ahead
4,800 48.0
(INR)
(%)
3,200 32.0
1,600 16.0
0 0.0
ARRs RevPAR ORs
Kolkata being primarily a financial hub, business travellers, along with airline crew, form
the majority demand. We expect this trend to continue in the near future.
Chart 19: Business travellers to continue to form the majority

100.0 4.2
3.8 8.5 10.3 8.7
8.5 8.3 4.9
8.6
80.0 8.2
15.2 6.8
60.0
(%)
75.7 65.1
40.0 62.8
66.3
20.0
7.8 11.5 13.1

0.0 1.7
FY05 FY06 FY07 FY08
Bengaluru: ARRs under pressure due to huge supply

Bengaluru is expected to witness 50% increased supply between FY10E and FY12E,
taking total premium rooms to 3,725. Total premium category rooms expected to
Strong supply to outpace
become operational in the next five years are 4,643 (6,000 including four star rooms).
the subdued demand
Owing to an unprecedented increase in demand during FY04-09, ORs were more than
75%. We expect ORs to remain constant at 65% till FY11E and then increase to 70% in
FY12E, driven by IT, ITes, banking, research and development and engineering sectors.

Hotels & Tourism
Chart 20: ORs to firm post FY12E

4,000 90.0
3,200 72.0
2,400 54.0
(Rooms)
(%)
1,600 36.0
800 18.0
0 0.0
Supply Demand ORs
We expect ARRs to rise 5% in FY11E and FY12E, after declining ~28% in FY10E (decline
due to the IT slowdown and new supply of rooms).
Chart 21: ARRs to firm FY11E onwards

16,000 90.0
12,800 72.0
ARRs to witness growth
only post FY11
9,600 54.0
(%)
(INR)
6,400 36.0
3,200 18.0
0 0.0
ARRs RevPAR ORs
With the emergence of Bengaluru as India’s Silicon Valley, business and foreign
travellers constitute more than three-fourth of the total demand. We expect this trend to
continue in future.

Hotels & Tourism
Chart 22: IT/ITes business travellers to continue to form the majority

100.0
5.1 7
13.4 1.2 11.4 1.9
9.4 2.5 5.9
2.5 4.6
80.0 10.5
60.0
(%)
76 78.5
76.1
40.0 69.1
20.0
4.5 8.3 5.4 6.7

0.0
FY05 FY06 FY07 FY08
Hyderabad: Conferencing the next big trend

Hyderabad is expected to witness 45% increased room supply between FY10E and FY12E,
taking the total number of rooms to 2,800 in the premium category. Number of premium
Conferencing facilities to
category rooms expected to become operational in next five years is 2,500 (4,200
drive the growth in
including four star rooms). We expect ORs to improve FY11E onwards, after hitting 55%
demand
in FY10E.
Chart 23: Demand to catch up with supply post FY10E

3,000 90.0
2,400 72.0
1,800 54.0
(Rooms)
(%)
1,200 36.0
600 18.0
0 0.0
Supply Demand ORs
We believe, going forward, the Hyderabad hotel industry will shape up with the number
of conferences happening there. Improved infrastructure already shows the efforts put in
by the state government to make Hyderabad a leading business city in India.
We expect slight improvement in ARRs FY11E onwards. With likelihood of Hyderabad

becoming a major conference city in the South and much better connectivity to the new
airport, ORs and ARRs are poised to improve, albeit gradually.

Hotels & Tourism
Chart 24: Gradual improvement in ARRs FY10E onwards

9,000 90.0
Strong demand to help 7,200 72.0

ARRs to improve post
FY10
5,400 54.0
(%)
(INR)
3,600 36.0
1,800 18.0
0 0.0
ARRs RevPAR ORs

Proportion of business travellers and airline crew has been going up consistently. We
expect this trend to continue in future, considering the way Hyderabad has come up on
the world IT map.
Chart 25: Proportion of business travellers to rise

100.0
12.8 12.3 11
28.4 8 7.2 8
80.0
10.4 15.8 13.5
3.5
6
60.0
(%)
40.0
68.4 58.7 62
60.6
20.0
0.0 1.5 6 5.5

0.4
FY05 FY06 FY07 FY08

Hotels & Tourism
Outlook on other major cities

Pune: We expect Pune to add 4,000 rooms over the next five years, growing more than
250%. In the premium category, ~1,000 rooms are expected to come up in the next five
years. Owing to IT slowdown and the swine flu scare, ARRs are expected to fall 25% in
FY10E and ORs to sub 50% levels. Likelihood of excess supply in the city is certain to
Long-term positive
keep the pressure on ORs and ARRs in FY11E and FY12E.
outlook on demand-
supply and ARRs on many
Pune has become highly popular because of its biotechnology, pharmaceutical, IT, ITeS
Indian cities
and BPO industries, which will eventually drive growth in its hospitality industry.
Goa: The city is expected to register 30% jump in supply till FY12E, taking the total
supply close to 3,900 rooms. Tough real estate laws are to be blamed for the slow
development of hotels across the city. Including four star hotels, the total supply
expected in the next five years is 2,178 rooms. We expect Goa to witness continuous
rise in ARRs during FY11-12E, as we expect domestic travellers to replace the gap left by
foreign travellers to some extent. Recent trends show increased demand for hotel rooms
in Goa all year round, reducing the impact of seasonality on the local hotel market. This
is also evident from the fact that ORs, FY04 onwards, have been moving up consistently.

Hotels & Tourism
Improving ARRs and ORs During 2010-12
During FY11E and FY12E, we expect ARRs to move up 13% and ORs to improve to 65% and
70% respectively. In FY04-08, 32% increase in room demand outpaced 21% increase in
Improvement in all India supply, resulting in 132% increase in ARRs and more than 70% ORs during the same period.
ARRs and ORs till FY12 We believe that the demand-supply mismatch, coupled with slow development of planned
projects, would be a positive for the hotel industry in the medium term.
Global economic downturn during FY09 impacted the ORs, reducing them to 64% from 72%
in FY08 with flat ARRs. The 26/11 Mumbai attack and swine flu fever in FY10 severely
impacted the already weak numbers. In H1FY10, ARRs tumbled 25% and ORs reduced to just
53%. Improvement in the reported data of past few months and positive body language of
the industry players give us confidence that worst for the industry is behind.
Chart 26: High seasonality in tourist arrivals

0.7
0.6
0.4
(mns)
0.3
0.1
0.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2006 2007 2008 2009
Source: CRISIL, Ministry of tourism, Edelweiss research
CRISIL estimates 44% of the total new supply coming onstream during FY10-15 to become
operational only in FY15, leaving the demand-supply mismatch favourable till FY12-13. We
see geographically concentrated players at a relatively higher risk against those with a wider
footprint. With an increase in the total number of travellers, we expect strong demand across
segments.

Hotels & Tourism
Chart 27: Scenario post FY10 looks promising

12,000 90.0
9,600 72.0
7,200 54.0
(INR)
(%)
4,800 36.0
2,400 18.0
0 0.0
ARR Rev PAR Occupancy rate


Hotels & Tourism
Global Players’ Indian Venture
With the growing economy and increasing FDI, several top international hotel chains,
including the likes of Marriott, Four Seasons, Hilton, Accor & Intercontinental, have
announced plans of entering Indian shores either by tying up with an existing domestic hotel
chain or with a real estate player and managing them. As 100% FDI is permitted in hotels
and tourism through the automatic route, there are no obstacles for these companies to
launch operations.
Table 2: Top hospitality chains entering India

S. No. Group Brand Origin Planned Hotels Partner (if any)
1 Claridges 5
2 Wyndham Worlwide Holiday Inn Express Ramada USA 10 Royal Orchid Hotels
3 Le Meridian Le Meridian USA 10
4 Carlson Hospitality Regent, Park Inn,
Country Inn USA 30 US PE fund
5 Marriott International Ritz Carlton, Marriott,
Renaissance, Courtyard USA 24
6 Accor France 200 Emaar-MGF
7 Hilton Corporation Hilton, Hilton Garden Inn,
Homewood Suites USA 75 DLF
8 Best Western Best Western USA 100 Licensee
9 Starwood Hotels Luxury Collection, Aloft USA 19 ITC
10 Choice Comfort Inn, Clarion,
Quality Inn USA 50
11 Berggruen Hotels Keys USA 38
12 Hampshire Hotels USA 25
13 Four Seasons Hotels Four Seasons Canada 8
14 Global Hyatt USA 15
15 Shangri la Traders Hotel, Shangri La Hong Kong 2 Phoenix Group
16 Intercontinental HG Intercontinental, Holiday Inn UK
17 Golden Tulip Hospitality Netherland 30-50
18 Dusit Hotels Thailand 6 Bird Group
19 Meuse Hotels Singapore 100
Source: Edelweiss research
With the global economy now reviving, international hotel companies are revisiting their India
plans and are signing deals with realty players for future developments in the country. For
instance, Carlson recently signed a Memorandum of Understanding (MoU) to manage a 160-
key five star deluxe hotel in Gurgaon. Also, Hindustan Construction Company (HCC), for its
township project in Lavasa, has signed four management contracts for the upcoming hotels
there.
We believe with the entry of major international players, not only ARRs in India will increase
over a period of time, but service standards of hotels will also rise substantially. Undoubtedly,
international chains will intensify competition for the leading Indian hotel chains like IHCL,
EIH and Hotel Leela, but in the long run, they will also increase the size of the market.

Hotels & Tourism
Vacation Ownership
Vacation ownership (VO) is a part of leisure travel. With rising income levels and improving
lifestyle, more Indians want to enjoy holidays. Better road connectivity and cheaper air
tickets have made more remote places accessible to travellers. With just 4.5% (2006) of
Indian population as holiday takers, India is far behind in comparison with the US (85%) and
the UK (69%).
Chart 28: Holiday takers as % of total Indian population

5.0
4.5
4.4
3.9
3.8
Huge untapped potential
(%)
in the Indian VO industry 3.4

3.2 3.2
2.9
2.6
2.5 2.6
2.0
2000 2001 2002 2003 2004 2005 2006
Source: Travel and Tourism – India: Euromonitor International: Country Market Insights, November 2008,
Edelweiss research
Global timeshare industry: Globally, VO, commonly known as ‘timeshares’, posted sales of
USD 15 bn in 2007, of which, the US accounted for majority. Ernst & Young (E&Y) puts the
US VO industry sales at USD 10.7 bn in 2007, with a membership base of 6.5 mn. In 1990s,
industry growth was led by large, established players such as Marriott, Hilton, and Hyatt.
Their entry was seen as a sign of legitimacy and quality, and their capital strength allowed
them to tap the entire VO value chain, from simple vanilla to high-end products.
Apart from the US and Europe, the VO industry is at an early stage in Australia, Africa and
Asia. South Africa had a membership base of 2,60,000 (Source: RCI South Africa) in 2006,
while Australia 1,25,000 (Source: ATHOC). India, on the other hand, has a membership base
of 2,50,000.
US lead the worldwide VO Worldwide, VO has proved to be a difficult product to sell, where brand equity is the key to
industry growth. VO, as a product, ranks high in terms of value and investment. Consequently, it
assumes a quasi-investment strategy of locking in lifetime vacations in the current period.
Customers’ trust in the company to deliver high quality holiday services over an extended
period of time drives sales. Owing to its high value, the product has been slow to pick up as
investors had less faith in smaller operators.

Hotels & Tourism
Chart 29: Timeshare sales in the US since 1975

12.5
10.0
7.5
(USD bn)
5.0
2.5
0.0
1975 1980 1985 1990 1995 2000 2005
Source: MHRIL DRHP, Edelweiss research
Timeshare industry in India: In India, after an initial good response to the VO concept in
1990s, some unscrupulous operators duped investors, which hurt industry prospects. In the
past few years, the industry has, however, regained some momentum with players adding
members at a brisk pace. We expect India to follow the path of the US, where large and
established players are expected to enter the industry at the initial years of growth. As per All
India Resort Development Authority (AIRDA), there are 80 operating resorts, with a total
membership base of 2,50,000.
Vacation ownership industry products

Deemed ownership: A purchaser acquires ownership interest in the immovable
property, which corresponds to the quantity of time allotments purchased. As the
ownership of the property stays with the buyer, the buyer can transfer title to another
person. Time ownership, undivided interest, co-operatives and fractional interests are
some of the most common forms of deemed ownership.
Right-to-use products: Allows users to avail accommodation during a specified period,

season or time interval for a specified number of years. Post the specified years, the
property returns to the developer or to the trust which disposes off the assets and
proceeds on a pro rata basis among the members. Time period for which members have
usage rights is usually long (25-50 years) and could stretch to 80 years as well. Club
membership and holiday licenses are some of the commonly followed formats.
According to AIRDA, some of the most important things to consider while purchasing
timeshare ownership interest are:
• Flexibility with regards to different locations, unit size and time of the year
• Credibility of the timeshare company
• Opportunity to exchange other resort locations
Industry players
Mahindra Holidays & Resorts (MHRIL) is the largest VO company in India with more than
1,00,000 members across different schemes. With 28 resorts and ~1,500 rooms, the
company has gained the critical mass to expand on a large scale. As MHRIL entered the
industry little late, it offered a fixed price non-deeded flexible product (customer only has
right to use the property for a specified period and does not own it) against pure VO

Hotels & Tourism
product (customer owns a share of the unit, and can use it for the designated holiday
period).
MHRIL offers 25-year 7 nights holidays to its members where membership rates range
from INR 0.15 to INR 1.00 mn. It offers purple, red, white and blue seasons as per the
membership rates. MHRIL charges its members upfront and uses that cash to build its
fixed assets inventory. The company also offers Zest (targeting young urban consumers
seeking short breaks), Club Mahindra Fundays (targeting corporate customers) and
Mahindra Holidays Mahindra Homestays (targeting vacation travellers who prefer to stay with an Indian
dominates the Indian VO family). Further, the company plans to launch more schemes like Mahindra Heritage (for
industry senior citizens), Gypsy (targeting teenagers) and fractional ownership property products
(for high-end customers seeking a holiday home).
MHRIL derives its revenues from membership fee, annual subscription fee, resort income,
securitization income and interest income. As MHRIL charges customers upfront to build
its resorts. The company gains as ownership of the property stays with it and the
member gains over a period of time as the value of membership increases which is
transferable.
Country Club and Sterling Holiday Resorts are some of the competitors in the listed
space, but their scale and operations are no comparison for MHRIL.

Hotels & Tourism
Global Travel & Tourism

T&T is currently one of the world’s largest economic activities. It is the leading industry in
many countries as well as the fastest growing economic sector worldwide in terms of job
creation, according to the World Tourism Organization (UNWTO). Encompassing all
Worldwide T&T is a ~USD
components of T&T consumption, investment, government spending and exports, T&T is
8 tn industry
estimated to have generated ~USD 7,892 bn of economic activity worldwide in 2008. In 2008,
global T&T is expected to have accounted for USD 5,890 bn of economic activity, equivalent
to 9.9% of total GDP. In the same year, there were 230.5 mn jobs in the industry, making up
8.2% of the total employment worldwide. Rising economic importance of the industry has
been fuelled by the large and growing number of international travellers. According to
UNWTO, the number of international arrivals grew from 25 mn in 1950 to an estimated 763
mn in 2004, corresponding to an average annual growth rate of 6.5%.
T&T is divided into inbound and outbound tourism, where inbound refers to countries
attracting the largest number of tourists and outbound refers to countries from where the
largest number of tourist originate.
Inbound tourism
International tourist arrivals reached 907 mn in 2007, up 6.6% from 2006. The EU and
US continue to attract maximum number of tourists, corning almost 70% of the total
traffic. France (9%), Spain (6.5%) and the US (6.2%) were the top three tourist
destinations worldwide. Asia and the pacific region were able to increase their share to
almost 20% in 2007 against just 15% in 1997.
Chart 30: World inbound tourism: International tourist arrivals in 2007

Middle East, 48
mn, 5%
Africa, 44 mn,
5%
EU and USA dominate the

America, 142
inbound tourism industry
mn, 16%
with 70% market share
Europe, 484
mn, 54%
Asia and the

Pacific, 184 mn,
20%
Source: World Tourism Organization, Edelweiss research
In Asia, China attracted almost 6% of the total worldwide inbound traffic. India attracted
~5.6 mn (42nd rank) international tourists in 2007, accounting for just 0.56% of the total
traffic. WTTC expects T&T economies’ GDP to contract 3.6% in 2009, but estimates the
overall T&T economy to grow 4% in real terms in the next 10 years, accounting for
almost 275 mn jobs or 8.4% of the total employment worldwide.

Hotels & Tourism
Chart 31: World inbound tourism: International tourism receipt 2007

America, USD Africa, USD 28
171 bn, 20% bn, 3%
Middle East,
US$34 bn, 4%
Asia and the

Pacific, USD
189 bn, 22%
Europe, USD
433, 51%
Source: World Tourism Organization, Edelweiss research
International tourist receipt grew to USD 856 bn in 2007, up 5.6% from 2006. The EU
and US continue to draw the highest amount of total receipt, corning almost 71% of the
total receipt. The US (11.3%), Spain (6.7%) and France (6.3%) were the top three
earners. Asia and the pacific region were able to increase their share to almost 22% in
2007 against just 18.6% in 1997. In Asia, China was the highest earner with almost
4.9% of the total international tourism receipt.
India ranks 65th in the overall inbound traffic and 7th with regards to the number of world
heritage sites. It is 6th in terms of price competitiveness, with very low ticket taxes and
airport charges. With regards to the policy environment, property rights are indeed well
protected and foreign ownership is authorized, although the stringency of visa
requirements places India in a very low 106th position. Also, the tourism infrastructure
in India remains underdeveloped. Furthermore, despite government and industry efforts
to promote the country abroad (India ranked 4th with regards to tourism fair
attendance) and the exposure given to recent promotional campaigns, the assessment of
marketing and branding to attract tourists remains mediocre (ranked 59th) (Source: The
Travel & Tourism Competitiveness Report 2007, World Economic Forum).
Outbound tourism
According to UNWTO, Germany (USD 82.9 bn), the US (USD 76.2 bn), and the UK (USD
72.3 bn) were the top three spenders in 2007. China (ranked 5th) was the highest
spender from Asia, spending almost USD 29.8 bn. India ranked 27th, closely followed by
other emerging countries like Mexico and Brazil. Among the developed countries
Australia, the US and UK are expected to show the highest growth in outbound tourism.

Hotels & Tourism
Key Trends
We believe with the resilience shown by the Indian economy since 1997, overall business
environment in the country is changing. Along with this, the Indian hotel industry is also
witnessing emergence of few key trends:
1. Domestic travellers: Despite growing at 12.3% CAGR during 1996 and 2008 compared
with 7.2% growth of FTAs, domestic travellers have long been ignored by the hotels in
India. With lower propensity to spend, they bargain hard. In the past few years, their
perception of money is, however, undergoing a tectonic shift with rise in the educated,
middle class with disposable incomes. This, in turn, is driving domestic tourism. Rise in
VO membership of MHRIL to almost 100,000 in FY09 against 28,500 in FY05 gives us
enough evidence that at right price, domestic travellers are willing to spend. During
H1FY10, many hotel companies have mentioned the important role played by domestic
travellers in many leisure destinations.
2. Sources of revenue: Rising ORs have increased the contribution of room revenues, up
from 57% in FY05 to 60% in FY09. Owing to the demand-supply mismatch witnessed by
the hotel industry during FY04-09, ARRs increased at 20% CAGR. During the same
period, the increase in F&B per occupied room was much less. We believe the current
ratio of room, F&B and other revenue will continue as we expect modest increase in
ARRs in FY11E and FY12E.
Chart 32: Room revenue proportion has been rising

100.0
15.0 17.0 15.0 14.0 14.0
80.0
28.0 26.0 25.0 26.0
26.0
60.0
(%)
40.0
57.0 57.0 59.0 61.0 60.0

20.0
0.0
2004-05 2005-06 2006-07 2007-08 2008-09
Other Food & Beverage Rooms

Source: HVS, Edelweiss research
3. Visa on arrival: GoI has decided to offer visa-on-arrival to a few countries including
New Zealand, Japan, Luxembourg, Singapore and Finland. It was reluctant to offer this
service earlier due to security reasons. The decision has been taken to promote Indian
tourism and increase the inflow of international tourists, which will directly and positively
affect the Indian hospitality industry.
4. Corporate guest houses: Following the steep rise in hotel tariffs in Bengaluru over the
past 2-3 years, companies like Infosys and Wipro have set up their own guesthouses and
hotels for accommodating their guests. This has been one of the reasons for lower
occupancies in premium hotels in the city. This trend could be a concern if taken up in
other cities as well.

