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Asia Pacific Equity Research


07 June 2010

Initiation

Indian Hotels
Turning around: Initiate with Overweight, PT of Rs130
Initiate with OW, Mar-11 PT of Rs130: Indian Hotels (IHCL), is the largest play on the hospitality sector in India, with an inventory of close to 12,200 rooms. Following a muted FY09/10, which saw the company report the biggest loss in its history, we now expect a turnaround in operating performance in FY11 driven by improving occupancy/ARR trends in domestic operations and stabilization of its international portfolio post the re-opening of its marquee property Pierre (US). Our PT of Rs130 is based on 13.5x FY12E EV/EBITDA, in line with the historical average. A fundamental improvement in business trends and high EBITDA/earnings growth will support valuations, in our view. Turnaround story is playing out nicely as the occupancy rates for the domestic business picked up to 70-76% in 2H FY10. An improving economy (FY11E GDP of 8.3%) and strong volume growth should drive standalone revenue/EBITDA growth of 22%/36% over FY10E-12E. The companys international portfolio should also now start stabilizing. Recent launch of Pierre (New York property) received an encouraging initial response (occupancy at 71% in May). Further our US lodging analysts (Joseph Greff) believes that we are in the early stages of a multi-year lodging upturn and expects 2010 to be a year of robust lodging demand. Management commentary coming out of key US hoteliers (Marriott/ Hyatt) in the recent 1Q10 results seems to reinforce this positive view. Share price catalysts: IHCLs share price correlation with USD/INR is striking and seems to hold for both short (three-month) to long-term (15year) periods. Our estimate of 7% rupee appreciation by end CY10 is a positive. Further quarterly improvement in revenue/EBITDA trends in the domestic business and incremental data points on US portfolio performance are likely to be the key share price drivers in the near term. Key risks to our view: Leverage concerns still persist: IHCLs net D/E at 1.5x is fairly elevated and will likely remain so as the company is still in an investment mode in the domestic business. However a Rs7.6B cash balance makes it well funded to meet capex/interest commitments. The main funding gap for IHCL primarily comes from the potential acquisition of Sea Rock (likely 2013/14) which on our estimates will require additional capital of Rs12B. Other risks: 1) a slowdown in economic growth; 2) longer-thanexpected turnaround period for the international business; 3) any negative incidents (e.g. terrorist attack, swine flue).
Bloomberg: IH IN; Reuters: IHTL.BO
Rs MM, year-end March Sales EBITDA Net profit P/E (x) EV/EBITDA ROE (%) Net debt/Equity P/B FY09 26,861 5,121 125 562.8 20.9 0% 133% 2.1 FY10 25,210 3,981 (1,369) -51.3 26.9 -5% 145% 2.8 FY11E 31,891 6,595 1,919 36.6 16.3 7% 145% 2.6 FY12E 39,894 9,805 4,337 16.2 10.9 15% 127% 2.3

Overweight
IHTL.BO, IH IN Price: Rs97.10 Price Target: Rs130.00

India Hotels & Lodging Saurabh Kumar


AC

(91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com

Gunjan Prithyani
(91-22) 6157-3593 gunjan.x.prithyani@jpmorgan.com J.P. Morgan India Private Limited

Company data
52-wk range (Rs) Mkt cap. (Rs MM) Mkt cap. (US$ MM) Avg. daily volume (MM) Avg daily value (US$ MM) Shares O/S (MM) Index (BSE Sensex) Exchange rate
Source: Bloomberg

118.35 - 55.2 70,249 1,561 1.9 4.1 723 16,781 47.1

Source: Company reports and J.P. Morgan estimates.

See page 22 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

This document is being provided for the exclusive use of NGUYEN VO at VIET CAPITAL SEC JOINT STOCK COMPAN
Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

Company Description Indian Hotels Company Ltd (IHCL) is the largest hotel operator in South Asia with an inventory of ~12,200 rooms (103 hotels) across India and international markets (USA, Australia, Maldives, Malaysia, UK, Sri Lanka). IHCL has presence across luxury, premium, mid-market and value segments of the market via its various brands i.e. Taj, Vivanta, Gateway and Ginger.

