December 18, 2008 | Hospitality

Hotel Industry – Terror Impact

Rashesh Shah
Rashes.shah@icicidirect.com
Recession, terrorism cloud on tourism…
The recent terror attacks in Mumbai have added to the woes of the hospitality industry that is already reeling
under the impact of the global financial meltdown. The terror attacks at Taj and Oberoi will not only impact
premium segment occupancy levels and average room rates (ARRs) in Mumbai but also have a negative impact
in other parts of the country especially leisure tourist destinations like Goa, Kerala, Rajasthan, etc. A sharp
decline of the rupee against most foreign currency should have geared up growth of foreign tourist arrivals in
India, but the global financial crisis and rising terrorist activities have brought the entire tourism industry
growth under a cloud.

Foreign tourist arrivals growth tapered:

Due to the terror attacks in Mumbai, Indian hotel industry has seen huge cancellations / postponement of room
bookings by many foreign tourists in the past 15-20 days. Since it was an attack inside five star hotel premises
and that too in South Mumbai (premium location), it has given a rise to security issues in India. Due to this we
expect its negative impact to continue to stay for a longer period of time. This, coupled with the global financial
crisis is expected to drive down the tourist arrival growth to negative growth trajectory by the end of FY09E.

Average Room rates (ARRs) and Occupancy levels to see huge correction:
We expect average occupancy levels across major cities to decline further by around 800-900 bps, i.e. from the
current average of 65-66% to 57-58% levels. We expect leisure destinations to get affected more than business
destinations.

With increase in room supply of about 7-8% over the last year and a subdued future demand outlook, average
room rates (ARR) are expected to decline further by 15-20% over the next six to eight months.

Shortage of premium segment room supply in South Mumbai:

The terror attacks have created a sudden shortage of room supply of about 1,450 rooms from a total of around
2,238 premium segment hotel rooms in South Mumbai. Since Mumbai is the main business hub of the country,
business travellers will continue to visit the city though on a lower scale. Also, several countries like the US, UK,
Netherlands and Canada have started toning down the warnings issued to their citizens against travel to India. This
is expected to provide a short-term marginal benefit to hotels located in the north and central regions of the city,
like Hotel Leela, ITC and other hotels located near the airport.

Exhibit 1: Revised Estimates

Sales EPS EV/EBITDA P/E Revised
Company Recomendation
FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E Target price
EIH 1075.60 1264.12 3.28 5.11 17.39 12.39 24.70 15.85 81.00 UNDER PERFORMER

Hotel Leela 492.92 544.27 2.23 2.58 12.45 11.51 11.66 10.08 26.00 PERFORMER

Viceroy Hotels 126.27 244.76 1.47 3.21 16.16 11.00 19.73 9.03 29.00 PERFORMER

Kamat Hotels 143.27 164.36 13.06 13.15 8.63 5.12 3.37 3.35 44.00 PERFORMER
Source: ICICIdirect.com Research

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Impact of terror attack on companies under coverage –

Direct Impact
Closure of hotel property for renovation:
East India Hotels (EIH) gets about 43-45% of its revenues from its 868-room property in Mumbai. While the 541
room Trident hotel is expected to open in the third week of December 2008, The Oberoi, which has 327 rooms, is
likely to remain closed till the first quarter of FY10. Though the terror attack has caused huge damage to its hotel
properties especially Oberoi hotel, these two properties are insured against such incidents to the tune of Rs 1,500
crore. While a major part of its Mumbai property will be opened for business from December 21 2008, the
company will have to grapple with a drastic decline in occupancy levels in FY09E and FY10E.
Exhibit 1: Estimated Loss of Revenue

Estimated loss
Expected time to
Hotel No of rooms of revenue*
re-open
(Rs. In crore)
Trident 541 14.00 Dec 08 End
Oberoi 327 58.00 Q1FY10

868 72.00

Source: Company, ICICIdirect.com Research

Diversion of funds, meant for expansion to repairs and renovation:

Apart from loss of revenues, there would be a diversion of funds earlier meant for expansions to repairs and
renovation. Since both these properties in Mumbai are major revenue contributors to EIH’s total revenue, bringing
back these two properties to their erstwhile condition with fool proof security would be the top priority of the
company. In the medium-term, this will impact the company’s expansion plans and its future projects may get
delayed by at least 8-12 months.
Though both properties are insured against terror attacks and loss of revenues, the picture is still unclear as to
when and up to what proportion of total loss including loss of revenues, the company will get from insurers. Till
that time, the company will have to shell out all these extraordinary expenses from its own pocket.