Hotels & Tourism
5. Hotel brand growth in India: With the emergence of India as one of the leading T&T
destinations worldwide, more than 25 leading international hotel names are lined up to
have a presence in one of the fastest growing economies. This is a far cry from 2000
when IHCL, EIH, ITC, and ITDC (government owned) used to dominate the hospitality
sector in India. Growth of Indian middle class offers a large consumer base for hotel
chains ranging from luxury to budget. With the lower end of the market still in the hands
of unorganized players, we expect huge scope for the organised sector.
6. Emerging MICE business opportunity: Convention or meetings tourism accounts for

over 20% of all international arrivals worldwide. The US and Europe dominate this space,
although several Asian countries have successfully captured a growing portion of MICE
business in recent years. The Hyderabad International Convention Centre (HICC) is
India's only branded (Novotel), large scale convention facility with a capacity of 5,000
which has been able to attract some business. IHCL is also planning to have a world-
class convention center in Mumbai. We believe with the growth of science and technology
related industries like biotechnology and pharmaceuticals (wherein companies host large
conferences), India needs to successfully replicate the model of HICC to tap the
emerging MICE business opportunity.
7. Food & beverage (F&B) concepts: With the emergence of standalone eating joints
selling their own USPs, five star hotels are expected to face a tough competition going
ahead. As diners are always ready to test different concepts with fine dining experience,
restaurants like Indigo, Tote, Olives, Tetsuma, Trishna, Zest and Smoke House Grill are
making marks in small pockets. We believe over a period of time, many more individual
restaurants with different concepts and superior interiors will come into India and expand
the market exponentially.

Hotels & Tourism
Business Analysis
We have evaluated companies under our coverage on two important parameters: (1)
geographical diversification and (2) asset model. For geographical diversification, IHCL, with
its presence in both India and abroad along with wide coverage of Indian cities is much better
placed in comparison to EIH and Hotel Leela. EIH and Hotel Leela are dependent on the
performance of couple of cities which form majority of their rooms and revenues. On the
asset model as well, IHCL seems to be better placed as 48 out of its 97 properties are with
associates/JV/Management contract. EIH and Hotel Leela perform poorly on this aspect as
well. Going forward, IHCL plans to follow the asset-light model aggressively and intends to
add 4,200 rooms under management contract in FY11E and FY12E.
Following is a comparative snapshot of the companies under our coverage:
Table 3: Snapshot of major hotel companies

General parameters IHCL EIH Hotel Leela
Hotel as % of total revenue 92 70 100
Other businesses Air catering Air catering None
Printing
Car rentals
Aviation
Planned expansion incl mgmt contract(FY10-12) 6,398 1,085 630
Owned rooms inventory 6,541 2,306 1,201
Rooms inventory (Incl. mgmt contracts) 11,546 3,643 1,610
No. of properties 97 24 6
Property Distribution
- In India 90 20 6
- Abroad 7 4
Property type
- Owned & managed (incl those by subs) 49 10 5
- Owned & managed by associates 17 10
- JVs 15 4
- Mangement contracts 16 1
Top 3 cities by number of rooms
Mumbai Mumbai Bengaluru
Delhi Delhi Mumbai
Bengaluru Bengaluru Goa
Revenue components (FY09)
- ARRs 10,504 11,709 11,610
- Ors (%) 66.0 60.0 63.0
- RevPAR 6,905 702,540 731,430
Source: IHCL, EIH, Hotel Leela, Edelweiss research
From the above snapshot, we can see that even though IHCL, EIH and Hotel Leela are
comparable on the ARRs and ORs basis, the geographical spread and asset model of IHCL
makes it a favourable play. Slow expansion of EIH, along with diversification in the unrelated
areas like printing and car rentals, drag down the overall returns. High dependence of Hotel
Leela on its Bengaluru property for above industry level profits and the heavy investment in
the Delhi property makes it one of the most expensive companies in the entire space.

Hotels & Tourism
Geographical spread
IHCL, with 80% of its rooms located in India and 25% of total revenues coming from
international properties, is the most geographically diversified company in our coverage.
IHCL has presence across luxury, business leisure and economy segments. IHCL is
present with the ‘Taj’ brand in luxury, ‘Vivanta’ in upper upscale, ‘Gateway’ in upscale
and ‘Ginger’ in the economy segments. IHCL plans to add 60 more properties in the next
2 years, adding 8,458 rooms (including 2000 room abroad). More than 50% of the room
addition is expected to come under the asset light model of management contract.
Table 4: Geographical spread

Q3FY10 Indian Hotels EIH Hotel Leela
Hotels Rooms Hotels Rooms Hotels Rooms
North 23 1,823 8 912 1 409
South 32 3,271 4 472 2 538
Geographically IHCL is
East 7 628 1 213 - -
best spread as compared
West 19 3,334 7 1,748 3 663
to its peers
India 81 9,056 20 3,345 6 1,610
Abroad 16 2,490 4 298 - -
Total 97 11,546 24 3,643 6 1,610
EIH is spread evenly in terms of number of rooms, but is concentrated in revenues in

two cities - Mumbai and Delhi (accounting for majority of its revenues). Four of its
properties located abroad are JVs and their accounts are not yet consolidated. Hotel
Leela is still a two-city hotel, with Bengaluru and Mumbai accounting for more than
three-fourth of its revenues. The Delhi property of Hotel Leela is expected to open in
Q2FY11E.
IHCL’s international portfolio: This includes 16 properties, 2,490 rooms across South
East Asia, Middle East, Africa, UK and US. The entire portfolio consists of luxury rooms,
catering to both business and leisure travellers. IHCL is making its maiden venture into
China with management contracts for two hotels.
Asset model
IHCL is the most diversified asset model company, making use of all available methods
to increase the total rooms. The asset light model, where using the brand the company
managing the property extracts a part of top line and bottom line of the hotel from the
developer of the property, is a world-wide followed formula. Marriott International is a
perfect example, where, of the total 5, 76,000 rooms, the hotel owns only 1,785 rooms.
Worldwide, leading hotel chains leverage their brand by managing properties and
charging a fee for it.
In our coverage, IHCL drives the maximum mileage from its brand image with almost 16
hotels out of 97 under management contract. IHCL is planning to add more than 4,200
rooms through management contract in the next two years, both in India and abroad.
This is more than 50% of the total planned expansion of the company.

Hotels & Tourism
Table 5: Asset model

Q3FY10 Indian Hotels EIH Hotel Leela
Hotels Rooms Hotels Rooms Hotels Rooms
Owned 25 3,633 8 2,082 5 1,201
IHCL makes the most of
Subsidiary 24 2,908 1 106 - -
asset light model
Associate 17 2,113 10 1,072 - -
JV 15 1,275 5 383 1 409
Management Contract 16 1,617 - - - -
Total 97 11,546 24 3,643 6 1,610
EIH also plans to add three properties in Bengaluru and Hyderabad under JV in the next
2-3 years. Hotel Leela added its first property through management contract in 2009
(409 rooms in Gurgaon).
Expansion plans
We believe that the next few years present good business conditions for the Indian
hospitality companies to expand and grow. With the high GDP growth expected for the
Indian economy, business and leisure travel will increase commensurately. Major
international players have also announced their plans to enter the Indian hospitality
space. Considering the good economic environment, we expect IHCL to benefit the most
considering its aggressive expansion plans.
IHCL has the most aggressive plan in our universe of companies. It plans to add
~10,000 rooms in the next 24 months, across luxury, business, leisure and economy
segments. The expansion is planned across the entire asset model.
Table 6: Expansion plans - IHCL most aggressive

IHCL has the most
FY10E FY11E FY12E
aggressive expansion
Indian Hotels 1,026 5,372 3,500
plans
EIH 440 592 493
Hotel Leela 495 295 340
To hedge against going asset heavy and to leverage the brand image of Taj, for IHCL,
~40% of the total addition is coming in the form of management contract. Also, under
the Ginger brand in the economy segment, IHCL plans to add 3,500 rooms in next 24
months. Investment per room in Ginger is substantially lower than the average costs for
a luxury room. Although in the next 24 months, IHCL plans to double its room inventory,
the total planned expenditure is just INR 20 bn.
IHCL plans to add more than 30 properties in different cities in India and 8 properties
aboard including China, Dubai, Qatar, UAE and Morocco. EIH, on the other hand, plans to
add five properties in India; it also has plans to add properties in Dubai, Oman, Abu
Dhabi and Morocco, but all these properties are expected to come under its wholly
owned subsidiary EIH International where due to its registration status accounts are not
merged with the consolidated entity. Hotel Leela plans to add only two properties in
Delhi and Chennai in the next 18-24 months.
Among the many properties to be added by IHCL in FY10, FY11 and FY12, properties like
Yeshwantpur (Bengaluru), Falaknuma Palace (Hyderabad), Taj Panjim (Goa) Fishcove
expansion (Chennai) and Cape Town (South Africa) are expected to become operational
in FY10 and FY11.

Hotels & Tourism
Valuation Methodology
Replacement costs (EV/Room) and EV/EBIDTA are the most followed valuation methods to
evaluate hotel companies worldwide. Replacement cost provides the flexibility to compare
peers across the market. It also acts as a value barometer in case of bad economic scenarios
where earnings are suppressed to a very large extent. Average replacement costs of a luxury
room is INR 25-30 mn compared with average replacement costs of INR 8-12 mn for a four
star hotel.
Chart 33: Replacement costs – IHCL most attractive in the peer group
7.0
5.6
4.2
(INR mn)
2.8
1.4
0.0
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Oct-04
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
EIH Leela IHCL
EIH and Hotel Leela are trading (adjusted for managed rooms) at INR 35 mn per room on the
replacement basis against IHCL that is trading at a significant discount of 60%. Owing to its
portfolio mix across segments, IHCL’s discount is justifiable to some extent, but we believe
given its portfolio diversification, there is value in the stock at the current price.
EV/EBIDTA is another valuation tool for the hotel industry. This tool finds its utilisation during
the periods where there is earnings visibility. Hotel industry, being a cyclical industry where
4-5 good years are followed by 1-2 bad years worldwide, it is very important to have
different valuation parameters.
On EV/EBIDTA basis, IHCL is trading at 10x FY11E and 7x FY12E. EIH, on the other hand, is
trading at 13.5x FY11E and 12x FY12E, and Hotel Leela at 23x FY11E and 17x FY12E. Global
hotel companies are trading at 12x FY11E and 10x FY12E. We believe that at current
valuations, IHCL still has upside left, considering the fact almost 17% of its EBIDTA comes
from management contracts that attract higher valuation worldwide.

Hotels & Tourism
Chart 34: IHCL a better bet on EV/EBIDTA

37.0
30.0
23.0
(x) 16.0
9.0
2.0
FY06 FY07 FY08 FY09 FY10E
Indian Hotels Hotel Leela EIH
EIH’s slow expansion and heavy dependence on two cities makes us believe that its current
valuations are demanding; the stock price also factors in probability of a corporate action.
We find Hotel Leela’s valuations too demanding, given its expensive expansion plan and
severe pressure on ARRs in Bengaluru.

Hotels & Tourism
Key Risks
1. Terrorism acts: Following the event of 26/11, many countries issued travel warnings to
their citizens, advising them against traveling to India. Considering the elasticity of
demand in this industry, such acts of terrorism impact the sentiments and inflow of
tourists into the country.
2. Competition from South Asian countries: Many South Asian countries are now
consciously trying to increase their tourism activities by offering world-class facilities at
highly competitive prices. These destinations pose threat to the Indian leisure hotels. To
counter competition, GoI has, however, started many campaigns like Incredible India to
promote India as a leading travel destination.
3. Employee cost: Employee cost (as a percentage of total income) is as much as 25%,
the largest cost component in the overall cost structure of the hotel industry. With the
estimated supply addition of almost 30,000 rooms in the next five years, we expect a lot
of pressure on hiring and retaining trained manpower. Most leading players are,
therefore, ensuring that the required supply of trained workforce comes through either
their own hotel management institutes or through tie-ups with workforce training
institutes.
4. Cost and time over-runs: In 2007, many hotels and real estate companies had
announced their major plans, encouraged by a buoyant economy. Most of them were,
however, shelved in 2008 and 2009 owing to constrained liquidity scenario following a
financial slowdown. Delays in construction, which ultimately increases the overall project
costs, are common in India.
Company-specific risks
1. Indian Hotels: Later–than-expected turnaround in the international portfolio and high

debt taken to finance the aggressive expansion of the past few years.
2. EIH: Better-than-expected performance of the Mumbai market, any possible land sale
and open offer by ITC could provide an upside risk to our call.
3. Hotel Leela: Above expected performance of the Bengaluru property and upcoming
Delhi property could help the company to tide over its liquidity constraints, improving the
overall profit margins.
4. MHIL: Below estimated member addition, along with increase in commission payment to
agents, could hit profitability. Also, if the company losses its ongoing case with the IT
department, then it may have to part with a one-time payment of INR 900 mn.
5. Cox & Kings: Further deployment of working capital in the subsidiaries or for corporate
travel business may strain its balance sheet. Integration of acquired companies is
another key challenge for the company.

Hotels & Tourism
Challenges
Scores of agencies and licenses major hurdle

As per ICRA, to start a new hotel in India, clearances from roughly 40 agencies and 110
licenses are required. Considering the state of bureaucracy in India, the time and costs
involved in getting the required approvals is quite high. We believe that the country
needs a single window clearance system, so that the industry can focus on getting the
operational issues right, then doing the paperwork.
Low FSI + high land costs: A dangerous combination

Considering the high costs of prime land in India, the current permissible FSI for hotels is
woefully inadequate. Manhattan allows FSI of 15 for hotels; whereas, in Mumbai it is
3.45 at Nariman Point, 2.66 in the city and 1 in suburbs. Higher FSI will allow hotels to
construct higher number of rooms, in turn, increasing the profitability of the property.
We realise that higher FSI will increase the already heavy pressure on the existing
inadequate infrastructure facilities. However, considering the importance of hotel
industry to the overall economy and the fact that it doesn’t receive any kind of benefit
from the government, we believe higher FSI is very much needed in India. In one of the
recent development, Mumbai Metropolitan Region Development Authority (MMRDA)
recently sanctioned an FSI of 9.34 in G block of BKC, Mumbai. The higher FSI was
redistributed by MMRDA as the FSI in the area was underutilized.
Taxes: A complex issue

1. Section 80 IA (infrastructure status for the hotel industry): The Indian hotel
industry was asking for the infrastructure status under Section 80 IA of the IT Act.
In 2010 budget, the government has included hotels under section 35 AD where any
capex (excl. land, goodwill and financial instruments) incurred post 1.4.2010 is
eligible for 100% deduction as investment linked tax incentive in the year of
expenditure. We believe the benefit to help the industry in the long-term, even
though the land costs forms a major part of total capex.
In fact, under Section 10 (23) g of the IT Act, hotels were added to the
infrastructure list so that the interest received by financial institutions and banks for
loans extended to hotels were tax exempted. However, the section itself was
discontinued from April 1, 2007.
2. Luxury tax: Luxury tax, which is a state level tax, is levied on the published rates
without taking into consideration the discount given on the rack rates and
commission paid to agents. Luxury tax in India varies from 5% to 15%. The industry
has been asking for the tax to be reduced to a maximum of 5%.
3. VAT, sales tax, excise duty, custom duty and service taxes are some of the other
issues which the industry has been grappling with.
Infrastructure bottlenecks
Woefully inadequate infrastructure has been one of the biggest problems for India to
emerge as the topmost travel and tourism destination. In comparison to some of the
leading tourist destinations of South East Asia, the infrastructure in India scores poorly.
Inadequate infrastructure is one of the main reasons why many Indian cities with great
potential remain untapped on the world tourism map.