Valuation and EPS sensitivity metrics


Volume growth assumption Impact of each 1% point change ARR growth assumption Impact of each 1% point change

EBITDA impact (%) 1% 3%

EPS impact (%) 3% 6%

Source: J.P. Morgan estimates

Price target and valuation analysis

We are setting a Mar-11 PT of Rs130 based on 13.5x FY12E EV/EBITDA for the consolidated which is inline with its historical average. We believe improving fundamental trends can well propel the stock to above historical averages.
NAV breakdown by asset class

Key risks to target price are: 1) a slowdown in economic growth; 2) longerthan-expected turnaround period for international business; 3) any more terrorist attacks in India.

Key share price catalysts for the stock over the next 12 months in our view:
Source: Company reports

EPS: J.P. Morgan vs consensus


Rs/share FY11E FY12E
Source: Bloomberg

a) Positive Q/Q growth in reported revenues/EBITDA in domestic business (standalone business) driven by improving ARR and occupancy trends.
Consensus 2.0 4.0

J. P. Morgan 2.7 6.0

b) Any commentary (positive/negative) from the management on the US portfolio performance (especially Pierre performance). IHCL does not report consolidated numbers on quarterly basis, therefore it is difficult to ascertain the performance of the international portfolio (held via subsidiaries). c) Rupee appreciation, given the strong correlation of the share price with the USDINR Fx rate as highlighted above. J.P. Morgan expects the rupee to appreciate by 7% by CY10 end.

Table 1: Peer valuations


Name Indian Peers Indian Hotels EIH Hotel Leela Global Peers Marriott International-Cl A Starwood Hotels & Resorts Hyatt Hotels Corp - Cl A Wyndham Worldwide Corp Shangri-La Asia Ltd Genting Singapore Plc Mandarin Oriental Intl Ltd Average
Source: Bloomberg, J.P. Morgan estimates. Price as of Jun-7, 2010 2

MCap (US$MM) 1,561 1,012 396 12,419 8,914 1,748 4,195 5,180 8,954 995

Price/Earnings (x) FY11E FY12E 37 26 19 33 52 NM 14 28 47 29 33.7 16 19 20 24 32 NM 12 20 25 19 22.0

Price/Book (x) FY11E FY12E 2.6 3.1 1.3 7.4 4.5 1.4 1.5 1.2 2.8 1.4 2.9 2.3 2.8 1.4 5.9 4.1 1.4 1.3 1.1 2.5 1.3 2.5

EV/EBITDA (x) FY11E FY12E 16.3 15.5 21.4 14.4 14.4 16.5 7.0 15.9 21.4 26.5 16.6 10.9 12.5 15.8 11.2 12.0 13.0 5.9 13.1 14.2 17.1 12.4

This document is being provided for the exclusive use of NGUYEN VO at VIET CAPITAL SEC JOINT STOCK COMPAN
Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

Investment Positives
Expect room demand to rebound sharply on the back of improving economic growth
We believe IHCLs domestic business revenues and earnings have troughed and will incrementally see a turnaround happening over FY11/12 as an improving economy leads to higher occupancy and ARR trends. The complete opening of Mumbai property by July-11 should also aid operating parameters.
Leading indicators like tourist arrivals and air passenger traffic are showing positive trends

Improved economic outlook should aid both occupancy and ARR trends going ahead. JPM expects GDP growth of 8.3% in FY11 against 7.4% in FY10

Various economic indicators are now pointing towards an improvement in room demand. Tourist arrivals in India after witnessing a decline for over one year have now started to turn positive, registering a double digit growth in the peak season (Dec-09/Feb-10). Against FY02-09 tourist arrival CAGR of 15%, growth in FY10 was a mere 4% (impact of economic slowdown). However this should start to reverse going ahead. Various industry bodies point to a 13-15% growth in room demand over FY10-12, inline with past historical trends This should be driven by increasing corporate travel budgets, conferences /conventions, diplomatic visits and a pick-up in sporting events such as Commonwealth Games (2H10), Cricket World Cup (2011). IHCL with an industry leadership position and presence across leisure/ business/ mid market segment is well poised to benefit as demand rebounds to its pre-crisis levels driven by improvement in real GDP.
Figure 1: India room demand (mm) vs. Real GDP trends (%)
12 10 8 6 4 2 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11EFY12E Room Demand
Source: Bloomberg, Crisil and J.P. Morgan estimates.