Sudden shortage of premium segment room supply in South Mumbai:

The terror attacks have created a sudden shortage of room supply of about 1,450 rooms from a total of around
2,238 premium segment hotel rooms in South Mumbai. Out of four premium hotel properties, Trident (541 rooms)
and Taj Hotels (new tower wing – 235 rooms) are expected to re-open by the end of December 2008. The old tower
of Hotel Taj (330 rooms) is expected to re-open after a year and Oberoi (327 rooms) would be opening up in
Q1FY10. Since Mumbai is the main business hub of the country, business travellers will continue to visit the city
though on a lower scale. Also, several countries like the US, UK, Netherlands and Canada have started toning down
the warnings issued to their citizens against travel to India. This is expected to provide a short-term marginal benefit
to hotels located in the north and central regions of the city, like Hotel Leela, ITC and other hotels located near the
airport.

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Indirect Impact

Decline in growth of foreign tourist arrivals (FTAs):

India receives huge tourist inflows from the UK and US. Due to the terror attacks in Mumbai, many countries like the
UK, US, Australia, etc had issued travel advisory notes, advising their citizens to not to visit India. This has led to
huge cancellations/postponements of room bookings by many foreign tourists to the tune of 35-40% in the last 10-
15 days. The historical data shows that whenever such terror attacks happen, the room booking
cancellations/postponement process continues for around two to three months. However, since it was an attack
inside five star hotel premises and that too in South Mumbai (premium location) we expect its negative impact to
continue for a longer period than in the past. This, coupled with the global financial crisis, could drive down the
tourist arrival growth to negative growth trajectory by the end of FY09E. We will see the full impact of terror attacks
in Q4FY09. Leisure tourist destinations like Goa, Kerala, Jaipur, etc are expected to be impacted more than business
destinations.

Exhibit 2: Growth in foreign tourist arrivals from January 1998 to November 2008

40.0% SARS(Nov02-July03) London Train Blasts (July 05)

Guj Earth quack (Jan 01)

Kargil War (May-July 99) Attack on Parliament (Dec 01) Mumbai Train Blasts (July
30.0% Iraq war (Mar 03) 06)

20.0%
Global Financial Crisis

10.0%

0.0%
Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08

-10.0%

-20.0%

-30.0% Attack on Akshardham

Temple (Sep 02)
Bomb Blasts, Mumbai & Delhi
Attack on WTC (Sep 01) Terror attack on Taj & Oberoi
-40.0% (Sep05, Oct05)
(Nov 08)
MonthlyGrowth Yearly Growth

Source: Ministry of Tourism, ICICIdirect.com Research

Impact on average room rates and occupancy levels:

We expect average occupancy levels across major cities to decline further by around 800-900 bps, i.e. from the
current average of 65-66% to 57-58% levels. We expect leisure destinations to get affected more than business
destinations.

With increase in room supply of about 7-8% over the last year and a subdued future demand outlook, average
room rates (ARR) are expected to decline further by 15-20% over the next six to eight months.

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Change of Estimates:

We have revised our estimates for FY09 and FY10, taking into consideration both the direct and indirect impact on
the companies under our coverage.

East India Hotels (EIH)

2008-09E 2009-10E
Particulars
New Old % Change New Old % Change
Sales 1,075.60 1,230.10 -12.6% 1,264.12 1,405.27 -10.0%
EBITDA 244.80 376.30 -34.9% 340.39 442.36 -23.1%
PAT 128.97 224.90 -42.7% 195.60 274.06 -28.6%
EPS 3.28 5.72 -42.7% 5.11 6.97 -26.7%
Operating margin 22.8% 30.6% -780 bps 26.9% 31.5% -460 bps
Net profit margin 10.8% 16.4% -560 bps 14.1% 17.7% -360 bps

• We expect average occupancy levels for FY09E to decline to 57-58% from last year’s average occupancy
of 66-67% and average room rates are expected to decline further by around 10-15% in Q4FY09 across
all major cities.
• We expect EIH to take a hit of at least Rs 47 crore in FY09E and Rs 25 crore in FY10E on account of loss of
revenue due to closure of its two premium hotel properties (Oberoi and Trident) for repairs and
renovation.
• We also expect a rise in other operating cost by around 15-18% on account of rise in security and other
expenses.
• EIH has insurance cover of Rs 750 crore against each property. The company has also taken loss of profit
insurance cover, but it needs to be seen how much of the total loss is expected to be recovered from
insurance companies. We will revise our earnings estimates further, if the company comes out with any
developments with respect to recoveries from insurance companies.
• Operating margins are expected to decline further by 780 bps in FY09 due to closure of Oberoi and
Trident hotels and anticipated further decline in foreign tourist arrivals in the current winter season.
However, the same is expected to improve in FY10 due to opening up of its new hotel property in BKC,
re-opening of Hotel Oberoi in Q1FY10 and some improvement in growth of foreign tourist arrivals.