Hotels & Tourism
Annexure I
Table 7: Properties and rooms to be added by IHCL till FY12
Date of
Property details No. of rooms Cost
completion
IHCL
Taj Falaknuma Palace, Hyderabad 60 850 Mar-10
Yeshwantpur, Bengaluru 331 160 Dec-10
Taj Lake End, Udaipur 80 250 -
Taj Surya, Coimbatore 184 980 -
Taj Santacruz, Mumbai 175 1300 -
Moti Mahal, Bharatpur 40 400 -
Taj Residency, Noida 450 3150 Sep-10
Taj Group of Companies
Taj Palace, Cape Town 72 2960 Mar-10
Fishcove Expansion, Chennai 64 350 -
Gateway, Gondia 35 110 -
Gateway, Bannerghatta, Bengaluru 225 600 -
Ginger Hotels (different locations) 1,968 1200 -
Total 3,684 12,310 -
Management Contracts
Under Vivanta Brand:
Vivanta by Taj, Bekal 72 - Mar-10
Taj, Gurgaon 208 - -
Taj, Karkumaduma, Delhi 180 - -
Taj, Nagpur 337 - -
Taj, Pondicherry 60 - -
Under Gateway Brand:
OMR, Chennai 159 - -
Hinjewadi 150 - -
Karkumaduma, Delhi 300 - -
Kolkata 205 - -
Raipur 123 - -
Jallunder 123 - -
Kakkanad, Kochi 150 - -
Navi Mumbai 125 - -
International Contracts
Taj Palace temple of Heaven, China 60 - -
Taj Palace , Hainan, China 500 - -
Exotica Resort & Spa, Palm island, Dubai 262 - -
Taj Exotica Resort & Spa, Doha, Qatar 150 - -
Taj Mahal, Yas Island, Abu Dhabi, UAE 500 - -
Taj Hotel, Mina Zayed, Abu Dhabi, UAE 300 - -
Taj Tangiers, Morocco 65 - -
Taj Exotica Resort & Spa, Ras Al Khaimah 180 - -
Total 4,209 - -
Source: Company, Edelweiss research

Hotels & Tourism
Annexure II
Table 8: City wise ARRs

FY04 FY05 FY06 FY07 FY08 FY09 9MFY10
ARR (INR)
Bengaluru 6,227 9,149 11,857 14,154 13,461 13,272 9,307
Chennai 3,564 4,118 5,119 6,044 7,515 7,755 6,473
Hyderabad 3,641 4,649 6,562 8,081 7,480 7,331 6,183
Kolkata 3,264 3,498 4,329 5,719 7,048 7,171 6,253
Delhi 4,441 5,404 7,463 9,968 11,332 11,818 8,881
North Mumbai 4,180 4,730 6,152 8,659 10,949 10,971 8,290
South Mumbai 5,142 5,806 7,297 9,992 12,314 12,725 9,324
Pune 2,901 3,579 4,811 7,754 8,407 8,054 6,198
Agra 2,451 2,991 3,758 4,781 6,554 6,873 5,983
Goa 3,741 4,085 5,002 6,311 7,465 7,386 6,324
Jaipur 4,595 5,294 6,964 6,969 7,028 7,130 5,281
Kerala 2,574 3,043 3,655 4,200 5,108 5,413 NA
Table 9: City wise ORs

FY04 FY05 FY06 FY07 FY08 FY09 9MFY10
Occupancy rate (%)
Bengaluru 82.1 77.5 77.3 74.5 71.0 64.9 61.0
Chennai 62.3 72.0 78.2 76.7 74.3 65.5 55.0
Hyderabad 75.9 79.3 85.0 75.0 70.0 58.4 59.0
Kolkata 58.2 67.6 73.9 74.5 75.0 68.3 63.0
Delhi 70.4 77.7 79.7 76.0 75.0 73.0 59.0
North Mumbai 69.4 76.9 80.0 80.5 75.0 64.5 59.0
South Mumbai 62.3 68.7 68.8 69.7 67.0 58.3 58.0
Pune 77.2 87.5 81.8 81.4 75.0 60.5 45.0
Agra 43.9 55.0 56.1 56.8 64.1 61.0 53.0
Goa 55.9 65.5 68.1 72.0 71.1 62.0 62.0
Jaipur 56.4 61.8 61.9 62.3 64.4 56.0 51.0
Kerala 60.0 63.0 63.0 68.0 67.0 64.0 NA

Hotels & Tourism
Annexure III
Table 10: City wise room availability

FY04 FY05 FY06 FY07 FY08 FY09
Room availability
Bengaluru 1,567 1,563 1,581 2,282 2,455 2,558
Chennai 1,541 1,541 1,646 1,646 1,910 2,142
Hyderabad 1,013 1,017 1,017 1,302 1,495 1,799
Kolkata 1,244 1,244 1,249 1,249 1,249 1,249
Delhi 6,601 6,651 6,813 6,638 6,735 6,380
North Mumbai 3,925 4,219 4,418 4,616 4,602 4,832
South Mumbai 1,892 2,012 2,080 2,080 2,080 1,998
Pune 511 508 508 534 534 536
Agra 1,341 1,354 1,354 1,504 1,553 1,601
Goa 2,339 2,547 2,754 2,937 3,104 3,255
Jaipur 935 1,128 1,128 1,351 1,429 1,613
Kerala 843 843 999 1,194 1,253 1,393
Table 11: City wise room demand

FY04 FY05 FY06 FY07 FY08 FY09
Room demand
Bengaluru 1,287 1,212 1,222 1,700 1,743 1,663
Chennai 960 1,109 1,287 1,262 1,420 1,392
Hyderabad 769 807 864 977 1,046 1,043
Kolkata 724 841 923 931 937 849
Delhi 4,650 5,170 5,430 5,045 5,051 4,658
North Mumbai 2,725 3,245 3,534 3,716 3,452 3,107
South Mumbai 1,178 1,382 1,431 1,450 1,394 1,159
Pune 394 445 416 435 401 322
Agra 589 744 759 854 995 977
Goa 1,308 1,668 1,875 2,115 2,207 2,018
Jaipur 528 697 698 842 920 903
Kerala 506 531 629 812 840 891

Hotels & Tourism
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India Midcap Research Initiating Coverage
Hotels & Tourism
COX AND KINGS

Making holidays more organised
Geographical diversification minimises event risk April 1, 2010

Cox & Kings (CNK), with operations in 19 countries, is geographically diversified
Reuters : COKI.BO Bloomberg : COXK IN
for an event risk. We expect India to account for just 50% of its FY11E revenues
and PAT. A combination of inbound, outbound, and domestic tourist growth is
EDELWEISS RATING
expected to drive the company’s Indian operations. Entry into new segments like
rail tourism and visa processing is expected to further enhance revenue diversity. Absolute Rating HOLD
We expect UK, Japan, Australia, Dubai, and US to account for almost 75-80% of
subsidiaries revenue.
MARKET DATA
CMP : INR 488
Consistent innovation and acquisitions driving revenues 52-week range (INR) : 505 / 304
Share in issue (mn) : 62.9
Innovative product offerings like Duniya Dekho, Bharat Dekho, and FlexiHol are
M cap (INR bn/USD mn) : 30.6 / 683.6
some of CNK’s most popular schemes. To capture the high end tourist outside
Avg. Daily Vol. BSE/NSE (‘000) : 1,734.2
India, the company has made sizable acquisitions in the UK, Australia, and US. To
drive growth further, it has launched a pan-India luxury train in JV with IRCTC
along with an ambitious visa processing project. We expect the luxury train and SHARE HOLDING PATTERN (%)
visa processing initiative to contribute 7% to FY11E revenues. Promoters* : 63.6
MFs, FIs & Banks : 8.5
FIIs : 18.7
Increasing leisure travel to reduce working capital requirement Others : 9.0
We expect the additional working capital deployment to dip going forward as the * Promoters pledged shares : Nil
(% of share in issue)
share of leisure travel increases in the overall portfolio. CNK is likely to generate
approximately INR 3.8 bn of positive operating cash flow in FY11E and FY12E.
With its strong brand equity, the company can negotiate better terms with
RELATIVE PERFORMANCE (%)
corporates and in turn reduce working capital deployed.
Sensex Stock Stock over
Sensex
1 month 5.5 10.8 5.3
Outlook and valuations: Positive; initiating coverage with ‘HOLD’
3 months 0.8 8.7 7.9
CNK, due to its strong brand equity and vast knowledge of various geographies,
has created a niche for itself in the T&T space. Although it is poised to exploit the
high growth expected in the worldwide T&T space, we believe, a lot of these
expectations are already factored in the share price at current levels. We expect
the stock to trade at 25.0x FY11E and 20.0x FY12E P/E. At CMP of INR 488, CNK
is trading at 23.4x and 18.6x consolidated P/E of FY11E and FY12E, respectively.
Using the target P/E, we arrive at a target price of INR 520, and initiate coverage
on the stock with a ‘HOLD’ recommendation.
Financials
Year to March FY09 FY10E FY11E FY12E
Revenues (INR mn) 2,869 3,684 4,708 5,605
Growth (%) 57.5 28.4 27.8 19.1
Manoj Bahety, CFA
EBIDTA (INR mn) 1,214 1,545 1,995 2,381
+91-22- 6623 3362
Net profit (INR mn) 634 845 1,297 1,611
manoj.bahety@edelcap.com
Share outstanding (mn) 28 63 63 63
EPS (INR) 10.0 13.3 20.6 25.6
Manav Vijay
EPS growth (%) 47.4 33.0 55.3 24.2
+91-22- 4063 5413
Diluted P/E (x) 48.9 36.8 23.7 19.1
manav.vijay@edelcap.com
ROAE (%) 32.7 16.5 15.1 16.3
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Edelweiss
SecuritiesSecurities
Limited Limited
41
Hotels & Tourism
Investment Rationale
Geographical diversification minimises event risk

With operations in 19 countries, CNK is geographically diversified to minimise any event
risk. We expect India to account for less than 50% of its FY11E revenues and PAT. A
good combination of inbound, outbound, and domestic tourist growth is expected to
drive the company’s Indian operations. Entry into new segments like rail tourism and
visa processing is expected to further enhance revenue diversity. We expect UK, Japan,
Australia, Dubai, and US to account for almost 75-80% of subsidiaries revenue.
Chart 1: Foreign subsidiaries minimise impact of an event risk

70.0
56.0
(Revenue %)
42.0
28.0
14.0
0.0
FY08 FY09 FY10E FY11E FY12E
India Subsidiaries
Considering that T&T is part of discretionary spending and the first to bear the brunt of
any event (terrorist or disease) risk, CNK has diversified its revenue stream across
geographies. Main foreign subsidiaries like UK, Japan, Australia, Dubai, and US handle a
mix of inbound and outbound traffic and generate outbound tour packages for
approximately 55 countries. We discuss CNK’s major revenue generating countries:
1) India: In FY09, India accounted for 55% of revenue and PAT. Indian operations
serve the inbound, outbound, and domestic traffic for leisure and corporate travel.
Duniya Dekho, Bharat Dekho, and FIT are some of the company’s most popular
product offerings. Pan-India luxury train and visa processing facility are expected to
increase the gamut of services further.
2) UK (Cox & Kings Travel and ETN Services): Cox & Kings Travel is an outbound
Foreign subsidiaries reduce
the geographical risk tour operator and caters to only the leisure travel market. It concentrates on the up-
market business. ETN Services is an inbound travel wholesaler / ground handling
service provider in Europe. Both the subsidiaries accounted for 26% and 27% of
FY09 revenues and PAT, respectively.
3) Japan: This subsidiary generates revenues principally from package consultancy

and services for major wholesalers and societies. It has a tour operator class licence
from the Overseas Tour Operators Association of Japan (OTOAJ). In FY09, the Japan
subsidiary accounted for almost 10% and 9% of revenues and PAT, respectively.
4) Other subsidiaries: Dubai, Australia, and US act as outbound tour operators and
accounted for 9% and 4% of FY09 revenues and PAT, respectively. The Australian
subsidiary was acquired in November 2008 and is a specialist in outbound tours. The

Hotels & Tourism
US subsidiary was acquired in April 2009 and is a boutique travel company offering
private travel and group travel to high net worth clients.
Consistent innovation and acquisitions driving revenues

Product offerings like Duniya Dekho for outbound travel, Bharat Dekho for domestic
travel, and FlexiHol for flexible individual travelers are some of CNK’s most popular
Acquisitions and innovations schemes. To capture the high end tourist outside India, the company has made sizable
drive revenue growth acquisitions in the UK, Australia, and US. In FY07, India accounted for 92% and 100% of
revenues and PAT, respectively. Strategic acquisitions in UK (2007), Australia (2008),
and the US (2009) along with new companies started in Dubai and Singapore accounted
for almost 50% of FY09 revenue. We consider the acquisitions and new starts as
innovative steps by the management.
Table 1: Acquired companies are complementary to existing services

Year Company acquired Added services
2006 Clearmine (along with subsidiary ETN Destination management services for tours to Europe and
Services) inbound tours in Europe for other tour operators
2007 Cox & Kings.,UK (along with its subsidiary Outbound specialist tour operator that caters to leisure travel
Cox & Kings Travel) market of Europe
2007 Cox & Kings (Japan) Dedictated wholesaler of products and services to other tour
operators and offer ground handling capabilities in select
geographies
2008 Quoprro Global Services Visa processing [appovals from Singapore, Athens (Greece)
and Hong Kong] for outsourcing their visa processing
activities to C&K
2008 Tempo Holidays Pty., Australia (along with Significant part of its business is in European countries
its sub Tempo Holidays NZ in NZ)
2009 East India Travel Company Selling upmarket tours and travel packages in the US
To drive growth, the company has launched a pan-India luxury train in JV with IRCTC.
The train will run from September to April and carry 84 passengers per journey for 7-8
nights with fares starting at USD 800 per night and make 16 journeys every year. The
service is aimed at the very high end tourist. We expect the initiative to contribute
approximately 5% to FY11E revenue. The visa processing initiative is another ambitious
project to drive growth. We expect the luxury train and visa processing initiative to
contribute 7% to FY11E revenues.
Increasing leisure travel to reduce working capital requirement

We expect the additional working capital deployment to dip going forward as the share of
leisure travel in the overall portfolio increases. The company is likely to generate
approximately INR 3.9 bn of positive operating cash flow in FY11 and FY12. With its
strong brand equity, CNK can negotiate better terms with corporates and in turn reduce
Reduced working capital
going forward the working capital deployed.
Meetings, incentives, conferences, and exhibitions (MICE); corporate travel; and forex
are the business segments where the company needs to provide credit period to
customers. CNK has become selective in taking on the corporate travel business and is
ready to forego potential business if the same is coming at an incremental working
capital deployment.

Hotels & Tourism
Table 2: MICE and corporate business travel requires working capital

Business % of total Average credit
revenue days
India - Leisure (Inbound, outbound, domestic) 36.1 Zero

India - Leisure (MICE) 13.5 10 days
India - Corporate / business travel 2.7 20 - 25 days
India - Forex 2.7 7 -8 days
Foreign - Leisure 45 Zero
CNK has also loans and advances and debtors worth INR 2.5 bn that have been extended
to various subsidiaries, associates, and group companies. We believe as the subsidiaries
attain reasonable size, future fund deployment will be limited in comparison to the past.
Management is confident of turning around the working capital cycle and aims to report
a positive working capital going forward. One of the stated purposes of IPO proceedings
was to invest INR 625 mn into subsidiaries. We believe future deployment of funds post
this round of investment will be minimal.
Bulk buying advantage

Due to its strong brand image and geographical reach, CNK gets bulk buying discounts
for air travel, hotel accommodations, car rentals, and ground handling. This enables the
company to offer competitive packages to clients and customers. This bulk buying
Big discounts due to bulk
buying happens without any capital commitment on the part of CNK. Constant innovation of new
schemes helps the company fulfill commitments to hotels, airlines, and other partners
involved. In the earlier years, small travel operators earned nearly 80-90% of total
revenues from airline ticket bookings where margins were as high as 10%. However,
with the emergence of online booking portals like yatra, ezeego, and makemytrip and to
some extent with the weak financial condition of airlines, the mom and pop shops are
under severe threat. CNK is also active in this space with its associate company Ezeego
One Travel & Tours, where it holds 14.98%. Ezeego is a neutral market place which
showcases products of all companies including CNK and its competitors and offers
customers the flexibility to choose what they deem fit.
Global reach and alliances

CNK has global presence with operations in 19 countries besides India through its
subsidiaries, branch and representative offices. In India, it has 255 points of presence
covering 164 locations through a mix of 14 branch sales offices, 75 franchised sales
shops, and a mix of 185 general sales agents (GSAs) and preferred sales agents (PSAs).
Rooms and revenue lopsided
As a member of Radius, a global travel company, CNK is connected to a network of 90
towards Mumbai
Radius members from more than 80 prominent countries with over 3,600 locations and
service clients originating through them within India.
The company enhances its global presence through a network of GSAs and PSAs
covering other countries. Taking advantage of its global network, the company offers
outbound travel products to almost 150 countries.
Strong brand equity

CNK has evolved over 250 years and is one of the oldest and recognized holiday brands,
catering to the travel requirements of Indian and international travelers. The brand was
ranked No. 1 in India and 152 amongst top 1,000 brands in the Asia Pacific region in
2008 by Media Magazine & TNS.

Hotels & Tourism
Valuation
Considering CNK’s ability to merge an acquistion seamlessly in its existing operations, we

believe acquistions in Australia and US will be value accreavtive on a long term basis. We
also believe that the JV with IRCTC for a pan-India luxury train and the visa processing
facility will lead to substantial growth in FY11 and FY12.
PE multiple is the right valuation parameter for a company like CNK which is growing fast,
taking advantage of the industry’s organic growth and using acquistions as an inorganic
growth route.
With its strong brand equity and vast knowledge of various countries/geographies, CNK has
created a niche for itself in the T&T space. Considering the high growth expected in the
worldwide T&T space, the company is in a sweet spot to exploit the opportunity. At CMP of
INR 488, CNK is trading at 23.4x and 18.6x consolidated P/E of FY11E and FY12E,
respectively. We expect the stock to trade at 25.0x FY11E and 20.0x FY12E P/E. Some of the
Asian peers like Hanatours and Huangshan are also trading at similar multiples. Using the
target P/E, we arrive at a target price of INR 520, and initiate coverage on the stock with a
‘HOLD’ recommendation.

Hotels & Tourism
Key Risks
Bulk buying advantage could prove to be transient

CNKs ability to deliver volumes to its business partners is the prime reason behind it
earning good discounts from hotels, airlines, and car rental agencies. Also, as the
discount is without any kind of capital commitment from CNK, failure to drive volumes
could spell end of this advantage. To continue to enjoy the discounts and in turn offer
lower prices to customers, the company needs to consistently innovate schemes and
prices.
Deployment of further working capital

The company has an exposure of INR 2.5 bn in its subsidiaries and group companies as
investments, debtors, and loans and advances. As the subsidiaries are making efforts to
attain suitable size, the investment was necessary. But going forward also if CNK
continues to provide resources to these companies, then its working capital requirement
will grow manifold. Including the above, in another promoter owned company Ezeego
One Travel & Tours, CNK has advanced approximately INR 900 mn for the losses
incurred as Ezeego is writing off the goodwill for a swap of share equity to advertisement
space. Further assistance by CNK to this entity could add to the existing debt.
CNK has advanced approximately INR 350 mn to two of its loss making group companies
viz., Tulip Star Hotels and V Hotels, in the form of investments and advances. The
amount is part of the overall INR 2.5 bn exposure mentioned above.
Unforeseen events like war or disease

Outbreak of any disease like swine flu on a worldwide basis can affect business severely
even though CNK’s revenue stream is diversified in terms of geographies. As 90-95% of
revenue is from leisure travel, in case of any unforeseen event, leisure travel can face a
big decline.
Future acquisitions turning sour

Although CNK has the history of integrating acquisitions quite well with existing
operations, in 2010 the company needs to get the US and Australian acquisitions correct.
Also, as the company has raised funds for more acquisitions, any uncertainty on this
front could prove to be a major dampener.

Hotels & Tourism
Company Description
CNK is one of the largest and widely recognised holiday brands in India and has evolved over
250 years. The company caters to overall travel needs of Indian and international travelers.
It has presence in 19 countries and in India has 255 touch points covering 164 locations.
International operations account for almost 50% of total revenue. CNK’s business can be
broadly categorized as leisure travel, corporate travel, forex and visa processing. It provides
end to end travel solutions including land, air and cruise bookings, hotel bookings, in-transit
arrangements and various other services.
In India, the company caters to travelers coming into India, going out of India, and domestic
travelers within the country. Due to its extensive knowledge of various countries and
geographies, the company also caters to travelers originating from any country other than
India to any other country. Leisure travel dominates the revenue stream and the company
has aggressive plans like the Maharaja Express and visa processing to strengthen it. As the
corporate travel part of the business is capital intensive, the company is looking at measures
to reduce the deployment of working capital without any adverse impact on existing business.
Fig 1: Business chart
Cox & Kings (India)
Quorprro Global
- For Visa
Leisure business- Corporate Leisure business Royal Indian Rail processing, yet to
India business - India - Foreign Tours commence
operations
Constitutes 50% Constitutes 5% of Constitutes 45%

of net revenue net revenues of net revenues
Fig. 2: Corporate structure

Cox & Kings (India)
Cox and Kings -

Equity of INR 635 mn Cox & Kings (Japan)
(Owns Cox & Kings Equity of INR 233 ETN Services - Royal Indian Rail
Travel - Tour mn; second largest Ground handling Tours - 50:50
operators and travel sub contributing 10% unit; contributes JV with IRCTC.
organizers for EU. The of total revenues. 5% of total Yet to commence
biggest sub, revenue operations
contributes 22% of
total revenue).
Cox & Kings (Aus)- East India Travel Co.