30,000 25,000 20,000 15,000 10,000 5,000 Real GDP % ch YoY

This document is being provided for the exclusive use of NGUYEN VO at VIET CAPITAL SEC JOINT STOCK COMPAN
Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

Figure 2: Trend in foreign tourist arrivals (FY05-10)


6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY05 FY06 FY07 FY08 -3% FY09 23% 14% 14% 13% 25% 20% 15% 10% 4% 5% 0% -5% FY10

Figure 3: Airport passenger traffic


140 120 100 80 60 40 20 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 % Grow th (RHS) 40 30 20 10 0 -10

Tourist arriv als (mm)


Source: Crisil

% YoY grow th

Air passenger traffic (mm)


Source: Airport authority of India

Occupancies levels have already started to improve


Occupancy rates for IHCL too have increased to 70-75% over 2HFY10 compared to the lows of 50-60% in FY09/1HfY10. However, these levels are still below the peaks of 2007/08

Occupancies across key markets have improved by 5-20% y-o-y over the last quarter (Jan-10-Mar-10). South Mumbai and Bangalore markets were the key out performers witnessing 15-20% increase in occupancy rates (ORs) y-o-y and both of the markets are now operating at ~75% levels. At this level of demand, we do expect some amount of pricing power to come back to hoteliers leading to a 5-7% ARR growth in 2H FY11.
Figure 5: Occupancy trends (% ch YoY)
20 15.2 72 58 73 59 10 67 0 -10 -20 -16.2 -5.5 -7.2 -12.8 -1.5 -7.2 -1.9 -1.4 10.8 5.3 3.8

Figure 4: Occupancy across various markets (%)


90 80 70 60 50 40 South Mumbai North Mumbai Jan-09-Mar-09 Jan-10-Mar-10 Delhi Bangalore Chennai 54 81 64 69 84 72 64

78

75

79

Jan-08-Mar-08
Source: Crisil

Source: Crisil

and supply issues are getting resolved


A positive spillover of the credit crisis of 2008/09 is the tempering of supply line and reduction in industry competition. Room supply line has moderated as a number of new entrants/developers pushed back their expansion plans during the downturn of 2008. Weak room demand coupled with tight credit conditions forced the developers to put their development plans on hold.

Ap r-0 M 9 ay -0 9 Ju n09 Ju l-0 9 Au g09 Se p09 Oc t-0 9 No v-0 9 De c-0 9 Ja n10 Fe b10 M ar -1 0

This document is being provided for the exclusive use of NGUYEN VO at VIET CAPITAL SEC JOINT STOCK COMPAN
Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

Table 2: Room demand and supply in Mumbai/NCR


(nos) Mumbai Room availability (nos) Room demand (nos) Occupancy rate (%) NCR Room availability (nos) Room demand (nos) Occupancy rate (%)
Source: Crisil

2007-08 6,682 4,845 73 7,162 5,085 71

2008-09 6,829 4,265 62 7,071 4,879 69

2009-10 7,529 4,467 59 7,787 5,172 66

2010-11P 8,491 5,060 60 8,669 5,948 69

2011-12P 9,300 5,924 64 9,611 6,959 72

Demand growth of 13-14% is expected to outdo the inventory growth of 10%

Crisil now expects a total room addition of 7000 rooms, or a 10% CAGR over 201012. This is significantly below its initial target estimates and in line with expected demand growth. Further we note that luxury segment is not a significant contributor to the total upcoming supply. We do not see supply growth to be a big problem if tourist arrivals growth holds at 13-14% CAGR for the next two years (in line with historic trend). In addition to 14% growth in tourist arrivals, there is likely to be some growth coming in from domestic economic sectors and sporting events. This should lead to a proportional growth in room demand and should be enough to offset the room inventory growth.
Figure 6: Pan-India - Demand supply trends
50,000 40,000 30,000 20,000 10,000 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 80 60 40 20 First class 27%

Figure 7: Breakdown of upcoming supply


Lux ury 20%
Luxury segment accounts for only 20% of the upcoming supply.

Ex tended stay 3% Mid market 31%


Source: Industry reports

Room av ailability (nos) Occupancy rate % (RHS)


Source: Crisil

Room demand (nos)

Budget 19%

Of late, however, there seems to be a renewal in interest by international chains such as Mariott and Hyatt to build out their India business. However, we note that new entrants will likely take 3-4 years to scale up, leaving incumbents such as IHCL in a strong position in the medium term.