Valuations

We have revised our earning estimates downwards taking into consideration the post-terror impact and
arrived at a target price of Rs 81 using the DCF methodology. We rate the stock as ‘UNDERPERFORMER’. At
this price, the stock is available at a P/E of 24.7x FY09E EPS of Rs 3.28 and at 15.8x FY10E EPS of Rs 5.11. At
higher P/E multiple compared to other major hotel players, the stock commands a premium over other large
players on account of its brand value (Trident, Oberoi, etc), location (with 51% of total rooms in Mumbai,
20% of total rooms in NCR) and steady revenue growth along with a strong management team.

Note
The stock price has risen sharply to Rs 130 from a low of Rs 75 post the terror attack on account of
promoter’s raising their stake and at the same time due to major bulk deals happening last week. In the short
to medium-term, the stock could move up further on account of the promoter’s group increasing their stake
to more than 50% in six to eight months from the current 46.4%. To that extent, the stock contains an upside
risk.
As of 30/09/2008
Other major stake holder's % Held
Russell Credit Ltd. (ITC Group) 14.95%
LIC 6.53%
Sonata Investments Ltd.(ADAG) 1.68%
Source: BSE.

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Hotel Leela (HOTLEE)

2008-09E 2009-10E
Particulars
New Old % Change New Old % Change
Sales 492.92 524.73 -6.1% 544.27 571.85 -4.8%
EBITDA 202.85 225.76 -10.1% 219.29 246.40 -11.0%
PAT 110.53 125.35 -11.8% 128.17 141.74 -9.6%
EPS 2.23 2.53 -11.9% 2.58 2.86 -9.8%
Operating margin 41.2% 43.0% -180 bps 40.3% 43.1% -280 bps
Net profit margin 20.4% 21.8% -140 bps 20.9% 21.6% -70 bps

• Hotel Leela derives 70% of its total revenues from its Mumbai and Bangalore properties, while 30% of its
total revenues come from its other two premium hotel properties in Goa and Kovalam.
• As far as business destinations are concerned, we expect its Mumbai property to get some benefit of
marginal increase in occupancy level due to shortage of hotel rooms in South Mumbai in the short-term
to medium term. Also, we do not expect its Bangalore property to have any major adverse impact on its
occupancy levels on account of the terror attacks in Mumbai.
• In contrast, its hotel properties at Goa and Kovalam are expected see a sharp decline in average
occupancy levels from 74% to 61% on a YoY basis.
• We also expect a rise in other operating cost by around 12-15% on account of a rise in security and other
expenses. As a result, its operating margins are expected to decline further by 180 bps in FY09 and by
280 bps in FY10E.

Valuations

We expect some major delays in its expansions plans on account of the liquidity crunch, thereby impacting
its future revenues and profitability. Also, in the current scenario, its hotel properties in Goa and Kovalam are
expected to see major decline in occupancy levels. Considering the same, we have revised our earning
estimates downwards and arrived at a target price of Rs 26 using the DCF methodology and rate the stock as
‘PERFORMER’. At this price, the stock is available at a P/E of 11.6x FY09E EPS of Rs 2.23 and at 10x FY10E
EPS of Rs 2.58.

Concern

One of the major concerns of the company is that it has a high debt-equity ratio of 2.2 compared with other
major hotel players. We believe Hotel Leela would find it difficult to pay its FCCBs liabilities through cash
generated from operations. In case of that situation, the company would either have to refinance debt or sell
some of its attractive properties. If we value the company by the net asset value (NAV) method then it
commands a value of Rs 37 per share (based on 2005-06 hotel property prices), since all its properties are
located at premium locations and command a high premium along with its brand value. In that case also, it
becomes a good buy at this level with an investment horizon of 12-18 months.