Equity of INR 86 mn; Outbound operator
outbound operator from US; contributes
contributing 6% of 2% of revenue
total revenues

Hotels & Tourism
Financial Outlook
Acquisitions and new initiatives to drive revenue growth

Acquisitions by CNK in Australia (FY09) and US (FY10) and the starting of luxury train
along with the visa processing facility are expected to drive 28% and 33% revenue
growth in FY10E and FY11E, respectively. As past acquisitions attain size and the
synergies become more evident, CNK is in a sweet spot to exploit the tremendous
growth opportunity in the T&T space.
Chart 2: Sales growth momentum to continue
Thrust from inorganic 7,000 100.0

growth going forward
5,600 80.0
4,200 60.0
(INR mn)
(%)
2,800 40.0
1,400 20.0
0 0.0
FY07 FY08 FY09 FY10E FY11E FY12E
Sales Sales growth

Given the larger base of FY09, growth numbers of FY11 and FY12 are reasonable and are
not strictly comparable to the company’s growth rate in FY07 and FY08.
Strong margins to continue

We expect the company to report approximately 42% and 23% EBIDTA and PAT
(adjusted for extraordinary item) margins between FY10 and FY12, respectively. It is
difficult to predict the synergy benefits of the integration of its subsidiaries, but we
expect all the subsidiaries to be complementary.
Chart 3: Margins to improve in FY11

45.0
39.0
33.0
(%)
27.0
21.0
15.0
EBITDA margins Net profit margins

Hotels & Tourism
We expect margins to remain strong even though more than 50% of the revenue comes
from outside India as CNK primarily caters to the upper end of tourists who are less
sensitive to rates.
Positive operating cash flow due to reduced working capital requirement

We expect CNK to report positive cash flow from operations of approximately INR 3.5-
4.0 bn between FY10E and FY12E. The company is likely to start reporting positive
operating cash flows as subsidiaries attain size and its conscious efforts to choose the
corporate travel business. Management is also confident of reducing the working capital
requirement going forward.
Chart 4: Cash flow from operations to turn positive FY10 onwards

2,400
1,600
800
(INR mn)
(800)
(1,600)
Operating cash flow
We expect the incremental fund deployment in subsidiaries to decrease going forward

and reduce the working capital strain on the parent company.

Hotels & Tourism
Financial Statements
Income statement (INR mn)

Year to March FY08 FY09 FY10E FY11E FY12E
Income from operations 1,821 2,869 3,684 4,708 5,605
Total operating expenses 1,091 1,655 2,139 2,713 3,224
Employee cost 506 791 1,040 1,313 1,544
Other expenditure 586 865 1,099 1,400 1,680
EBITDA 730 1,214 1,545 1,995 2,381
Depreciation and amortisation 64 96 116 138 147
EBIT 666 1,118 1,429 1,857 2,234
Interest 59 201 304 267 211
Total other income 62 67 137 347 382
Profit before tax 669 983 1,261 1,936 2,405
Provision for tax 217 349 416 639 794
Core profit 451 634 845 1,297 1,611
Extraordinary income/(loss) - - 276 - -
Profit after tax 451 634 1,122 1,297 1,611
Minority interest (25) (6) (10) - -
Profit after minority interest 426 628 1,112 1,297 1,611
Shares outstanding (mn) 16 28 63 63 63
EPS (INR) basic 6.8 10.0 13.3 20.6 25.6
Diluted shares (mn) 16 28 63 63 63
EPS (INR) diluted 6.8 10.0 13.3 20.6 25.6
Dividend per share (INR) 0.2 0.2 2.0 2.2 2.5
Dividend payout (%) 1.5 1.0 13.2 12.8 11.4
Common size metrics- as % of net revenues

Operating expenses 59.9 57.7 58.1 57.6 57.5
Employee cost 27.8 27.6 28.2 27.9 27.5
Other expenditure 32.2 30.1 29.8 29.7 30.0
Depreciation and amortisation 3.5 3.3 3.1 2.9 2.6
Interest expenditure 3.2 7.0 8.3 5.7 3.8
EBITDA margins 40.1 42.3 41.9 42.4 42.5
Net profit margins 24.8 22.1 22.9 27.6 28.7
Growth metrics (%)

Revenues 87.9 57.5 28.4 27.8 19.1
EBITDA 81.8 66.2 27.3 29.1 19.4
PBT 96.4 47.0 28.3 53.5 24.2
Core net profit 115.0 40.5 33.2 53.5 24.2
EPS 43.3 47.4 33.0 55.3 24.2

Hotels & Tourism
Balance sheet (INR mn)

As on 31st March FY08 FY09 FY10E FY11E FY12E
Equity capital 279 279 629 629 629
Reserves & surplus 1,380 2,000 7,437 8,567 9,996
Shareholders funds 1,659 2,280 8,066 9,197 10,625
Secured loans 502 2,363 2,992 2,492 1,742
Unsecured loans 794 1,178 229 229 229
Borrowings 1,296 3,542 3,221 2,721 1,971
Deferred tax (net) 30 22 22 22 22
Sources of funds 2,986 5,843 11,309 11,940 12,618
Gross block 852 1,173 1,400 2,050 2,150
Depreciation 323 459 575 713 860
Net block 529 715 826 1,338 1,291
Capital work in progress 25 103 125 125 125
Intangible assets 102 1,110 2,254 2,254 2,254
Investments 465 457 4,457 4,457 4,957
Inventories 41 35 50 64 77
Sundry debtors 1,787 2,322 2,220 2,580 2,764
Cash and bank balances 561 634 384 199 298
Loans and advances 1,745 3,081 3,881 4,081 4,281
Total current assets 4,133 6,072 6,536 6,925 7,420
Sundry creditors and others 1,796 1,836 2,110 2,379 2,650
Provisions 486 818 818 818 818
Total current liabilities & provisions 2,282 2,654 2,928 3,197 3,468
Net current assets 1,851 3,418 3,609 3,728 3,952
Deferred tax (net) 15 39 39 39 39
Uses of funds 2,986 5,843 11,309 11,940 12,618
Book value per share (INR) 26 36 128 146 168
Free cash flow (INR mn)

Net profit 426 628 1,112 1,297 1,611
Depreciation 64 96 116 138 147
Others 59 201 28 267 211
Gross cash flow 549 925 1,255 1,702 1,969
Less: Changes in working capital (1,080) (1,826) (440) (304) (126)
Operating cash flow (531) (901) 815 1,398 1,844
Less: Capex (522) (1,400) (248) (650) (100)
Free cash flow (1,053) (2,301) 567 748 1,744
Cash flow metrics

Operating cash flow (531) (901) 815 1,398 1,844
Financing cash flow 1,422 2,374 4,327 (933) (1,145)
Investing cash flow (522) (1,400) (5,392) (650) (600)
Net cash flow 368 73 (250) (185) 98
Capex (522) (1,400) (248) (650) (100)
Dividend paid 7 7 147 166 184

Hotels & Tourism
Ratios
ROAE (%) 36.5 32.7 16.5 15.1 16.3
ROACE (%) 39.4 28.3 23.4 25.9 29.5
Inventory (days) 6 5 5 4 5
Debtors (days) 256 261 220 186 174
Payable (days) 480 400 360 302 285
Cash conversion cycle (219) (134) (135) (111) (106)
Current ratio 1.8 2.3 2.2 2.2 2.1
Debt/EBITDA 1.8 2.9 2.1 1.4 0.8
Interest cover (x) 11.3 5.6 4.7 6.9 10.6
Fixed assets turnover (x) 3.4 4.0 4.5 3.5 4.3
Total asset turnover (x) 0.6 0.5 0.3 0.4 0.4
Equity turnover(x) 1.7 1.7 0.8 0.6 0.6
Debt/Equity (x) 0.8 1.6 0.4 0.3 0.2
Adjusted debt/Equity 0.9 2.3 0.6 0.5 0.3
Du pont analysis
NP margin (%) 24.8 22.1 22.9 27.6 28.7
Total assets turnover 0.8 0.6 0.4 0.4 0.5
Leverage multiplier 1.8 2.3 1.7 1.4 1.2
ROAE (%) 36.5 32.7 16.5 15.1 16.3
Valuation parameters
Diluted EPS (INR) 6.8 10.0 13.3 20.6 25.6
Y-o-Y growth (%) 43.3 47.4 33.0 55.3 24.2
CEPS (INR) 17.5 25.9 34.1 51.4 63.0
Diluted P/E (x) 72.1 48.9 36.8 23.7 19.1
Price/BV(x) 18.7 13.7 3.8 3.4 2.9
EV/Sales (x) 4.4 5.6 7.9 6.1 4.9
EV/EBITDA (x) 11.0 13.2 18.8 14.4 11.5
EV/EBITDA (x)+1 yr forward 6.4 8.8 15.4 12.9
Dividend yield (%) 0.0 0.0 0.4 0.5 0.5

India Midcap Research Initiating Coverage
Hotels & Tourism
EAST INDIA HOTELS

Priced to perfection
Banking on Mumbai with 60% rooms inventory and 50% FY11E revenue April 1, 2010
With opening of the Trident in Bandra Kurla Complex (BKC), a 436-room property,
Reuters : EIHO.BO Bloomberg : EIH IN
Mumbai will account for 60% of East India Hotels’ (EIH) total owned rooms
inventory and approximately 50% of total FY11E revenues. Although we expect
EDELWEISS RATING
45% and 15% jump in FY11E and FY12E revenues, respectively, much is
Absolute Rating HOLD
dependent on the performance of the Mumbai hotel market. The South Mumbai
market is expected to be robust in FY11 and FY12, whereas the North Mumbai
market is expected to remain challenging due to 20% increase in supply.
MARKET DATA
CMP : INR 124
Insufficient expansion a long-term negative 52-week range (INR) : 154 / 86

EIH’s project pipeline is insufficient compared to the robust expansion plans of
M cap (INR bn/USD mn) : 48.9 / 1,082.5
other players. The BKC property (first major addition after four-five years) opened
Avg. Daily Vol. BSE/NSE (‘000) : 263.2
in Q3FY10 after a delay of almost four-five quarters. Post the launch, in the
absence of no major project in the pipeline for the next 12-18 months, the
company’s earnings growth is dependent on increase in average room rates SHARE HOLDING PATTERN (%)
(ARRs) and occupancy rates (ORs). We believe, with a slow expansion programme, Promoters* : 46.4
EIH is curtailing its earnings expansion and not leveraging on its brand image. MFs, FIs & Banks : 13.5
FIIs : 2.7
Others : 37.4
International operations not reflected in financials * Promoters pledged shares : 1.7
Due to British Virgin Islands regulations where EIH’s international subsidiary is
registered, the company reports only miniscule dividend income on the INR 1.8 bn
investment. Also, as the management of properties under the subsidiary is not
with EIH, we believe value of this investment is not reflected in financials. We
expect further capital to flow to this subsidiary due to the current expansion plans Sensex
1 month 5.5 1.8 (3.7)
in Dubai, Oman, and Morocco.
3 months 0.8 (11.1) (11.9)
12 months 71.0 44.4 (26.6)

Outlook and valuations: Expensive; initiating coverage with ‘HOLD’
At CMP of INR 124, EIH is trading at 13.4x and 11.3x consolidated EV/EBIDTA of
FY11E and FY12E, respectively, a 10-15% premium to peers. We expect the stock
to trade at 12.0x FY11E and 10.0x FY12E EV/EBIDTA, similar to its peers as the
advantage of low leverage is set off by insufficient expansion. Using the target
EV/EBIDTA and EV/room and valuing the international operations at 2x of
investments, we arrive at a target price of INR 120, and initiate coverage on the
stock with a ‘HOLD’ recommendation.
Financials
Revenues (INR mn) 11,769 9,620 13,877 15,235
Growth (%) (7.1) (18.3) 44.2 9.8
EBIDTA (INR mn) 4,143 2,417 4,463 5,196 Manoj Bahety, CFA
Net profit (INR mn) +91-22- 6623 3362

2,245 1,701 371 1,479
Share outstanding (mn) manoj.bahety@edelcap.com
393 393 393 393
EPS (INR) 4.3 0.9 3.8 5.0
Manav Vijay
EPS growth (%) (24.5) (78.2) 298.7 32.3
+91-22- 4063 5413
Diluted P/E (x) 28.6 131.3 32.9 24.9
ROAE (%) 12.8 2.6 10.0 12.3
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Limited
Edelweiss Securities Securities Limited
53
Hotels & Tourism
Banking on Mumbai with 60% rooms inventory and 50% FY11E revenue
With the opening of the Trident, BKC, in December 2009 and the expected reopening of
the Oberoi, Nariman Point, in Q4FY10, we expect Mumbai to account for 60% (1,310
rooms out of 2,192 rooms) of EIH’s total owned room inventory and approximately 50%
of total FY11E revenue. Thus, performance of the Mumbai hotel market is critical for the
company. While limited supply is expected to keep the South Mumbai market robust, the
North Mumbai market is expected to remain soft due to 20% increase in supply in the
next two years.
Chart 1: Highly concentrated in few cities
2,500
60
2,000
160 160
263 263
1,500 160 160 287 287
(Rooms)
263 263
Rooms and revenue lopsided 1,000 287 287

towards Mumbai
1,310 1,310
500
874 874
0
Mumbai 2008 Kolkata
NCR 2009
Bengaluru 2010ERanthambore
Udaipur 2011E
Rajgarh
Outlook on Mumbai hotel market

South Mumbai: South Mumbai commands one of the highest ARRs in the country due
to the location advantage and limited room supply. We believe, as BKC is fast developing
as an alternative business destination, Nariman Point will lose its premium tag over a
period of time.
North Mumbai: Banking and financial services are the primary demand generaters for
North Mumbai, but due to ample supply of rooms we expect ARRs and ORs to be soft in
the next 12-18 months. North Mumbai is expected to add 2,000 rooms by 2013, taking
the total to 7,000 rooms. Ample supply is expected to keep ARRs soft, which had jumped
230% to INR 11,000 during FY05-09. We are not including any effect of 4-star hotels
which are coming up in that part of town, although these hotels if not take away the
traffic, will atleast affect sentiments.

Hotels & Tourism
Chart 2: ARRs and ORs struggling in North Mumbai market

13,000 75
11,600 68
10,200 61
(%)
(INR)
8,800 54
7,400 47
6,000 40
Dec-08
Sep-08
Sep-09
Apr-09
Aug-09
Nov-08
Feb-09
May-09
Mar-09
Oct-08
Jan-09
Oct-09
Jun-09
Jul-09
ARRs ORs
Insufficient expansion a long-term negative

The 436-room BKC property is the only addition after almost four-five years. Post BKC,
Oberoi, Rajgarh with 60 rooms is expected to come up in FY11E. Apart from these, few
other properties are lined up for FY11 and FY12, but mostly under management contract
(MC).
Chart 3: Slow expansion limits earnings growth
No major expansion post 4,500

Trident, BKC
3,600
2,700
(Rooms)
1,800
900
0
FY07 FY08 FY09 FY10E FY11E
Owned rooms Total rooms
Slow expansion in rooms has led to revenue CAGR of just 17% from FY04-09 with ARRs
increasing at 15% CAGR during the same period. Had the company aggressively
expanded its rooms inventory, sales growth during the previous good business cycle
would have been much higher. Although we expect 45% and 15% increase in revenues
in FY11E and FY12E, respectively, majority of it accounts from the reopening of the
Oberoi, Nariman Point, and launching of the Trident, BKC.

Hotels & Tourism
Till FY12, EIH plans to add approximately 1,000 rooms through MC, increasing its total
rooms to approximately 1,600. In FY11E, although we expect MC to contribute 7% to the
consolidated EBIDTA, its impact on return ratios is not significant.
International operations go unaccounted

EIH International, a wholly owned subsidiary of EIH, with an investment of INR 1.8 bn,
holds stakes in various international properties. Since properties in which investments
are made through EIH International are not considered as an associate or subsidiary,
EIH’s consolidated numbers do not reflect actual performance of these properties.
EIH, through EIH International, has presence in Indonesia, Mauritius, and Egypt and
No income from across four properties has approximately 300 rooms. Due to the registration of this
international operations
subsidiary in the British Virgin Islands, EIH recognises only dividend income from it.
Although the inherent value of these properties is high, due to regulations, the real effect
of this is not visible. Through EIH International, EIH is also planning to increase its
presence internationally by adding properties in Dubai, Abu Dhabi, Morocco, and Oman.
We expect further flow of funds to this subsidiary due to the current expansion plans.
As the management of these properties is not with EIH or EIH International, the
company also does not report any MC income from them.
Mashobra Resort: Uncertainty continues

Due to the ongoing dispute with its JV partner, the Government of Himachal Pradesh, the
resort has been losing money. This has created uncertainty over EIH’s total investment
of INR 1.4 bn (comprising INR 0.26 bn in equity and INR 1.13 bn in loans and
advances). The dispute in regard to cost over runs and EIH’s subsequent request to
convert its debt into equity is with the high court. The dispute has resulted in Mashobra
losing INR 482 mn in the past five years on net basis. In the meantime, the company
continues to pay the debt and interest obligations. EIH is expected to provide another
INR 100 mn in FY10E towards the interest and the principal due to banks.
Airport and flight services: Tepid growth

Oberoi Flight Services (OFS) and Oberoi Airport Services (OAS) with an estimated annual
revenue of INR 1.8-1.9 bn (16% of consolidated revenue of FY09) in FY09 is not showing
any signs of growth. The company is expected to end FY10 with flat growth and
No growth in flight catering profitability is likely to be under stress considering the doddering financial condition of
business the airline industry.
EIH caters to only foreign airlines. Growth in the business has been tepid and the
company is not enthusiastic to pursue the business. In H1FY10, the estimated top line
for the business was INR 860 mn and the company expects similar performance in
H2FY10 as well.
Printing and car services business: The minions

We consider EIH’s car rental (Mercury Car Rentals; EIH holds 66.67%) and printing press
businesses as non core areas and believe the total investment of approximately INR 2 bn
in them to be overall dilutive for profitability. We believe it is difficult for these segments
to generate the hotel business EBIDTA margin of 25-30%.
Substandard returns from
printing and car rental
businesses The car rental business is a JV with Avis of Europe, wherein the latter holds one third
equity. In FY09, on sales of INR 776 mn, it posted a negative PBT of INR 73.4 mn as
many of the company’s initiatives did not yield the desired results. In FY10, the company

Hotels & Tourism
is expected to post marginal profits, both due to improved business conditions and
measures to cut loss making segments.
EIH generated revenue of INR 500 mn from the printing business where approximately
20% of the business is in house. Till 2008, the business operated out of Maiden Hotels in
Delhi. In FY09, the company invested INR 1 bn to expand and shift the business to
Manesar (close to Gurgaon, Haryana). The company has aggressive plans for this
business, but we believe its overall profitability is not more than 10-15%.

Hotels & Tourism
Valuation
We have used valuation parameters like EV/EBIDTA, EV/sales, P/B, and DCF to value EIH.
The stock is currently available at 13.4x and 11.3x consolidated EV/EBIDTA of FY11E and
FY12E, respectively, while its global peers are trading at 12.0x and 10.0x their EV/EBIDTA of
FY11E and FY12E, respectively. With a target price of INR 120, we believe the 10-15%
current premium over other comparables is not justified and expect EIH to trade at similar
multiple as peers. As we don’t have any light on the financial details of its overseas company,
we have valued the investments at 2x, which adds another INR 10 to our target price.
At CMP of INR 124, EIH is currently trading at 3.2x FY11E P/B. Although it is less than its
Insufficient expansion to historical P/B of 4.1x over FY06-09, we believe at the current price, the stock fully factors in
affect the earnings growth
better business performance. Disappointment on any of these fronts can adervsely impact
stock sentiments.
Our sensitivty analysis for the main valuation parameters like EV/EBIDTA and EPS also shows
a limited upside to our estimates.
Table 1: Sensitivtiy of EV/EBIDTA – FY12E

ORs
ARR increase 60% 65% 70% 75%
5% 13.8 12.7 11.7 10.9
10% 13.3 12.2 11.3 10.5
15% 12.8 11.8 10.9 10.1
20% 12.4 11.4 10.53 9.8
Table 2: Sensitivity of EPS – FY12E

ORs
ARR increase 60% 65% 70% 75%
5% 3.5 4.1 4.7 5.3
10% 3.7 4.4 5.0 5.6
15% 4.0 4.6 5.3 5.9
20% 4.3 4.9 5.57 6.2
Source: Edelweiss reserarch
We have assumed 70% ORs and 15% growth in ARRs for calculations. This is considering the
fact that 60% of its owned rooms are located in Mumbai, EIH has better chances of
increasing overall ARRs. The sensivity table clearly demostrates that even with ORs of 70%
and 15% growth in ARRs in FY12E, the company would be trading at EV/EBIDTA of 11.3x,
which is a 10% premium than peers. We initiate coverage on the stock with a ‘HOLD’
recommendation.