This should support ARR growth starting 2H FY11


ARRs across key markets such as Mumbai, Delhi and Bangalore have started to increase marginally Q/Q. 1H, being seasonally weak, is unlikely to see a big jump either. However, starting in 2H (seasonally stronger) we expect ARRs to start increasing in the 5-7% range across markets driven by higher occupancies, improving economic trends aided by sporting events (commonwealth), and corporate conferences.

This document is being provided for the exclusive use of NGUYEN VO at VIET CAPITAL SEC JOINT STOCK COMPAN
Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

Figure 8: ARR growth trends (% ch Y/Y)


10%
ARRs across key markets like Mumbai, Delhi and Bangalore have started to increase marginally Q/Q

0% -10% -20% -30% -40% Nov -08 Jan-09 Mar-09 May -09 Jul-09 Sep-09 Nov -09 Jan-10 Mar-10

Source: Crisil, J.P. Morgan

Volume growth trajectory is healthy


IH has a consistent history of delivering volume growth with the number of rooms under the group increasing to c12,250 from 7,900 rooms over FY04-10, implying a CAGR of 8%. We expect the total number of rooms to grow by 15% over the next two years. Note that the inventory addition over the next two years is primarily coming from management contracts.
Figure 9: Indian Hotels: Room inventory growth (no of rooms)
We expect IH to register a 15% CAGR growth in inventory over FY10-12E primarily driven by management contracts (MC)

17,000 15,000 13,000 11,000 9,000 7,000 5,000 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E 7,942 8,219 9,182 9,931 10,464 FY04-10 CAGR of 8% 11,546 12,243 14,015

16,335

FY12E

Source: Company reports and J.P. Morgan estimates.

This document is being provided for the exclusive use of NGUYEN VO at VIET CAPITAL SEC JOINT STOCK COMPAN
Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

Table 3: Expansion plans for FY11


No of rooms IHCL Taj Falaknuma Palace, Hyderabad Vivanta by Taj, Yeshwantpur Taj Group Taj Cape Town Vivanta by Taj Begumpet Fishcove Expansion, Chennai Vivanta by Taj, Corrg Ginger Hotels - 5 cities Management contract Vivants by Taj, Bekal Vivanta by Taj, Srinagar Gateway Hotel, OMR, Chennai Total
Source: Company reports

FY11 60 331 172 175 64 62 463 72 89 159 1647

Management contracts to dominate the future expansion plans IHCL currently has approximately ~1,900 rooms under management contract which account for 15% of its total inventory. Going ahead, management contracts will dominate the majority of expansion thereby limiting the capital requirement and improving reported margins. We expect the share of MTs to increase to ~20% by the end of FY12. We note that IHCL has almost 3,800 rooms planned under its domestic and international business to come via the management contract route.
Figure 10: Rooms under management contracts over FY08-12E
4,000
Management contracts as a % total inventory is expected to increase to ~20% by FY12 end vs. 15% currently

23% 19% 14% 14% 15%

25% 20% 15% 10% 5% 0%

3,000 2,000 1,000 FY2008 FY2009 FY2010

FY2011 As % of total inv entory

FY2012

Rooms under MT
Source: Company, J.P. Morgan estimates

This document is being provided for the exclusive use of NGUYEN VO at VIET CAPITAL SEC JOINT STOCK COMPAN
Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

Earnings and revenue growth should start improving from domestic business
We expect IHCL to register revenue a CAGR of 22% over FY10-12, primarily driven by volume growth of 15% pa and 5-7% ARR increase over the next two years. Further, increasing share of MTs in the total room inventory is likely to aid margins. Correspondingly, we expect an EBITDA CAGR of 36% over FY10-12E.
Figure 11: Standalone revenues (Rs MM) and YoY growth (%)
25,000 20,000 15,000 10,000 5,000 FY08 FY09 FY10 FY11E FY12E -8% -9% 15% 17% 27% 30% 20% 10% 0% -10% -20%

Figure 12: Standalone EBITDA (Rs MM) and YoY growth (%)
8,000 6,000 4,000 2,000 FY08 -29% FY09 9% -22% FY10 FY11E FY12E 19% 55% 60% 40% 20% 0% -20% -40%

Standalone rev enues


Source: Company reports and J.P. Morgan estimates.