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Viceroy Hotels (PALHEI)

2008-09E 2009-10E
Particulars
New Old % Change New Old % Change
Sales 126.27 132.00 -4.3% 244.76 249.99 -2.1%
EBITDA 35.19 37.79 -6.9% 54.17 59.16 -8.4%
PAT 6.22 7.97 -22.0% 13.59 16.95 -19.8%
EPS 1.47 1.88 -21.8% 3.21 4.00 -19.8%
Operating margin 27.9% 28.6% -70 bps 22.1% 23.7% -160 bps
Net profit margin 4.8% 5.9% -110 bps 5.5% 6.7% -120 bps

• Viceroy Hotels currently operates at its Hyderabad location.

• Hyderabad being a business destination, we do not expect any major decline in occupancy levels on a
YoY basis on account of terror attacks in Mumbai. However, in Q4FY09 and Q1FY10 we expect 20% and
18% decline in occupancy levels from our earlier estimated occupancy levels of 64% and 60%,
respectively.
• With a fall in inflation rate, we expect some improvement in its operating margins from the F&B business.
However, margins from its hotel business are expected to remain under pressure due to expected room
supply outpacing room demand in cities like Hyderabad and Chennai.
• Currently, the company operates around nine restaurant outlets at Hyderabad, Vijaywada and 10 “Bread
Talk” outlets in Mumbai, Bangalore, Gurgaon and Hyderabad.
• We also expect a rise in other operating cost by around 8-10% on account of a rise in security and other
expenses. As a result, its operating and net profit margins are expected to decline further by 70 bps and
100 bps in FY09E.

Valuations

In our report dated November 17 2008, we had downgraded the stock and arrived at a target price of Rs 36
with 11% downside. The stock in recent times has fallen sharply. Currently, it is trading at Rs 25-26 levels. We
value the company at 9x its revised FY10E EPS of Rs 3.21 per share (post terror impact) and arrive at a target
price of Rs 29. We rate the stock as “PERFORMER”.

Kamat Hotels (KAMHOT)

2008-09E 2009-10E
Particulars
New Old % Change New Old % Change
Sales 143.27 143.27 0.0% 164.36 164.36 0.0%
EBITDA 53.55 53.55 0.0% 59.61 59.61 0.0%
PAT 9.04 9.04 0.0% 27.41 27.41 0.0%
EPS 5.40 5.40 0.0% 16.38 16.38 0.0%
Operating margin 37.4% 37.4% 0.0% 36.3% 36.3% 0.0%
Net profit margin 6.1% 6.1% 0.0% 16.0% 16.0% 0.0%

• Kindly refer our detailed report on Kamat Hotels named “Concall update” dated December 3 2008 that
incorporates the post-terror impact.

Valuation

We have valued the company at Rs 44 using the DCF approach. The target price discounts the FY09E diluted
EPS (before exceptional items) of Rs 13.06 by 3.4x and FY10E diluted EPS (before exceptional items) of Rs
13.15 by 3.34x. (Refer report dated December 3 2008).

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Government initiatives:

In order to provide some relief to the hotel sector and considering the forthcoming mega event “Commonwealth
Games 2010” to be held in Delhi, the government is considering a slew of measures. The proposal includes
abolition of 12.5% service tax on tour packages, reduction in development charges for adding more rooms in
existing hotels and convincing states to have a 4% uniform luxury tax across the country. If these proposals come
through, then it would be helpful for the Indian hospitality industry to become more competitive in terms of room
tariffs compared to other South Asian nations. We will revisit our earnings estimates for FY10E, if the government
comes out with such relief measures.

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RATING RATIONALE

ICICIdirect endeavours to provide objective opinions and recommendations. ICICIdirect assigns ratings to its
stocks according to their notional target price vs. current market price and then categorises them as
Outperformer, Performer, Hold, and Underperformer. The performance horizon is two years unless specified
and the notional target price is defined as the analysts' valuation for a stock.

Outperformer: 20% or more

Performer: Between 10% and 20%
Hold: +10% return
Underperformer: -10% or more
Pankaj Pandey Head - Research pankaj.pandey@icicidirect.com

ICICIdirect Research Desk,

ICICI Securities Limited,
Mafatlal House, Ground Floor,
163, HT Parekh Marg,
Churchgate, Mumbai – 400 020

research@icicidirect.com

ANALYST CERTIFICATION
We /I, Rashes Shah, CA, research analyst and the author of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and
all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this
report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of ICICI Securities Inc.

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