Hotels & Tourism
Key Risks
Further stake increase by ITC

With ITC’s stake in EIH at 14.98%, further acquisition of shares by the former through
the open offer route will increase its involvement in the company. Even though ITC has
been holding this stake for the past five-six years, any open offer will affect the share
price.
Announcement of major projects

An aggressive expansion plan by the current management can propel the current slow
expansion to a fast track. As the company’s balance sheet is not highly leveraged, it is
possible for EIH to increase its rooms inventory under the ownership structure.
Sale of land bank

Sale of any land parcels by EIH may give access to substantial cash. We do not have
exact details of its land bank.
Monetisation of international operations

Efforts to monetise the value of EIH International may provide the much needed clarity
on international operations. As contribution of the international subsidiary is currently
minimal due to the registration regulation, we have assumed investment under the same
only at its book value.

Hotels & Tourism
Company Description
EIH, the third largest hospitality company in India after Indian Hotels and the ITC Welcome
Group, manages more than 3,000 rooms across 19 properties in India. It is the largest
company in the Oberoi Group. The group, founded in 1934, owns and manages luxury hotels
across five countries under the Oberoi and Trident brands. The group’s portfolio includes
hotels and operations in flight catering, airport restaurants, travel & tour services, car rentals,
project management, and corporate air charters. It manages more than 3,500 rooms across
India and the international market. The company also operates luxury cruisers in India.
Besides hotels, the group also owns a printing press.
In 2003, the group entered into a strategic alliance for Trident hotels with Hilton International
to cover eight hotels with approximately 1,900 rooms across India under the Trident Hilton
brand. In 2007, the company decided to call off the arrangement as Hilton itself was
increasing its presence in India. Post the break up, all eight hotels were re-branded as
Trident.
Fig. 1: Business flow chart
East India Hotel
Mgmt contract/
Owned rooms associate Airport and flight
2,086 rooms services Printing press Car rental
1,071 rooms
9 owned hotels
10 owned hotels
Constitutes 64% Constitutes 8% of Constitutes 17% Constitutes 5% Constitutes 6%

of net revenue net revenues of net revenues of net revenues of net revenues
Fig. 2: Corporate structure
East India Hotel
EIH International
- equity of Mashobra Resort -
INR 1.9 bn equity of Mumtaz Resort - EIH Associated
(Owns interest in 4 INR 260 mn; equity of Hotels - equity of
international loans of INR 394 mn INR 596 mn
properties,not INR 1.13 bn (60% interest) (36.1% interest)
clubbed in the (78.79% interest)
con no’s.)
Oberoi Kerala Mercury Car EIH Flight Services

Hotels & Resorts Rentals - equity - equity of
- equity of INR 22 mn of INR 10 mn INR 45 mn
(80% interest) (66.67% interest) (100% interest)

Hotels & Tourism
Financial Outlook
Revival of Mumbai market essential for sales growth

With the general revival in economic conditions, business and leisure travel is picking up
at a slow pace. Although we expect EIH to post sales growth of 45% and 15% in FY11E
Mumbai is essential for sales and FY12E, respectively, we believe higher proportion of villa properties in the portfolio
growth will delay recovery as foreign tourist arrival is still weak due to the global slowdown.
FY11 recovery is dependent on recovery of the Mumbai market as the same will account
for almost 60% of owned rooms in FY11.
Chart 4: Robust sales growth FY11 onwards

17,500 45%
14,000 30%
10,500 15%
(INR mn)
(%)
7,000 0%
3,500 -15%
0 -30%
Sales Sales Growth

Margins to remain subdued

Though we expect EIH’s profitability to improve with revival of the tourism industry,
return ratios will still be lower than those in FY07 and FY08. In the absence of any major
addition of rooms post the Trident, BKC, earnings growth is dependent on improvement
in ARRs and ORs.
Margins are dependent on
growth in ARRs and ORs
Chart 5: Margins to improve in FY11
50.0
40.0
30.0
(%)
20.0
10.0
0.0
EBIDTA Margin Net Profit Margin

Hotels & Tourism
Return ratios to improve, but at slower pace

With improvement in sales and operating margins, we expect the company’s RoE and
RoCE to improve FY11 onwards.
Chart 6: Slow improvement in return ratios
25.0
20.0
(%) 15.0
10.0
5.0
0.0
ROE ROCE
Return ratios to remain Source: Company, Edelweiss research

below average
EIH’s return ratios are likely to improve FY11 onwards, but at a slower pace as the
Trident, BKC, investment will start contributing only FY11 onwards. We expect returns to
remain muted considering the investment made in EIH International and the loss making
Mashobra resort. The average returns generated by the printing and car rentals
businesses should also keep overall returns ratios below historical ones.

Hotels & Tourism

Employee cost 2,517 2,726 2,742 3,469 3,504
F&B 963 822 716 967 1,027
Power & fuel 698 700 625 902 990
Other expenditure 3,541 3,377 3,120 4,076 4,518
EBITDA 4,947 4,143 2,417 4,463 5,196
Depreciation and amortisation 653 749 934 1,162 1,221
EBIT 4,295 3,394 1,483 3,301 3,975
Interest 904 953 1,207 1,387 1,319
Total other income 288 333 286 327 353
Profit before tax 3,679 2,774 562 2,241 3,009
Provision for tax 1,400 1,074 191 762 1,023
Profit after tax 2,245 1,701 371 1,479 1,986
EPS (INR) basic 5.7 4.3 0.9 3.8 5.1
EPS (INR) diluted 5.7 4.3 0.9 3.8 5.1
Dividend payout (%) 37.2 33.1 62.1 31.1 27.8

Employee cost 19.9 23.2 28.5 25.0 23.0
EBITDA margins 39.1 35.2 25.1 32.2 34.1
Growth metrics (%)

Revenues 19.3 (7.1) (18.3) 44.2 9.8
EBITDA 31.9 (16.3) (41.7) 84.6 16.4
PBT 43.6 (24.6) (79.7) 298.7 34.3
Core net profit 47.8 (25.4) (78.2) (298.7) 34.3
EPS 43.3 (24.5) (78.2) 298.7 34.3

Hotels & Tourism

Equity capital 786 786 786 786 786
Secured loans 9,189 11,399 15,399 15,399 13,899
Unsecured loans 125 10 10 10 10
Borrowings 9,314 11,409 15,409 15,409 13,909
Minority interest 250 272 294 317 339
Deferred tax (net) 1,102 1,210 1,210 1,210 1,210
Sources of funds 23,174 27,016 31,156 32,175 32,108
Gross block 20,085 21,101 32,273 34,123 35,623
Depreciation 4,691 5,241 6,175 7,337 8,558
Net block 15,394 15,860 26,098 26,786 27,065
Capital work In progress 4,292 6,171 - - -
Intangible assets 185 186 186 186 186
Investments 2,510 2,659 3,159 3,659 3,659
Inventories 374 345 322 354 439
Sundry debtors 1,308 1,062 1,172 1,287 1,595
Cash and bank balances 468 789 77 673 273
Other current assets 7 7 7 7 7
Provisions 951 694 694 694 694
Net current assets 776 2,139 1,714 1,545 1,198
Misc expenditure 17 - - - -
Uses of funds 23,174 27,016 31,156 32,175 32,108
Book value per share (BV) (INR) 32 36 36 39 42

Net profit 2,224 1,705 371 1,479 1,986
Depreciation 653 749 934 1,162 1,221
Deferred tax 133 108 110 115 114
Others 784 748 1,000 1,153 1,081
Gross cash flow 3,794 3,310 2,415 3,909 4,402
Less: Changes in working capital (173) 1,040 287 (766) 54
Operating cash flow 3,967 2,270 2,128 4,674 4,348
Less: Capex (2,985) (2,897) (5,000) (1,850) (1,500)
Free cash flow 981 (627) (2,872) 2,824 2,848
Cash flow metrics

Financing cash flow (1,887) 996 2,563 (1,847) (3,372)
Investing cash flow (2,296) (2,936) (5,403) (2,231) (1,376)
Net cash flow (217) 330 (712) 596 (400)
Capex (2,985) (2,897) (5,000) (1,850) (1,500)
Dividend paid (834) (562) (230) (460) (553)

Hotels & Tourism
Ratios
ROAE (%) 19.1 12.8 2.6 10.0 12.5
ROACE (%) 21.9 15.1 5.7 11.7 14.0
Debtors (days) 36 37 42 32 35
Payable (days) 91 110 126 100 108
Current ratio 0.3 0.2 0.2 0.3 0.3
Debt/EBITDA 1.9 2.8 6.4 3.5 2.7
Interest cover (x) 4.8 3.6 1.2 2.4 3.0
Debt/Equity (x) 0.7 0.8 1.1 1.0 0.8
Du pont analysis
NP margin (%) 17.8 14.5 3.9 10.7 13.0
ROAE (%) 19.1 12.8 2.6 10.0 12.5
Diluted EPS (INR) 5.7 4.3 0.9 3.8 5.1
Y-o-Y growth (%) 43.3 (24.5) (78.2) 298.7 34.3
CEPS (INR) 7.4 6.2 3.3 6.7 8.2
Diluted P/E (x) 21.6 28.6 131.3 32.9 24.5
Price/BV(x) 3.9 3.4 3.4 3.2 2.9
EV/Sales (x) 4.3 4.8 6.3 4.3 3.9
EV/EBITDA (x) 11.1 13.7 25.2 13.4 11.3
EV/EBITDA (x)+1 yr forward 13.3 23.5 13.6 11.5 NA
Dividend yield (%) 1.5 1.0 0.4 0.8 1.0

Hotels & Tourism

India Midcap
Hotels Research
& Tourism Initiating Coverage
HOTEL LEELAVENTURE
Expensive on all counts
Era of super normal profits a thing of past; 35% margin likely in FY11E April 1, 2010
IT slowdown, ample supply of new rooms, and shifting of the airport to the
outskirts of the city are expected to limit upside on ARRs for Hotel Leelaventure’s Reuters : HTLE.BO Bloomberg : LELA IN
(HLV) Bengaluru property. Post 35% dip in ARRs in H1FY10 over H1FY09, we
expect an overall 25% decline in FY10 over FY09 in this property’s ARR. Although EDELWEISS RATING
we expect the company’s EBIDTA margin to improve to 35.4% in FY11E over Absolute Rating REDUCE
29.8% in FY10E, it will be substantially low compared to over 44.6% margin

posted in FY08.
MARKET DATA
CMP : INR 50
FCF likely to be negative till FY11; high leverage a concern 52-week range (INR) : 52 / 18
Adjusted for the revaluation reserve, we expect HLV’s debt/equity to be at 3.5x in Share in issue (mn) : 377.8
FY11E, highest in the industry. We expect FCF to be negative till FY11 as the M cap (INR bn/USD mn) : 18.8 / 416.0
company continues to remain in heavy capex mode. With INR 5 bn of likely capex
in FY10E and FY11E for the upcoming Delhi and Chennai properties, considering
the high existing leverage, equity raising is the likely option as operations continue
SHARE HOLDING PATTERN (%)
to remain weak due to business slowdown. Likely redemption of EUR 39.2 mn
Promoters* : 52.7
FCCB at 125.5% of the principal amount will also keep liquidity pressure on the MFs, FIs & Banks : 7.2
company. We are not factoring in any FCCB buyback or equity dilution, although FIIs : 3.2
HLV has already passed a resolution to raise equity of up to INR 7.5 bn. Others : 37.0
* Promoters pledged shares : 24.6
Margins likely to be at par with industry going forward

With the Bengaluru property generating industry average profits going forward,
high interest costs as the Delhi and Chennai properties become operational by July
2010 and December 2010, respectively, and the amortisation of INR 1.15 bn of Sensex
exchange losses in FY10 and FY11 are likely to lead to PAT margins of 16.5% and 1 month 5.5 4.7 (0.7)
15.2% in FY11E and FY12E, respectively, compared to 28.9% in FY08. 3 months 0.8 (1.1) (1.9)
12 months 71.0 160.2 89.2
Outlook and valuations: Expensive; initiating coverage with ‘REDUCE’

At CMP of INR 50, HLV is trading at 23.6x and 17.4x consolidated EV/EBIDTA of
FY11E and FY12E, respectively, a premium of more than 70% to other listed
players. As the company is likely to generate industry level margins going forward,
we expect the stock to trade at industry level valuations. Using the target
EV/EBIDTA, EV/room, and DCF methodology, we arrive at a target price of INR 25,
and initiate coverage on the stock with a ‘REDUCE’ recommendation.
Financials
Revenues (INR mn) 4,522 4,041 6,223 8,571
Growth (%) (12.1) (10.6) 54.0 37.7
Net profit (INR mn) +91-22- 6623 3362

909 416 381 348
Share outstanding (mn) manoj.bahety@edelcap.com
378 378 378 378
EPS (INR) 2.4 1.1 1.0 0.9
Manav Vijay
EPS growth (%) (38.8) (54.2) (8.4) (8.7)
+91-22- 4063 5413
Diluted P/E (x) 25.5 55.6 60.7 66.5
ROAE (%) 12.8 5.7 5.0 4.5
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities
Edelweiss Limited 67
Securities Limited
Hotels & Tourism
Era of super normal profits a thing of past; 35% margin likely in FY11E
Slowdown in IT, ample supply of new rooms, and shifting of the airport to the outskirts
of the city are expected to limit upside on ARRs for HLV’s Bengaluru property. We expect
this property’s ARRs to decline by 25% in FY10E. During H1FY10, ARRs dipped 35% over
Era of abnormal ARRs in H1FY09. Although we expect the company’s EBIDTA margin to improve to 35.4% in
Bengaluru is over
FY11E over 29.8% in FY10E, it is low compared to the over 44.6% margin posted in
FY08.
IT boom along with limited supply of rooms had led to unprecedented increase in ARRs in
Bengaluru with an almost 127% jump between FY04 and FY07. The location advantage
of Leela Bangalore worked in its favor as the company was able to charge much higher
ARRs than prevalent in the city. HLV was able to charge on an average 25% more than
its peers in the city with almost same ORs. We believe with the doubling of rooms
between FY09 and FY14 in Bengaluru, growth in the company’s ARRs is likely to be
muted. Taking an optimistic view, we expect 10% increase in ARRs in both FY11E and
FY12E with 65% and 70% ORs during the same period.
Chart 1: HLV has enjoyed better than average ARRs in the past
20,000 80.0
18,000 74.0
16,000 68.0
(INR)
(%)
14,000 62.0
12,000 56.0
10,000 50.0
FY06 FY07 FY08 FY09
Leela ARRs City ARRs Leela ORs City ORs
Source: Company, CRISIL, Edelweiss research
With severe decline in ARRs, we expect Bengaluru property’s overall contribution to dip
to ~35% and ~26% in FY10E and FY11E, respectively, as new properties like Udaipur
and Delhi also start contributing to sales. Even with new properties we do not expect the
company to report all time high EBIDTA margin of 45-46% reported during FY06 and
FY08 as the new properties will become operational in highly competitive areas.
While Bengaluru is expected to add 2,000 premium category rooms in the next five
years, the city is expected to add 6,300 rooms including four star hotels (Source: HVS).
Though we expect a reasonable growth in demand, ARRs are likely to remain under
pressure till FY12 because of major upcoming supply.

Hotels & Tourism
Chart 2: Bengaluru hotels—Rooms availability and demand

5,000
4,000
(No. of rooms)
3,000
2,000
1,000
0
FY07 FY08 FY09 FY10E FY11E FY12E FY13E
Rooms availability Rooms demand
FCF likely to be negative till FY11; high leverage a concern

Adjusted for the revaluation reserve, we expect HLV’s debt/equity to be at 3.8x in FY11E,
highest in the industry. The company’s FCF is likely to be negative till FY11 as it
continues to remain in heavy capex mode. With INR 5 bn of likely capex in FY10 and
High leverage to continue FY11 for the upcoming Delhi and Chennai properties, considering the high existing
due to ongoing capex and
debt repayments leverage, we believe equity raising is the likely option as operations continue to remain
weak due to business slowdown. Likely redemption of EUR 39.2 mn FCCB at 125.5% of
the principal amount will also keep liquidity pressure on the company. We are not
factoring in any FCCB buyback or equity dilution, although HLV has already passed a
resolution to raise equity of up to INR 7.5 bn. The company has EUR 39.2 mn FCCB
outstanding liable to retire or convert by September 2010. The conversion price is INR
47 and the redemption will happen at 125.5% of the principal amount. As conversion
makes sense to the FCCB holder only if the market price goes beyond INR 60, we do not
expect any conversion. In case of redemption, we expect the company to pay INR 3.2-
3.3 bn.
In a recent development, HLV has repurchased FCCBs of USD 25 mn due in 2012 at a

steep discount. The redemption premium payable was 46.61%. Assuming the minimum
RBI allowed discount of 15%, we believe, there is an exceptional gain of approximately
INR 200 mn. As the payment has been refinanced with another bank loan, this
transaction only reduces the overhang of outstanding FCCBs to some extent.
Following are the details of capex for FY10 and FY11:
1. Delhi hotel: The 290-rooms hotel in Delhi is expected to become operational in July
2010, before the start of the Commonwealth Games in October 2010. Apart from
the land cost of INR 6.5 bn, the company is expected to spend INR 4.0-4.5 bn on
construction. We expect capex of INR 2 bn in FY10 and FY11 on this property.
2. Chennai hotel: The 340-rooms Chennai hotel is expected to become operational by

December 2010. Total cost is expected to be INR 5.0-5.5 bn. Due to tight liquidity
conditions, HLV has put this project on a slow track. We expect capex of INR 3 bn in
FY10 and FY11 on this property.

Hotels & Tourism
3. Office space in Chennai: HLV has constructed an office space of 0.35 mn sq ft

adjacent to the Chennai hotel at an estimated capex of INR 700 mn. Initially it was
to be an IT park, but with the slowdown in the sector, the company is converting the
project into normal office space. The decision of leasing or selling has still not been
taken. We expect revenue from this property to start from FY11.
With the addition of properties mentioned above, the company is doubling its total rooms
to almost 2,247 in FY12E from 1,119 in FY09.
Chart 3: Total rooms availability
2,500
2,000
(No. of rooms)
1,500
1,000
500
0
Rooms availability
Margins likely to be at par with industry going forward

45% decline in ARRs in the Bengaluru property since FY07 along with decline in ORs are
the primary reasons for the decline in EBIDTA margins to 34.4% in FY09 compared to
46.4% in FY07. With the expected continuous pressure on ARRs in Bengaluru and normal
Only normal industry 30-35% operating margins from other properties, we do not expect above industry
margins going forward
margins from the company, as was the case earlier.
Chart 4: Normal EBIDTA margins going forward

50.0
44.0
38.0
(%)
32.0
26.0
20.0
EBITDA margins

Hotels & Tourism
As Leela Bangalore has lost its locational advantage, it would be difficult for the property
to charge above average ARRs. In this light, we expect the hotel to generate normal
industry EBIDTA of 30-35% and PAT margins of 15-18%.
With the opening of the Delhi property in July 2010 and Chennai property in December
2010, we expect the revenue contribution of the Bengaluru property to dip to
approximately 35% and 25% in FY10E and FY11E, respectively.
Upcoming Delhi hotel: Too much at stake

To finance the upcoming Delhi hotel, HLV’s D/E ratio has jumped to 3.8x in FY09
compared to 1.5x in FY07. Due to the high land cost of INR 6.5 bn, management intends
Major investment in the to offer only high class club rooms with an expected ARR of INR 20,000. Introduction of
upcoming Delhi property
Sec 80 ID of Income Tax Act in the NCR region, where a five-year tax holiday has been
extended to 1, 2, 3, and 4 star hotels, is expected to put pressure on ARRs. HVS expects
Delhi to add 8,200 rooms including budget rooms in the next five years. We believe
success of the Delhi property is essential for HLV to reduce its high leverage as going
forward the Bengaluru property is not expected to generate above normal profits.
Investment of approximately INR 11 bn for 290 rooms in New Delhi is one of the largest
investments ever done by the company. HLV plans to pitch the hotel as an alternative to
the Imperial Hotel. We believe given the latter’s rich heritage, it would be difficult for
HLV to draw a comparison.