YoY grow th

Stanalone EBITDA
Source: Company reports and J.P. Morgan estimates.

YoY grow th

International portfolio turnaround can surprise positively


Our US lodging analyst and our global equity team have a constructive view on the US economy and the US lodging sector. Our US lodging analyst, Joseph Greff, believes that we are in the early stages of a multi-year lodging upturn, where occupancies are increasing nicely given strength in corporate volumes and initial signs of rate increases in certain markets and segments.
Figure 13: Improving economic growth should help room demand recover in US

Source: Smith travel research and JPMorgan Estimates

This document is being provided for the exclusive use of NGUYEN VO at VIET CAPITAL SEC JOINT STOCK COMPAN
Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

Management commentary coming out of key US hoteliers (Marriott/ Hyatt) also seems to be getting positive In its recent quarterly results, Marriott management commented that it is seeing rate increases in select markets such as New York, Boston and Washington. Hyatt in its 10Q filing commented that while the strength, pace and durability of a global economic recovery remains uncertain and hotels face rate pressure, we have seen an improvement in demand as evidenced by increased occupancy levels and recent stabilization of rates in certain markets.
Figure 14: US room demand trends are improving

Source: Smith travel research

IHCLs growth in the international business has primarily been acquisition led especially in times when valuations were reasonably high and most of the acquisitions were primarily debt funded. A high-cost renovation of a marquee property (Pierre) coupled with leverage has adversely impacted companys international business over the last few years. While the overseas operations account for ~20% of revenue, IHCL has consistently been making losses here last 2-3 years. However this should incrementally start changing. The international business especially US should start moving towards a cash flow neutral situation driven by:
International portfolio has been a drag on companys performance over the last two years. Incrementally, this should start to reverse primarily on the back of Pierre re-opening

Table 4: International subsidiary performance


Rs MM, year end March International subsidiary revenue as % of total revenues EBITDA
Source: Company reports

FY11E 5,066 16% 1,013

FY12E 6,353 20% 1,525

(a) Encouraging early trends from Pierre re opening in New York post its US$100MM renovation. The property was soft launched in September and has received a fairly encouraging response to its launch. The property has already reached 70% occupancy level and is commanding ARRs in the range of US$500-550. Management expects the ARRs to improve meaningfully going ahead given the asset is still in promotional mode and ARRs for similar properties in the vicinity are in the range of US$650-US-750.

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Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

Figure 15: Pierre performance post its renovation


560
Pierre launch has received encouraging initial response with occupancy rates increasing to 71% in May

540 520 500 480 460 Jan Feb Mar ARR (US$MM)
Source: Company reports

64% 35% 494 499 37% 509 43% 529

71%

80% 60%

549

40% 20% 0%

Apr Occupancy (%)

May

US analyst forecasts for Marriott and specifically Ritz Carlton imply improvement in operating metrics. This implies positive operating trends for IHCL's US portfolio

Table 5: Marriott and Ritz Carlton (comparable hotel) operating stats show improvement in FY11/12
% Ritz Carlton Occupancy Ritz Carlton ADR Y/Y change Ritz Carlton RevPar Y/Y change Total Marriott US portfolio Rev Par change
Source: Company reports and J.P. Morgan estimates.

2009 60.4% -9.5% -21.9% -12.5%

2010E 64.6% -1.0% 6.0% 7.1%

2011E 66.9% 4.5% 8.4% 7.6%

(b) Improvement in occupancies/ARRs across its international portfolio as global recovery gains pace. IHCL has a sizable exposure to overseas markets with international operations accounting for ~20% of the total revenues. Operating performance of key international properties such as St James Court (London), Taj Boston and San Francisco should start to improve driven by recovery in global economy.
Table 6: Key international properties
Property The Pierre, New York Taj Boston Campton Place, San Fransico Blue Sydney St. James, London
Source: Company presentation

Acquisition Cost (US$MM) 100 (cost of renovation) 170 60 27 NA

No of Rooms 201 273 110 100 342

(c ) Restructuring of international debt: IHCL recently has restructured its international debt profile by raising Rs7B of unsecured debt in India at an average yield of ~9.5% per annum (2% coupon). This has been used to pay back the high cost debt of overseas acquisitions (US properties and Samsara) thereby reducing the interest burden there.

10

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Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

Investment risks
Debt levels to remain elevated
IHCLs current net debt stands at Rs37B. We expect the debt levels to remain at these elevated levels over the next two years despite expected improvement in operational performance. This is because the cash flows generated would just about meet companys capex and interest commitments thereby leaving limited room to de leverage the balance sheet. IHCLs gearing level increased to 1.5x in FY10 from 0.9x in FY07 and is expected to remain high in the medium term. Most of the increase in debt over 2006-10 has been on account of its acquisitions in the international business. While the overseas operations currently account for ~20% of revenue, they have been making losses for the last 2-3 years. Company recently raised Rs7B of low-cost coupon debt at an average yield of 9.5% per annum (2% coupon). Amount raised has been used to pay back the high cost debt of overseas acquisitions (US properties and Samsara) thereby reducing the average cost of debt. Average cost of debt is expected to come down to around 7% (from 910%).
Table 7: Indian Hotels: Debt profile
Net debt at 1.5x is high. However, liquidity of Rs7.6B on hand enough to fund capex and meet commitments Gross Debt Non Committed Liability Net Debt Share holders funds Net Debt/Equity
Source: Company

Rs MM 44,610 7,590 37,020 25,451 1.5x

Figure 16: Indian Hotels: Gearing levels to remain high


1.6
IHCL's gearing levels has increased to 1.5x in FY10 from 0.9x in FY07 primarily on account of its debt funded international acquisitions

1.4

1.4 1.2 1.0 0.8 0.6 0.4 0.2 FY06 0.6

1.3

1.5

1.4

0.9

FY07

FY08

FY09

FY10

FY11E

Source: Company reports and J.P. Morgan estimates.

11

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Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

Sea Rock Hotel is primarily an off-balance-sheet debt


IHC had acquired an 85% interest in sea rock hotel, a marquee property in Mumbai via its subsidiary ELEL in 2009 for Rs6.8B. However, the acquisition as well as construction of this property would have further inflated the already high debt levels (FY10 net D/E 1.5x). In view of this, the company shifted the Sea Rock property to a separate SPV wherein it holds 19%, whereas the remainder is held by other Tata group entities. IHCL has an option to buy the asset back after three years (on completion) at a certain valuation. This implies a one-shot debt increase for the company in FY14/15 on buy back of this property. Assuming the company buys back the property at principal investment and interest, the company will need to shell out approximately Rs12B. This restructuring, in our view, understates the headline gearing and pushes the interest liability for the next 2-3 years. Overall plan for the Sea Rock investment is to integrate this property with an existing hotel (Taj Lands end) to make one of the biggest convention centers in India. Management expects the work on the same to begin over the next six months.
Table 8: Sea Rock - Total acquisition cost on completion
Potential acquisition of Sea Rock (likely 2013/14) would require additional capital of Rs11-12B on our estimates Initial cost of acquisition Number of the rooms Estimated construction capex Interest expense (for 3 years) Total cost Outflow for IHCL to the completed property
Source: Company reports and J.P. Morgan estimates.

Rs B 6.8 350 5.2 2.5 15 11.8

Orient Express Hotels is a meaningful MTM loss still not recognized


IHCL currently holds 7.85% in Orient express (OEH US) via its 100%-owned subsidiary Samsara Properties Ltd. At current share price of OEH (US$9.0), the value of IHs holding works out to US$65MM. This is against the total acquisition cost of US$250MM+ (all debt funded). IHs aggregate holding has also come down to ~7.9% from 11.5% last year on account dilution, post the rights issue. While there has been significant erosion in the value of IH's investments, company is still holding on to the investment and has not yet taken any hit on the balance sheet (considered as long term investment).
Figure 17: OEH share price performance (US$)
Value of IH's holding in OEH at current market price works out to ~US$65MM. This is against the total acquisition cost of US$250MM

70 60 50 40 30 20 10 0

IH picked up 11.5% stake for US$248MM

Current hoding stands at 7.9% on account of dilution post the rights issues.

IH acquired additional shares for ~US$10M.