Hotels & Tourism
Valuation
We have used valuation parameters like EV/EBIDTA, EV/sales, P/B, and DCF to value HLV.
The stock is currently available at 23.6x and 17.4x consolidated FY11E and FY12E
EV/EBIDTA, respectively, while its global peers are trading at 12.0x and 10.0x their FY11E
and FY12E EV/EBIDTA, respectively. At a target price of INR 25, with the hotel likely to
generate normal profits going ahead, there is no reason for it to trade at substantial premium
to other listed players.
At CMP of INR 50, HLV is currently trading at 3.4x FY11E P/B. Although it is less than its
historical P/B of 4.0x over FY06-09, we believe there is significant downside in the stock
considering the high leverage and absence of above average industry profits going forward.
We initiate coverage on the stock with a ‘REDUCE’ recommendation.

Hotels & Tourism
Key Risks
Better-than-expected improvement in Bengaluru ARRs

Better-than-expected improvement in Bengaluru ARRs can improve the overall EBIDTA
margins substantially. ARRs similar to FY07 and FY08 can easily push the overall EBIDTA
margin beyond 40% for HLV. Considering the demand-supply economics of the city, we
believe the probability of this event is quite low.
Sale of land bank

HLV has land banks in Agra (7 acres, close to Taj Mahal), Hyderabad (4 acres), and Pune
(6 acres). Though the company plans to develop hotels on all these properties, if the
company decides to sell these land bank(s) to reduce leverage, it could ease some of the
excess leverage concerns on the company.
Sale of Chennai general office space

The company has built a 3.5 lakh sq ft office space in Chennai, adjacent to its upcoming
hotel. As of now HLV plans to lease the space, but an outright sell can fetch
approximately INR 4 bn. A sale is likely to reduce leverage concerns to some extent.

Hotels & Tourism
Company Description
Hotel Leela Venture (HLV), a chain of luxury resorts and business hotels, operates 1,617
rooms, across six locations in India. Five properties with 1,205 rooms are owned by the
company and 409 rooms are under management contract. Compared to other hotel chains in
the country, HLV is small, but it has prominent presence in cities where it operates.
HLV has a marketing alliance with Kempinski for its properties in India. The company caters
to both business and leisure travelers. With rapid growth in room demand, the company
plans to increase presence, both through ownership and management contract routes. In
2009, HLV added its first property in Delhi through the management contract route. It also
holds land parcels in Agra, Hyderabad, and Pune, where it plans to build hotels in the future.
It is the flagship company of the Leela Group, where promoters’ holding is 55%.

Hotels & Tourism
Financial Outlook
Margins to be at par with industry going ahead

We expect HLV’s operating and net profit margins to decline 25% and 80% in FY11E and
FY12E, respectively, over the base of FY08 as the above average profits of the Bengaluru
property cease. We also expect profitability to come under further pressure as the entire
CWIP block shifts to fixed assets and the P&L starts reflecting the actual interest payable.
Channelisation of MTM loss of INR 1.04 bn through P&L will further erode profitability.
Chart 5: Peak profits are behind

50.0
40.0
30.0
(%)
20.0
10.0
0.0
Net profit margins EBITDA margins
Heavy leverage taking its toll on return ratios

With the ongoing capex of INR 15 bn on Delhi and Chennai properties, which will become
High leverage reducing operational only by FY11E and FY12E, respectively, we believe hotel CWIP of INR 9.3 bn
return ratios as of FY09 will affect return ratios. We expect RoE of 5.0% and RoCE of 3.8% in FY11E.
The improvement in ratios from FY10 is primarily due to the expected opening of the
Delhi property and general improvement in the business scenario.
Chart 6: High leverage to affect return ratios

25.0
20.0
15.0
(%)
10.0
5.0
0.0
ROAE ROACE

Hotels & Tourism
Negative FCF to continue till FY11

With an estimated capex of INR 5.5 bn in FY10E and FY11E, we expect FCF to remain
negative till FY11. As the cash generated from operations will not be sufficient for the
ongoing capex, we expect the D/E to remain at 3.5x in FY11E. In FY12E, as the capex
slows down, Delhi and Chennai properties become operational, and general business
environment improves, we expect a positive FCF.
Key highlights from 2009 annual report

• Hotel Leelaventure availed the option of capitalising/deferring foreign exchange
difference on long-term monetary items provided by Accounting Standard 11.
Consequently,
• Exchange loss aggregating INR 1.8 bn are added to fixed assets and would be
depreciated over the life of related assets.
• Exchange losses aggregating INR 1.1 bn are accumulated in “foreign currency

monetary translation difference account” (net of FY09 amortisation aggregating
INR 104.7 mn) and will be amortised over the next two financial years or earlier.
• Exchange gains, recognised in earlier years, aggregating INR 227.4 mn and INR
112.0 mn were adjusted in fixed assets and “foreign currency monetary
translation difference account” respectively.
As a result, PAT for the year is higher by INR 2.8 bn, ~ 1.5x of reported PBT.
• Post March 2009, INR appreciated ~ 11.8% vis-à-vis the USD and a substantial
portion of the MTM losses on outstanding derivative positions and the unrealized
exchange loss on foreign currency denominated borrowings could be recouped.
• Losses on derivative positions recognised during the year aggregate INR 29.4 mn.
Provision for losses on derivative positions aggregate INE 81.5 mn (FY08: INR 78.5
mn). Derivative exposure on March 31, 2009 is not disclosed.
• Borrowings increased by INR 4.1 bn (20.0%) to INR 24.5 bn (FY08: INR 20.4 bn).
Fresh borrowings (net) aggregate INR 1.2 bn and restatement of borrowings at
depreciated INR aggregate INR 2.9 bn. ~ 59.0% of total borrowings are
denominated in foreign currency. However, debt equity ratio decreased moderated
by 90bps to 1.3x (FY08: 2.2x) due to higher equity base, courtesy revaluation of
land.
• Premium on redemption of FCCB’s and FCCB issue expenses are charged to

securities premium account. FY08 charge aggregates INR 256.3 mn (net of taxes
and redemption premium on FCCB’s bought back during the year). However, gain
(discount) on buyback of FCCB’s aggregating INR 646.4 mn, ~ 33.4% of PBT, is
recognised in the income statement.
• Freehold and leasehold land rights on properties situated in Mumbai, Bangalore, Goa
and Kovalam were revalued during the year by INR 10.3 bn. Revaluation reserves
aggregate INE 12.4 bn, ~ 63.9% of net worth.
• Interest expenditure decreased 29.0% to INR 237.9 mn (FY08: INR 335.0 mn).
Borrowing cost (ex FCCB) decreased 290bps to 1.5% (FY08: 3.5%).
• Exchange gains recognised during the year aggregate INR 87.0 mn, 4.5% of
reported PBT.
• Sundry creditors increased 1.6x to INR 703.7 mn (FY08: INR 275.1 mn) due to 5.9x
increase in project related creditors aggregating INR 427.8 mn (FY08: INR 62.0
mn).

Hotels & Tourism

Employee costs 815 884 889 1,307 1,800
Other expenses 2,034 2,081 1,949 2,938 3,960
EBITDA 2,297 1,557 1,203 2,205 3,038
Depreciation and amortisation 453 549 694 842 1,011
EBIT 1,843 1,008 509 1,363 2,028
Interest expenses 356 267 458 1,464 2,187
Other income 745 653 660 669 678
Profit before tax 2,233 1,393 711 568 519
Provision for tax 747 485 295 188 171
Core profit 1,485 909 416 381 348
Extraordinary items - 542 184 - -
Profit after tax 1,485 1,450 600 381 348
Profit after minority interest 1,485 1,450 600 381 348
EPS (INR) basic 3.9 2.4 1.1 1.0 0.9
Diluted equity shares (mn) 483 463 463 463 463
EPS (INR) diluted 3.1 2.0 0.9 0.8 0.8
Dividend payout (%) 14.9 12.2 7.4 34.8 63.6

Depreciation and Amortization 8.8 12.1 17.2 13.5 11.8
EBITDA margins 44.6 34.4 29.8 35.4 35.4
Growth metrics (%)

Revenues 23.8 (12.1) (10.6) 54.0 37.7
EBITDA 19.0 (32.2) (22.7) 83.4 37.8
PBT 52.1 (37.6) (49.0) (20.1) (8.7)
Net profit 75.9 (38.8) (54.2) (8.4) (8.7)
EPS 72.4 (38.8) (54.2) (8.4) (8.7)

Hotels & Tourism

Equity capital 756 756 756 756 756
Secured loans 12,911 18,186 20,336 26,336 27,836
Unsecured loans 7,445 6,309 5,159 2,659 2,659
Borrowings 20,357 24,495 25,495 28,995 30,495
Deferred tax liability (net) 914 1,004 1,004 1,004 1,004
Sources of funds 30,571 44,898 46,370 50,034 51,577
Gross block 25,531 38,870 38,870 53,715 55,715
Depreciation 3,364 3,985 4,762 5,688 6,782
Net block 22,167 34,885 34,108 48,027 48,933
Capital work in progress 4,058 9,345 11,345 0 0
Total fixed assets 26,225 44,231 45,453 48,027 48,933
Investments 1 1 1 1 1
Inventories 387 420 332 511 704
Sundry debtors 386 315 310 477 657
Cash and equivalents 2,958 306 445 23 709
Other current assets 2,675 2,846 3,046 3,246 3,446
Sundry creditors and others 933 1,713 1,711 1,744 2,367
Provisions 1,129 1,508 1,508 508 508
Total CL & provisions 2,061 3,221 3,218 2,252 2,874
Net current assets 4,344 666 915 2,006 2,643
Uses of funds 30,571 44,898 46,370 50,034 51,577
Adjusted BV per share (INR) 13.9 13.5 14.6 14.9 15.0

Net profit 1,485 1,450 600 381 348
Depreciation 453 549 694 842 1,011
Deferred tax 199 90 0 0 0
Others (293) (764) (216) 973 1,697
Gross cash flow 1,845 1,325 1,078 2,196 3,055
Less:Changes in WC 657 (647) 110 513 (49)
Operating cash flow 1,188 1,972 968 1,684 3,104
Less: Capex (9,320) (6,547) (2,000) (3,500) (2,000)
Free cash flow (8,131) (4,575) (1,032) (1,816) 1,104
Cash flow metrics

Operating cash flow 1,188 1,972 968 1,684 3,104
Financing cash flow 10,316 891 497 904 (908)
Net cash flow 2,833 (2,653) 139 (423) 687
Capex (9,320) (6,547) (2,000) (3,500) (2,000)
Dividend paid (221) (177) (44) (133) (221)

Hotels & Tourism
Ratios
ROAE 21.2 12.8 5.7 5.0 4.5
ROACE 8.0 3.3 1.5 3.8 5.3
Inventory days 26.0 32.5 34.0 24.7 25.9
Debtors days 29.1 28.3 28.2 23.1 24.2
Payable days 131.2 162.8 220.2 148.5 130.3
Cash conversion cycle (76.1) (102.0) (158.0) (100.7) (80.2)
Current ratio 3.1 1.2 1.3 1.9 1.9
Debt/EBITDA 8.9 15.7 21.2 13.1 10.0
Interest coverage 5.2 3.8 1.1 0.9 0.9
Fixed assets t/o (x) 0.3 0.2 0.1 0.2 0.2
Debt/equity 2.8 3.5 3.4 3.8 4.0
Du pont analysis
NP margin (%) 28.9 20.1 10.3 6.1 4.1
ROAE (%) 21.2 12.8 5.7 5.0 4.5
Diluted EPS (INR) 3.1 2.0 0.9 0.8 0.8
Y-o-Y growth (%) 53.1 (36.1) (54.2) (8.4) (8.7)
CEPS 5.1 3.9 2.9 3.2 3.6
Diluted P/E (x) 16.3 25.5 55.6 60.7 66.5
Price/BV (x) 3.6 3.7 3.4 3.4 3.3
EV/Sales (x) 7.9 10.5 11.9 8.4 6.2
EV/EBITDA (X) 17.6 30.4 40.1 23.6 17.4
EV/EBIDTA (x)+1 yr forward 26.0 39.3 21.8 17.1
Dividend yield (%) 1.0 0.8 0.2 0.6 1.0

Hotels & Tourism

India Midcap
Hotels Research
& Tourism Company Update
INDIAN HOTELS COMPANY

Better outlook going ahead
Strong ORs and growth in ARRs going forward April 1, 2010
In Q3FY10, the Indian Hotels Company (IHCL) posted its highest ORs of 70% in
Reuters : IHTL.BO Bloomberg : IH IN
the past eight quarters, signaling a healthy turnaround in the industry. ARRs
registered a healthy increase of 28% Q-o-Q and we expect them to firm up from
EDELWEISS RATING
these levels going forward. We expect ORs of 67% and 70% in FY11E and FY12E,
Absolute Rating BUY
respectively.
Sea Rock restructuring akin to REPO; interest cost to skirt P&L MARKET DATA
IHCL shifted the ownership of Sea Rock to an SPV where it holds 20% (the CMP : INR 103
52-week range (INR) : 109 / 39
balance is held by other TATA Group companies and third parties). The SPV has
raised INR 6.8 bn and paid that money back to IHCL. IHCL has the option to take
M cap (INR bn/USD mn) : 74.2 / 1,643.6
the asset back after 37 months which we believe will happen at principal +
interest.

Low coupon cumulative bond; reserves to take a hit
Promoters* : 29.5
The company raised INR 4 bn at 2% coupon and 9.85% YTM for an average seven
years to retire offshore debt in its international subsidiaries. The difference of INR
FIIs : 13.3
3.76 bn between coupon and YTM has been adjusted against the securities Others : 28.4
premium account. We believe the transaction will have no positive impact on * Promoters pledged shares : 1.4
adjusted profitability.
Better cash flows due to investment linked benefits

We expect IHCL to save INR 2 bn over FY11E and FY12E due to the inclusion of
hotels in Sec 35 AD of the Income Tax Act. With its ongoing capex, we expect the Sensex
1 month 5.5 8.9 3.4
company to start paying MAT FY11 onwards.
3 months 0.8 (3.8) (4.6)
12 months 71.0 156.7 85.7
Outlook and valuations: Business turning around; maintain ‘BUY’

With improvement in ARRs and ORs, cost containment exercise, shifting of Sea
Rock to a SPV and dedicated efforts to turnaround the US portfolio, we believe the
company is on a revival path. To effectively manage liquidity, management is
committed to complete the ongoing capex within the time schedule and budget.
With revival in the tourism industry, we believe the next 18-24 months present a
conducive business environment for the company. We maintain our ‘BUY’
recommendation on the stock.
Financials (Consolidated)
Revenues (INR mn) 26,800 24,728 31,769 39,574
Growth (%) (8.2) (7.7) 28.5 24.6
Net profit (INR mn) 51 318 2,155 4,648 +91-22- 6623 3362
Share outstanding (mn) 723 723 723 723 manoj.bahety@edelcap.com
EPS (INR) 0.2 0.6 3.1 6.6

Manav Vijay
EPS growth (%) (97.0) 179.7 442.2 110.7
+91-22- 4063 5413
Diluted P/E (x) 499.6 178.6 32.9 15.6
ROAE (%) 0.2 1.0 6.7 13.7
Edelweiss Securities 81
Limited
Hotels & Tourism
Sea Rock restructuring akin to REPO; interest cost to skirt P&L

To manage the current liquidity crisis in the company, IHCL shifted the Sea Rock
property to an independent SPV where it holds 20%; the balance 80% is held by other
TATA Group companies and third parties. The SPV has raised INR 6.8 bn zero coupon
money on the strength of its assets and paid that money back to IHCL. IHCL has the
option to take the asset back after 37 months. Although, the stated transaction will get
the interest liability down for the next 37 months, it just pushes back the liability without
actually reducing it.
Low coupon cumulative bonds: Reserves to take a hit

IHCL raised INR 4 bn at 2% coupon and 9.5% YTM for an average period of seven years,
to pay off the debt of its international subsidiaries. The company plans to add another
INR 3 bn in March 2010 with similar terms. These funds are being utilised to retire USD
95 mn of Samsara Properties (Orient Express stake) and USD 90 mn of IHMS US (for the
Boston and NYC property). The premium on redemption of INR 4 bn debenture has been
adjusted against the securities premium account. Our analysis suggests that with this
transaction, the debt/equity for FY10E will increase to 1.8x from the current 1.5x. The
aforesaid accounting practice will result in keeping yearly interest cost of ~ INR 500 mn
off P&L and, hence, will result in higher reported profits (no impact on adjusted profits).
Better cash flows due to investment linked benefits

In 2010 budget, hotels have been included in Sec 35 AD of the Income Tax Act where
investment linked benefits have been extended for any new hotel coming up anywhere in
India. We expect IHCL to save approximately INR 2 bn over FY11E and FY12E due to its
ongoing capex. We expect the company to pay MAT due to the heavy ongoing capex.

Hotels & Tourism
Company Description
IHCL is the largest hotel operator in India with presence in luxury, business and leisure
hotel segments. The company manages 12,243 (103 properties) across India and
international locations. It has also entered into the budget hotel segment with a new
brand, ‘Ginger’ and has also gone into the adventure business with wildlife lodges. IHCL
also runs airline catering business under the brand of Taj SATS, which contributes 6-7%
to total sales. The company has aggressive expansion plans, both in India and abroad by
using ownership and asset light model of management contract.
Investment Theme
With the revival of ARRs and ORs across India, the hotel industry is looking for better
times ahead. With India emerging as one of the fastest growing economy, FTAs of both
business and leisure are expected to pick up. Domestic tourism is also on a great revival
path and with more Indians ready to take holidays, the segment is expected to perform
well in the years to come. We expect IHCL’s Indian portfolio (almost 80% of total sales)
to post healthy growth with the revival of domestic ARRs and ORs. We also expect
international operations to turnaround and start contributing significantly to overall
margins.
Key Risks
Economic slowdown is the biggest risk for the company as travel and tourism takes the
first knock in uncertain times. Unexpected events like terrorist attack or swine flu also
affect the industry badly as many countries advise their citizens against traveling to
affected regions. The company can continue to earn negative returns on its international
investments due to longer-than-expected turnaround of international operations and the
stake of Orient Express.

Hotels & Tourism

Employee cost 7,644 8,552 8,194 9,281 10,018
F&B 2,782 2,772 2,473 3,177 3,957
Power & fuel 1,547 1,677 1,360 1,747 2,177
Other expenditure 8,307 8,743 7,651 9,018 10,872
EBITDA 8,920 5,056 5,051 8,547 12,549
Depreciation and amortisation 1,676 1,885 2,195 2,491 2,690
EBIT 7,244 3,171 2,856 6,055 9,859
Interest 2,203 2,711 3,393 3,603 3,568
Total other income 1,106 1,111 1,012 764 646
Profit before tax 6,147 1,571 475 3,216 6,938
Provision for tax 2,426 1,520 157 1,061 2,289
Core profit 3,720 51 318 2,155 4,648
Extraordinary income/(loss) (542) - - - -
Profit after tax 3,179 51 318 2,155 4,648
Minority interest (414) (97) (97) (97) (97)
Profit after minority interest 3,593 148 415 2,252 4,745
EPS (INR) basic 6.9 0.2 0.6 3.1 6.6
EPS (INR) diluted 6.9 0.2 0.6 3.1 6.6
Dividend payout (%) 0.4 7,636.1 133.0 58.9 31.9

Employee cost 26.2 31.9 33.1 29.2 25.3
EBITDA margins 30.5 18.9 20.4 26.9 31.7
Growth metrics (%)

Revenues 16.5 (8.2) (7.7) 28.5 24.6
EBITDA 23.8 (43.3) (0.1) 69.2 46.8
PBT 15.4 (74.4) (69.8) 577.2 115.7
Core net profit 10.6 (98.6) 520.3 577.2 115.7
EPS 11.5 (97.0) 179.7 442.2 110.7

Hotels & Tourism

Equity capital 603 723 723 723 723
Preference share capital - 1,200 1,200 1,200 1,200
Secured loans 16,316 26,596 30,596 32,596 29,596
Unsecured loans 18,353 19,873 19,873 19,873 19,873
Borrowings 34,668 46,469 50,469 52,469 49,469
Minority Interest 2,820 2,741 2,116 2,116 2,116
Deferred tax (net) 1,485 1,602 977 977 977
Sources of funds 61,665 83,790 86,435 89,271 89,438
Gross block 46,465 53,924 61,586 69,536 72,036
Depreciation 11,321 13,041 15,235 17,727 20,417
Net block 35,144 40,883 46,350 51,809 51,619
Capital work In progress 4,352 7,273 1,273 1,273 1,273
Intangible assets 2,970 3,612 3,612 3,612 3,612
Investments 15,419 24,077 21,582 19,825 19,825
Long term deposits 1,421 1,628 1,628 1,628 1,628
Inventories 533 641 542 609 651
Sundry debtors 2,079 1,778 1,694 2,176 2,711
Cash and bank balances 2,576 3,322 3,612 3,071 3,790
Provisions 861 2,015 2,015 2,015 2,015
Net current assets 2,267 7,035 12,146 11,280 11,637
Misc expenditure 92 76 76 76 76
Uses of funds 61,665 83,790 86,435 89,271 89,438

Net profit 3,593 148 415 2,252 4,745
Depreciation 1,676 1,885 2,195 2,491 2,690
Others 1,874 2,397 2,787 2,932 3,015
Gross cash flow 7,144 4,431 5,397 7,675 10,450
Less: Changes in working capital (79) 1,297 520 (325) (362)
Less: Capex (6,820) (8,623) (3,662) (7,950) (2,500)
Free cash flow 403 (5,489) 1,215 50 8,312
Cash flow metrics

Financing cash flow 10,334 17,230 184 (2,872) (8,049)
Net cash flow 805 746 291 (541) 719
Capex (6,820) (8,623) (3,662) (7,950) (2,500)
Dividend paid (163) 416 - - -

Hotels & Tourism
Ratios
ROAE (%) 17.1 0.2 1.0 6.7 13.7
ROACE (%) 16.7 6.0 4.6 9.0 14.2
Debtors (days) 26 26 26 22 23
Payable (days) 93 95 97 83 84
Current ratio 1.3 1.9 2.8 2.5 2.3
Debt/EBITDA 3.9 9.2 10.0 6.1 3.9
Interest cover (x) 3.3 1.2 0.8 1.7 2.8
Debt/Equity (x) 1.5 1.4 1.5 1.6 1.3
Du pont analysis
NP margin (%) 12.7 0.2 1.3 6.8 11.7
ROAE (%) 17.1 0.2 1.0 6.7 13.7
Diluted EPS (INR) 6.9 0.2 0.6 3.1 6.6
Y-o-Y growth (%) 11.5 (97.0) 179.7 442.2 110.7
CEPS (INR) 8.0 2.8 3.6 6.6 10.3
Diluted P/E (x) 15.0 499.6 178.6 32.9 15.6
Price/BV(x) 3.3 2.3 2.3 2.3 2.1
EV/Sales (x) 2.7 3.5 4.0 3.3 2.5
EV/EBITDA (x) 8.8 18.4 19.7 12.1 8.0
EV/EBITDA (x)+1 yr forward 15.5 18.5 11.6 8.3 6.6
Dividend yield (%) 1.9 1.2 0.5 1.5 1.7

India Midcap
Hotels Research
& Tourism Company Update
MAHINDRA HOLIDAYS & RESORTS INDIA

Rich valuations; little room for upside
Back-end and maintenance expenditure to increase going forward April 1, 2010
We expect the repairs & maintenance (RM) expenses to rise substantially in the
Reuters : MAHH.BO Bloomberg : MHRL IN
future as properties come of age. With an expected capex of INR 2-3 bn every
year for the next 3-4 years, we expect Mahindra Holidays & Resorts (MHRIL) to
EDELWEISS RATING
incur ~INR 300-350 mn on RM expenses in FY14-15E. Since we have explicit
Absolute Rating REDUCE
assumptions only till FY12 and we had valued the company on DCF basis
assuming 20% growth rate of FCF for the next 10 years beyond FY12, we are
now revising our numbers down 2.0-2.5% as the scope and scale of future
MARKET DATA
liabilities is still not clear.
CMP : INR 540
52-week range (INR) : 574 / 306
Addition of star properties and more rooms a must
M cap (INR bn/USD mn) : 45.4 / 1,006.7
We expect MHRIL to aggressively add a few star properties to resume the sale of
Avg. Daily Vol. BSE/NSE (‘000) : 404.5
its ‘purple’ membership which was stopped a few quarters ago. The primary
reason behind stopping this membership was the heavy demand for some
properties like Goa, Coorg, and Munnar which were running at almost peak SHARE HOLDING PATTERN (%)
capacity. MHRIL needs to be aggressive in adding rooms, because the company Promoters* : 83.1
knows in advance how many new members will have to be serviced in the next MFs, FIs & Banks : 4.5
12 months. We expect the company to add minimum 500 rooms every year. FIIs : 4.1
Others : 8.3
* Promoters pledged shares : Nil
Outlook and valuations: Positives priced in; downgrade to ‘REDUCE’
At CMP of INR 540, we believe the price fully factors in all the good news flow.
Post the disappointing Q3FY10 results, severe decline in the stock shows that
expectations are high from the company. Although we are positive on the
business model and concept, we are concerned about the rich valuations. Sensex
1 month 5.5 21.9 16.4
Considering the future liability of its expenses to serve current members, we
3 months 0.8 15.6 14.8
arrive at a fair price of INR 420 using the DCF approach. We downgrade our
recommendation on the stock to ‘REDUCE’ from ‘HOLD’.
Financials
Revenues (INR mn) 4,421 5,762 8,168 10,975
Growth (%) 17.2 30.3 41.8 34.4
Net profit (INR mn) 798 1,209 1,855 2,662 +91-22- 6623 3362
Share outstanding (mn) 78 84 84 84 manoj.bahety@edelcap.com
EPS (INR) 10.2 14.4 22.0 31.6

EPS growth (%) (5.0) 40.9 53.4 43.5 Manav Vijay
+91-22- 4063 5413
Diluted P/E (x) 53.0 37.6 24.5 17.1
ROAE (%) 47.1 37.2 35.6 38.5
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities
Edelweiss Limited 87
Securities Limited
Hotels & Tourism
Back-end and maintenance expenditure to increase going forward

We expect the RM expenses to rise substantially in the future as the properties come of
age. With an expected capex of INR 2-3 bn every year for the next 3-4 years, MHRIL is
likely to incur ~INR 300-350 mn RM expenses in FY14-15E, similar to a hotel company.
Since we have explicit assumptions only till FY12 and have valued the company on DCF
Growth in back ended
expenditure to hit the basis assuming 20% growth rate of FCF for the next 10 years beyond FY12E, we are now
profitability in later years revising our numbers down 1.0-1.5% as the scope and scale of future liabilities is still
unclear.
In FY09, on total GFA of INR 4.3 bn, the company incurred INR 100 mn on RM, which we
believe is not the correct representation of future as we expect expenses to rise as old
properties start needing more maintenance work. We believe rise in back-end expenses
to serve the existing members, together with higher maintenance expenditure, will
reduce FCFF growth assumption by ~3%.
Based on the reasons mentioned above, we are reducing our FCF growth rate to 17%
from 20% earlier beyond FY12E for 10 years. The current cash flow fully recognizes the
company’s cash collection procedure without putting due emphasis on expenses which
are back ended.
Our revised DCF assumption considers 25% growth in membership and 7% increase in
membership fee for FY11 and FY12, followed by 17% growth in FCFF for the next 10
years beyond FY12E and 5% terminal growth rate. We have considered WACC of 12.7%.
We believe there is little scope for positive surprise to the above assumptions.
Revenue recognition method to lead to income expenditure mismatch

Membership fee comprises non-refundable admission fee (60% of membership fees) and
entitlement fee (40% of membership fees) which is refundable. While MHRIL recognises
the entire admission fees as current year’s revenues, entitlement fee is recognised
linearly over the balance period of membership.
As MHRIL recognises significant portion of membership fee upfront, we believe 40% of

membership fees will not be sufficient for servicing existing members for the next 24
years, leading to an income expenditure mismatch. Although the company charges its
members an AMC which is indexed to the Urban Consumer Price Index published by RBI,
we believe this income will be inadequate to meet future expenses of existing members.
As the company is just 12-13 years old and has attained size in the past 4-5 years, as
the number of members grows, the liability of servicing them will also grow manifold.
Addition of star properties and more rooms a must

We expect MHRIL to aggressively add properties along with some star properties, to
resume the sale of its purple membership which had been stopped a few quarters ago.
The primary reason for stopping them was the heavy demand for some of the properties
like Goa, Coorg, and Munnar which were running at almost peak capacity. We believe
with its cash flows, MHRIL needs to be aggressive in adding rooms, more so because it
knows in advance how many new members will have to be serviced in the next 12
months. We expect the company to add minimum 500 rooms every year for 25%
membership growth.
Owing to the heavy rush at the most popular properties, members often complain of
non-availability of rooms during the desired period. We believe the company, in its
attempt to sell memberships, has actually oversold higher class memberships. As almost
33% of its members come from referrals, we believe this number could be at a serious
risk if this problem is not addressed early.

Hotels & Tourism
No Sec 35 AD benefit
The Union Budget 2010 has extended the benefit of Sec 35AD of the Income Tax Act to
all new hotels coming anywhere in India post 1.4.2010. As MHRIL is not classified as a
hotel company, we expect the company to continue to pay full corporate tax rate of
33%. This is not strictly disadvantageous for the company. However, if the company
makes a case before the IT department to get classified as a hotel company, it may lose
its ongoing tax dispute of INR 900 mn with the department.

Hotels & Tourism
Company Description
MHRIL was started in 1997 and offers a unique vacation ownership model to Indian
consumers with resorts spread across India. The company has different schemes for
families, singles and corporates. With almost 100,000 members spread across different
membership schemes, the company uses the upfront membership fee charged from
members to build resorts. With its resorts located across India, the company plans to
aggressively expand its reach both in terms of members and new resorts.
Investment Theme
With its unique business model, although MHRIL is in a sweet spot to exploit the growth
in the Indian travel & tourism sector, but we are concerned with the accounting
treatment of the income and expenditure done by the company. We believe with its
aggressive income recognition principle, the future expenses to serve the existing
members is not getting properly accounted. Due to the limited history of its operations,
we believe only 5-10 years down the line we will have the visibility of its full scale
expenses.
We are not assigning any value to the change in valuations once the cycle of 25 years of
membership ends as the same resorts can again be re-used for new members
considering the resorts would also be attracting lumpy capex which we have not taken in
our assumptions.
Key Risks
Launching new schemes, restart to sell the Purple membership, increase in overall
average membership fee are some of the factors that could provide risk to our estimates.
Settlement of ongoing Munnar property and IT dispute can also provide upside risk to
our estimates.

Hotels & Tourism

Employee cost 474 608 908 1,254 1,644
Sales promotion and comission 882 1,117 1,135 1,633 2,149
Other expenditure 975 1,174 1,622 2,215 2,862
EBITDA 1,442 1,522 2,097 3,066 4,320
Depreciation and amortisation 113 168 264 334 426
EBIT 1,329 1,354 1,833 2,732 3,894
Interest 33 70 62 62 62
Total other income - - 60 140 200
Profit before tax 1,296 1,284 1,832 2,810 4,032
Provision for tax 456 486 623 955 1,371
Profit after tax 840 798 1,209 1,855 2,662
EPS (INR) basic 10.7 10.2 14.4 22.0 31.6
EPS (INR) diluted 10.7 10.2 14.4 22.0 31.6
Dividend payout (%) 19.4 34.4 32.1 23.5 18.2

Sales promotion and comission 23.4 25.3 19.7 20.0 19.6
EBITDA margins 38.2 34.4 36.4 37.5 39.4
Growth metrics (%)

Revenues 56.3 17.2 30.3 41.8 34.4
EBITDA 81.2 5.6 37.8 46.2 40.9
PBT 93.2 (0.9) 42.7 53.4 43.5
Core net profit 97.6 (5.0) 51.5 53.4 43.5
EPS 97.6 (5.0) 40.9 53.4 43.5

Hotels & Tourism

Equity capital 764 770 829 829 829
Reserves & surplus 666 1,188 3,714 5,040 7,124
Secured loans 201 247 247 247 247
Deferred tax (net) 236 295 295 295 294
Sources of funds 1,867 2,500 5,084 6,411 8,494
Gross block 2,734 4,293 6,593 8,343 10,643
Depreciation 479 641 905 1,239 1,664
Net block 2,255 3,652 5,688 7,018 8,806
Capital work In progress 450 513 513 513 513
Investments 0 0 1,500 2,000 3,000
Inventories 35 53 73 93 113
Sundry debtors 4,034 4,826 5,286 7,127 9,459
Cash and bank balances 76 328 837 1,573 2,594
Loans and advances 621 665 765 865 965
Sundry creditors and others 609 821 1,026 1,429 1,864
Advance from member facilities 4,825 6,410 8,247 11,044 14,786
Provisions 171 306 306 306 306
Net current assets (838) (1,665) (2,617) (3,121) (3,825)
Uses of funds 1,867 2,500 5,084 6,411 8,494

Net profit 840 798 1,209 1,855 2,662
Depreciation 113 168 264 334 426
Deferred tax 34 59 - - (1)
Others (825) 1,485 2,985 2,540 3,512
Gross cash flow 163 2,510 4,458 4,729 6,599
Less: Changes in working capital (303) 926 1,462 1,239 1,725
Operating cash flow 466 1,584 2,996 3,490 4,874
Less: Capex (732) (1,633) (2,300) (1,750) (2,300)
Free cash flow (266) (50) 696 1,740 2,574
Cash flow metrics

Operating cash flow 466 1,584 2,996 3,490 4,874
Financing cash flow 9 (183) 1,300 (518) (566)
Investing cash flow (492) (1,149) (3,787) (2,237) (3,287)
Net cash flow (17) 251 509 736 1,021
Capex (732) (1,633) (2,300) (1,750) (2,300)
Dividend paid (87) (140) (388) (436) (485)

Hotels & Tourism
Ratios
ROAE (%) 76.9 47.1 37.2 35.6 38.5
ROACE (%) 94.0 62.0 60.3 68.4 78.6
Debtors (days) 301 366 320 277 276
Payable (days) 79 90 92 88 90
Cash conversion cycle 226 281 235 195 191
Current ratio 0.9 0.8 0.7 0.8 0.8
Debt/EBITDA 0.1 0.2 0.1 0.1 0.1
Interest cover (x) 40.3 19.3 29.7 44.3 63.1
Debt/Equity (x) 0.1 0.1 0.1 0.0 0.0
Du pont analysis
NP margin (%) 22.3 18.0 21.0 22.7 24.3
ROAE (%) 76.9 47.1 37.2 35.6 38.5
Diluted EPS (INR) 10.7 10.2 14.4 22.0 31.6
Y-o-Y growth (%) 97.6 (5.0) 40.9 53.4 43.5
CEPS (INR) 12.6 13.1 17.5 26.0 36.6
Diluted P/E (x) 50.3 53.0 37.6 24.5 17.1
Price/BV(x) 29.6 21.6 10.0 7.7 5.7
EV/Sales (x) 11.2 9.5 7.5 5.2 3.7
EV/EBITDA (x) 29.4 27.7 20.7 13.7 9.3
Dividend yield (%) 0.3 0.6 0.7 0.8 0.9

Hotels & Tourism

India Midcap
Hotels Research
& Tourism Company Profile
ASIAN HOTELS
Waiting for clarity
Company Description
April 1, 2010
Asian Hotels (AHL) was established in 1980 and is the fourth largest listed 5-star
hotel company in India. It has over 1,100 rooms across three properties in the
Reuters : ASHT.BO Bloomberg : AHOT IN
country viz., Delhi, Mumbai, and Kolkata. While the Delhi property is owned by
AHL, Hyatt International operates the hotel and provides marketing, branding,
EDELWEISS RATING
and management services. Delhi accounts for 44% of total rooms and almost
Absolute Rating NOT RATED
48% of total revenue. Mumbai accounts for 34% and Kolkata for 22% of the total
1,150 rooms.
MARKET DATA
CMP : INR 560

Key Highlights 52-week range (INR) : 590 / 207
With three different groups as promoters, AHL has decided to trifurcate the Share in issue (mn) : 22.8
company. The Jatia Group will take over the Delhi property and the company will M cap (INR bn/USD mn) : 12.8 / 283.1
be renamed Asian Hotels. The Saraf Group will take over the Kolkata property Avg. Daily Vol. BSE/NSE (‘000) : 21.0
along with development rights in Bhubaneshwar, Regency Convention Center and

Hotels and appropriate cash to form Vardhaman Hotels. The Mumbai property
along with the development options of Bengaluru will go to the Gupta Group and
Promoters* : 63.6
will be named Chillwinds Hotels. The company’s restructuring aims to give higher
flexibility to promoters to expand their businesses, resulting in higher growth FIIs : 0.8
prospects in the future. Others : 32.0
* Promoters pledged shares : 4.9
Key Risks
With the Delhi property accounting for close to 50% of AHL’s total revenue, the
company is heavily dependent on a single market for its performance.
Delay in finalisation of the restructuring process could be a negative as the

exercise is already under process since a long time.
Financials
Year to March FY06 FY07 FY08 FY09
Revenues (INR mn) 3,290 4,134 5,135 6,415
Rev. growth (%) 25.7 24.2 24.9
EBITDA (INR mn) 1,258 1,830 2,275 2,173
Net profit (INR mn) 567 915 1,326 942
Shares outstanding (mn) 23 23 23 34 Manoj Bahety, CFA
+91-22- 6623 3362
Diluted EPS (INR) 24.9 40.1 58.1 27.5
EPS growth (%) 61.3 44.9 (52.7)
Diluted P/E (x) 22.5 14.0 9.6 20.4
Manav Vijay
EV/EBITDA (x) 11.7 7.8 5.9 6.7
+91-22- 4063 5413
ROAE (%) 18.5 12.2 9.8 NA
Limited
Hotels & Tourism

Net revenues 3,290 4,134 5,135 6,415
Total operating expenses 2,032 2,304 2,860 4,242
Empolyee expenses 668 653 863 902
Other expenses 1,363 1,651 1,997 3,340
EBITDA 1,258 1,830 2,275 2,173
Depreciation 210 221 246 414
EBIT 1,049 1,609 2,029 1,759
Other income 14 13 220 71
EBIT incl. other income 1,063 1,623 2,249 1,830
Net interest 192 174 214 295
PBT 871 1,449 2,035 1,535
Provision for taxation 304 534 709 593
Core PAT 567 915 1,326 942
Profit after tax 567 915 1,326 942
Profit after minority interest 567 915 1,326 942
Equity shares outstanding (mn) 23 23 23 34
EPS (INR) basic 24.9 40.1 58.1 27.5
Diluted shares (mn) 23 23 23 34
EPS (INR) fully diluted 24.9 40.1 58.1 27.5
CEPS (INR) 40.2 51.0 73.5 NA
DPS 10 10 1 1
Dividend payout ratio (%) 46 28 2 3
Common size metrics - as % of net revenues

Cost of materials 61.8 55.7 55.7 66.1
Administrative and other expenses 20.3 15.8 16.8 14.1
Selling costs 41.4 39.9 38.9 52.1
Depreciation 6.4 5.3 4.8 6.5
Net interest expenditure 5.8 4.2 4.2 4.6
EBITDA margin 38.2 44.3 44.3 33.9
EBIT margin 31.9 38.9 39.5 27.4
Net profit margin 17.2 22.1 25.8 14.7
Growth metrics (%)

Year to March FY07 FY08 FY09
Revenues 25.7 24.2 24.9
EBITDA 45.5 24.3 (4.5)
PBT 66.3 40.4 (24.6)
Net profit 61.3 44.9 (28.9)
EPS 61.3 44.9 (52.7)

Hotels & Tourism

As on 31st March FY06 FY07 FY08 FY09
Equity Capital 228 228 228 342
Pref Share capital 200 3,510
Reserves 2,841 11,707 14,592 14,401
Shareholders' funds 3,069 11,935 15,020 18,253
Secured loans 2,023 2,078 1,385 1,653
Borrowings 2,023 2,078 1,385 1,653
Deferred tax (net) 458 486 589 688
Sources of funds 5,550 14,498 16,993 20,594
Gross block 6,543 15,093 15,691 16,162
Less depreciation 997 1,184 1,410 1,796
Net fixed assets 5,546 13,909 14,281 14,366
Capital work in progress 107 263 401 73
Investments - 235 287 2,947
Current assets 662 1,433 4,131 6,171
Inventories 80 83 98 91
Sundry debtors 96 133 162 222
Cash and bank balance 39 342 455 3,360
Loans and advances 447 876 3,416 2,498
Current liabilities 766 1,343 2,107 2,963
Liabilities 446 552 715 1,688
Provisions 320 791 1,393 1,275
Working capital (104) 90 2,024 3,208
Uses of funds 5,550 14,498 16,993 20,594
BV (INR) 135 523 659 533
Cash flow statement (INR mn)

Net profit 567 915 1,326 NA
Depreciation 210 221 246 NA
Deferred tax 141 27 104 NA
Others 217 203 1,160 NA
Gross cash flow 1,134 1,366 2,836 NA
Less: Changes in WC (137) (108) 1,820 NA
Operating cash flow 1,272 1,474 1,016 NA
Less: Capex 175 573 619 NA
Free cash flow 1,097 900 397 NA
Cash flow metric

Operating cash flow 1,272 1,474 1,016 NA
Financing cash flow (1,030) (826) 2,780 NA
Investing cash flow (165) (792) (3,828) NA
Net cash flow 77 (144) (33) NA
Capex (175) (573) (619) NA
Dividends paid 360 261 56 NA

Hotels & Tourism
Ratios
ROAE 18.5 12.2 9.8 NA
ROACE 18.9 16.2 13.1 NA
Debtor days 11 10 10 NA
Inventory days 9 7 7 NA
Payable days 85 119 150 NA
Current ratio 0.9 1.1 2.0 NA
Debt/EBITDA 1.6 1.1 0.6 NA
Cash conversion cycle days (65) (101) (132) NA
Debt/Equity 0.7 0.2 0.1 NA
Adjusted debt/equity 0.7 0.2 0.1 NA
Interest coverage (x) 5.5 9.3 9.5 NA
Operating ratios
Total asset turnover 0.6 0.4 0.3 NA
Fixed asset turnover 0.6 0.4 0.4 NA
Equity turnover 1.1 0.6 0.4 NA
Du pont analysis
NP margin (%) 17.2 22.1 25.8 NA
Total assets turnover 0.6 0.4 0.3 NA
Leverage multiplier 1.8 1.3 1.2 NA
ROAE (%) 18.5 12.2 9.8 NA
Diluted EPS (INR) 24.9 40.1 58.1 27.5
Y-o-Y growth (%) 61.3 44.9 (52.7)
CEPS (INR) 40.2 51.0 73.5 NA
Diluted P/E (x) 22.5 14.0 9.6 20.4
Price/BV (x) 4.2 1.1 0.9 1.1
EV/Sales (x) 4.5 3.5 2.6 2.3
EV/EBITDA (x) 11.7 7.8 5.9 6.7
Basic EPS (INR) 24.9 40.1 58.1 27.5
Basic P/E (x) 22.5 14.0 9.6 20.4

India Midcap
Hotels Research
& Tourism Company Profile
TAJ GVK HOTELS & RESORTS

Regional play
Company Description April 1, 2010
Incorporated in 1999, Taj GVK Hotels & Resorts is a joint venture of the Taj and
Reuters : TAJG.BO Bloomberg : TAJG IN
GVK groups. The Tata Group company, Indian Hotels Company (IHCL), holds
25.52% and other promoters hold 49.47% of the company. IHCL is a strategic
EDELWEISS RATING
investor in the company. The company currently operates five premium properties
Absolute Rating NOT RATED
totaling 900 rooms. These locations include Hyderabad, Chennai, and Chandigarh
with Hyderabad accounting for majority of the rooms and revenue.
MARKET DATA
CMP : INR 157

Key Highlights 52-week range (INR) : 168 / 46
To take advantage of its land bank, the company is running a capex programme Share in issue (mn) : 62.7
of INR 2.5 bn. The expansion involves 180 rooms in its existing property at Taj M cap (INR bn/USD mn) : 9.8 / 217.9
Deccan, a block of 43 room service apartments at Taj Krishna, and addition of Avg. Daily Vol. BSE/NSE (‘000) : 294.6
nearly 190 rooms at Begumpet. The company is also planning a 12,000 sq ft retail
expansion at its Taj Krishna property which is expected to be operational by
Q1FY11. It has also acquired a 6.5 acre plot in Bengaluru for future expansion. It
Promoters* : 75.0
is also contemplating Jaipur, Kodaikanal, and Amritsar for expansion.
FIIs : 1.4
Others : 15.8
Key Risks * Promoters pledged shares : Nil
Taj GVK receives more than 75% of its revenue from three hotels located in
Hyderabad. Although the company has diversified by opening hotels in Chennai
and Chandigarh, the dependence on a single city is high.

Delay in execution of its projects along with oversupply of premium category Sensex
rooms in Hyderabad are the main concerns for the company. 1 month 5.5 2.1 (3.3)
3 months 0.8 5.3 4.6
12 months 71.0 231.7 160.7
Financials
Revenues (INR mn) 1,894 2,442 2,584 2,382
Rev. growth (%) 29.0 5.8 (7.8)
EBITDA (INR mn) 848 1,152 1,221 1,026
Net profit (INR mn) 463 643 704 528 Manoj Bahety, CFA
Shares outstanding (mn) 63 63 63 63 +91-22- 6623 3362

Diluted EPS (INR) 7.4 10.3 11.2 8.4
EPS growth (%) 39.0 9.4 (25.0)
Manav Vijay
Diluted P/E (x) 21.3 15.3 14.0 18.6
+91-22- 4063 5413
EV/EBITDA (x) 12.3 9.0 8.6 10.9
ROAE (%) 31.3 38.9 34.0 21.1
Limited
Hotels & Tourism
Financial Statements (Consolidated)

Net revenues 1,894 2,442 2,584 2,382
Total operating expenses 1,045 1,291 1,362 1,356
Empolyee expenses 271 319 379 453
Other expenses 774 971 984 903
EBITDA 848 1,152 1,221 1,026
EBIT 739 1,039 1,106 890
EBIT incl. other income 739 1,039 1,106 890
Net interest 40 31 21 62
PBT 700 1,008 1,085 828
Provision for taxation 237 365 381 301
Core PAT 463 643 704 528
Profit after tax 463 643 704 528
Profit after minority interest 463 643 704 528
Equity shares outstanding (mn) 63 63 63 63
EPS (INR) basic 7.4 10.3 11.2 8.4
Diluted shares (mn) 63 63 63 63
EPS (INR) fully diluted 7.4 10.3 11.2 8.4
CEPS (INR) 9.4 12.3 13.2 11.1
DPS 2.0 2.5 2.6 2.0
Dividend payout ratio (%) 31 34 33 28
Common size metrics - as % of net revenues

Cost of materials 55.2 52.8 52.7 56.9
Administrative and other expenses 14.3 13.1 14.7 19.0
Selling costs 40.9 39.8 38.1 37.9
Depreciation 5.8 4.6 4.5 5.7
Net interest expenditure 2.1 1.3 0.8 2.6
EBITDA margin 44.8 47.2 47.3 43.1
EBIT margin 39.0 42.6 42.8 37.4
Net profit margin 24.4 26.3 27.2 22.1
Growth metrics (%)

Year to March FY07 FY08 FY09
Revenues 29.0 5.8 (7.8)
EBITDA 35.7 6.1 (16.0)
PBT 44.0 7.6 (23.6)
Net profit 39.0 9.4 (25.0)
EPS 39.0 9.4 (25.0)

Hotels & Tourism

As on 31st March FY06 FY07 FY08 FY09
Equity Capital 125 125 125 125
Reserves 1,391 1,734 2,204 2,585
Shareholders' funds 1,516 1,860 2,329 2,710
Secured loans 706 684 505 1,090
Unsecured loans 150 50 240 300
Borrowings 856 734 745 1,390
Deferred tax (net) 65 81 202 133
Sources of funds 2,437 2,674 3,276 4,233
Gross block 2,541 2,581 2,686 4,631
Less depreciation 609 644 759 891
Net fixed assets 1,932 1,937 1,928 3,740
Capital work in progress 207 760 1,386 694
Investments 140 - - -
Current assets 627 619 503 327
Inventories 25 31 39 45
Sundry debtors 73 60 54 64
Cash and bank balance 140 253 113 21
Loans and advances 389 276 297 197
Current liabilities 507 669 559 544
Liabilities 352 402 298 395
Provisions 155 267 261 149
Working capital 120 (50) (56) (218)
Misc expenditure 38 27 18 17
Uses of funds 2,437 2,674 3,276 4,233
BV (INR) 24 29 37 43
Cash flow statement (INR mn)

Net profit 463 643 704 528
Deferred tax 19 16 9 33
Others (31) (337) 99 85
Gross cash flow 559 434 926 782
Less: Changes in WC (11) (283) 134 (70)
Operating cash flow 571 717 792 852
Less: Capex 469 349 732 1,258
Free cash flow 102 368 61 (406)
Cash flow metric

Operating cash flow 571 717 792 852
Financing cash flow 27 (258) (200) 314
Investing cash flow (469) (349) (732) (1,258)
Net cash flow 128 110 (139) (92)
Capex (469) (349) (732) (1,258)
Dividends paid 64 141 219 234

Hotels & Tourism
Ratios
ROAE 31.3 38.9 34.0 21.1
ROACE 32.2 41.8 37.2 23.7
Debtor days 14 10 8 9
Inventory days 5 5 6 7
Payable days 98 100 79 83
Current ratio 1.2 0.9 0.9 0.6
Debt/EBITDA 1.0 0.6 0.6 1.4
Cash conversion cycle days (79) (85) (65) (68)
Debt/Equity 0.6 0.4 0.3 0.5
Adjusted debt/equity 0.6 0.4 0.3 0.5
Interest coverage (x) 18.7 33.2 51.9 14.4
Operating ratios
Total asset turnover 0.8 1.0 0.9 0.6
Fixed asset turnover 1.0 1.3 1.3 0.8
Equity turnover 1.2 1.4 1.2 0.9
Du pont analysis
NP margin (%) 24.4 26.3 27.2 22.1
Total assets turnover 0.8 1.0 0.9 0.6
Leverage multiplier 1.6 1.5 1.4 1.5
ROAE (%) 31.3 38.9 34.0 21.1
Diluted EPS (INR) 7.4 10.3 11.2 8.4
Y-o-Y growth (%) 39.0 9.4 (25.0)
CEPS (INR) 9.4 12.3 13.2 11.1
Diluted P/E (x) 21.3 15.3 14.0 18.6
Price/BV (x) 6.7 5.4 4.3 3.7
EV/Sales (x) 5.5 4.2 4.1 4.7
EV/EBITDA (x) 12.3 9.0 8.6 10.9
Basic EPS (INR) 7.4 10.3 11.2 8.4
Basic P/E (x) 21.3 15.3 14.0 18.6

(INR) (INR) (INR)
300
360
420
480
540
600
0
14
28
42
56
70
300
340
380
420
460
500
Jul-09 Apr-09 Cox & Kings
May-09
Dec-09
Aug-09
Jun-09
Sep-09
Hotels & Tourism
Jul-09
Hotel Leelaventure
Oct-09
Jan-10
Aug-09
Buy
Nov-09 Sep-09
Buy
Dec-09 Oct-09
Nov-09
Jan-10
Dec-09
Mahindra Holidays & Resorts India
Hold
Feb-10 Jan-10 Feb-10 Mar-10
Mar-10 Feb-10
Mar-10
(INR) (INR)
EIH
35
65
95
125
155
185
30
48
66
84
102
120
Apr-09
Apr-09
May-09
Indian Hotels
May-09
Jun-09
Jun-09
Jul-09 Jul-09
Aug-09 Aug-09
Sep-09 Sep-09
Oct-09
Oct-09
Nov-09
Dec-09 Nov-09
Jan-10 Dec-09
Buy
Feb-10 Jan-10
Mar-10 Feb-10
Buy
Apr-10
Mar-10
Edelweiss Securities Limited

103
Hotels & Tourism
Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021,
Board: (91-22) 2286 4400, Email: research@edelcap.com
Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246
Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206
Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411
Coverage group(s) of stocks by primary analyst(s): Hotels

Indian Hotels and Mahindra Holidays & Resorts India
Recent Research
1,150 Date Company Title Price (INR) Recos
950 04-Dec-09 Indian Time to check-in; 88 Buy

Buy Hotels Initiating Coverage
750
(INR)
550 12-Oct-09 Mahindra Membership-led 346 Buy

Resorts &
Buy growth;
350 Buy
India Initiating Coverage
150
Aug-08
Sep-08
Nov-08
Dec-08
Oct-08
Jan-09
Jun-09
Jul-08
Jul-09
Feb-09
May-09
Mar-09
Apr-09
Distribution of Ratings / Market Cap

Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe Rating Interpretation
Edelweiss Research Coverage
Buy Universe
Hold Reduce Total
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 101 56 9 169 Buy appreciate more than 15% over a 12-month period
Rating Distribution* 53 43 29 128
* 3 stocks under review
* 3 stocks under review
> 50bn Between 10bn and 50 bn < 10bn Hold depreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 103 53 13
Market Cap (INR) 72 41 15
Access the entire repository of Edelweiss Research on www.edelresearch.com
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Manoj Bahety, CFA Manav Vijay

+91 22 6623 3362 +91 22 4063 5413 Edelweiss Securities Limited

 ARRs to rise and ORs to stay firm till FY12

 International hotel chains eye Indian hospitality

 Outlook: Good long-term opportunity

In this report, we have discussed listed hospitality companies. We initiate coverage on

Indian Travel & Tourism Industry: Overview ................................................................... 4

Demand-Supply Economics Favourable .......................................................................... 5

Improving ARRs and ORs during 2010-12..................................................................... 20

Global Player’s Indian Venture .................................................................................... 22

Vacation Ownership ................................................................................................... 23

Global Travel & Tourism ............................................................................................. 26

Key Trends ............................................................................................................... 28

Business Analysis ...................................................................................................... 30

Valuation Methodology ............................................................................................... 33

Key Risks ................................................................................................................. 35

Annexure III ............................................................................................................. 39

Cox & Kings ............................................................................................................ 41

Hotel Leelaventure .................................................................................................... 67

Indian Hotels Company .............................................................................................. 81

Mahindra Holidays & Resorts India............................................................................... 87

Asian Hotels ............................................................................................................. 95

Taj GVK Hotels & Resorts ........................................................................................... 99

2 Edelweiss Securities Limited

FY10E 3,684 1,545 1,112 13.3 28 27 33 33 18.0 36.8

FY11E 4,708 1,995 1,312 20.9 28 29 55 57 13.6 23.7

Edelweiss Securities Limited

Indian Travel & Tourism Industry: Overview

Chart 1: Indian T&T industry size

Capital Personal travel &

Fig.1 : Major players in the Indian T&T industry

Source: WTTC, CRISIL, Industry, Edelweiss research

4 Edelweiss Securities Limited

Demand-Supply Economics Favourable

 Tourism demand on the rise in India

Chart 2: Rise in FTAs to aid growth in organised hospitality

Hospitality sector size FTAs growth

Source: CRISIL, Ministry of Tourism, Edelweiss research

Edelweiss Securities Limited 5

Chart 3: Increased ARRs and tourist influx to aid hotel industry

Source: CRISIL, Ministry of Tourism, Edelweiss research

 FTAs on the rise; past 0.6 mn in December 2009

Chart 4: FTAs to rise substantially

Foreign tourists % Growth

Source: Ministry of Tourism, Edelweiss research

6 Edelweiss Securities Limited

 Domestic travel in 2008 at all time high

Chart 5: Domestic tourism is expected to do well

Source: Ministry of Tourism, Edelweiss research

 Increased airline traffic, average length of stay yield more business

Edelweiss Securities Limited 7

Source: DGCA, Edelweiss research

 Supply overhang unfounded

8 Edelweiss Securities Limited

Table 1: Distribution of existing and proposed branded hotels by major cities

Source: CRISIL, Edelweiss research

Edelweiss Securities Limited 9

 Supply scenario in major markets

Source: CRISIL, Edelweiss research

ARRs RevPAR ORs

Source: CRISIL, Edelweiss research

10 Edelweiss Securities Limited

Chart 10: Business and leisure travellers form the majority

ARRs to rise and ORs to stay firm till FY12

International hotel chains eye Indian hospitality

Outlook: Good long-term opportunity

Tourism demand on the rise in India

FTAs on the rise; past 0.6 mn in December 2009

Domestic travel in 2008 at all time high

Increased airline traffic, average length of stay yield more business

Supply overhang unfounded

Supply scenario in major markets

Mumbai: Strong economic revival to aid growth

Chennai: IT and auto sectors to keep ARRs firm

Kolkata: Limited supply to keep ARRs firm

Bengaluru: ARRs under pressure due to huge supply

Hyderabad: Conferencing the next big trend

Outlook on other major cities

Vacation ownership industry products