6/1/2007

8/1/2007

2/1/2008

4/1/2008

6/1/2008

8/1/2008

2/1/2009

4/1/2009

10/1/2007

12/1/2007

10/1/2008

Source: Bloomberg

12

12/1/2008

6/1/2009

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Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

OEHs recent 1Q results were bad largely as a result of one-time, weather/floodrelated events in Peru and Madeira. With that said, our US team is upbeat on a seasonally strong 2Q and 3Q outlook. Forward booking trends continue to improve, and this should help occupancy levels and room revenues to increase in 2010. JPMs 2010 PT on OEH is US$14 (current share price US$9), based on ~15.6x 2011EV/ EBITDA. A higher multiple is given to justify a high asset quality.

13

This document is being provided for the exclusive use of NGUYEN VO at VIET CAPITAL SEC JOINT STOCK COMPAN
Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com Asia Pacific Equity Research 07 June 2010

Valuation and share price analysis


Price target of Rs130; Overweight
We initiate on Indian Hotels with Mar-11 PT of Rs130, based on 13.5x EV/EBITDA for the consolidated, which is in line with its historical average. We believe improving fundamental trends can well propel the stock to above historical averages (as in the last cycle). Key risks to target price are 1) a slowdown in economic growth, 2) longer-thanexpected turnaround period for international business, 3) any more terrorist attacks in India.
Figure 18: Indian Hotels: Price to Book
4.0 3.0 2.0 1.0 0.0

Figure 19: Indian Hotels: EV/EBITDA


22.0

Average - 1.8x

18.0 14.0 10.0 6.0

Average - 13.5x

05

06

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03

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04

06

07

07

Oc t-

08

Oc t-

Oc t-

Oc t-

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Oc t-

Oc t-

Oc t-

Oc t-

Oc t-

08 Oc t-

P/B
Source: Company reports, Bloomberg and J.P. Morgan estimates.

Av g

EV/EBITDA

Av g

stdev +1

Source: Company reports, Bloomberg and J.P. Morgan estimates

Figure 20: Long term EV/EBITDA charts of key US hotels- Most have traded at 12-14x long term average. Our target 13.5x EV/EBITDA multiple is inline with long term averages of key large hoteliers

Source: Company reports and J.P. Morgan estimates.

14

Oc tsdev -1

Oc t-

Oc t-

Oc t-

09

01

02

09

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Looking at global peer group we find that most of them are trading at 16.6x /12.5x CY10/11 EV/EBITDA. A higher multiple for next year is mostly on account of a view that current EBITDA levels are depressed but may quickly gather steam as growth recovers. Indian Hotels which has a high growth domestic business and a recovering international portfolio is trading at a 10-15% discount to global peer group.
Table 9: Peer valuations
Name Indian Peers Indian Hotels EIH Hotel Leela Global Peers Marriott International-Cl A Starwood Hotels & Resorts Hyatt Hotels Corp - Cl A Wyndham Worldwide Corp Shangri-La Asia Ltd Genting Singapore Plc Mandarin Oriental Intl Ltd Average
Source: Bloomberg, J.P. Morgan estimates. Price as of Jun-06, 2010

MCap (US$MM) 1,561 1,012 396 12,419 8,914 1,748 4,195 5,180 8,954 995

FY11E 37 26 19 33 52 NM 14 28 47 29 33.7

Price/Earnings FY12E 16 19 20 24 32 NM 12 20 25 19 22.0

FY11E 2.6 3.1 1.3 7.4 4.5 1.4 1.5 1.2 2.8 1.4 2.9

Price/Book FY12E 2.3 2.8 1.4 5.9 4.1 1.4 1.3 1.1 2.5 1.3 2.5

FY11E 16.3 15.5 21.4 14.4 14.4 16.5 7.0 15.9 21.4 26.5 16.6

EV/EBITDA FY12E 10.9 12.5 15.8 11.2 12.0 13.0 5.9 13.1 14.2 17.1 12.5

Looking at EV/IC and Return on invested capital (ROIC) trends, we find that Indian Hotels is better placed than some of its peer group. Further given heavy capex nature of Indian Hotels (asset ownership model), the return ratios are relatively under stated vs. peer group. Also IHCL has carries a mark-to-market loss on OEH investment (EV discounts it but still considered part of invested capital). Adjusting for this, Indian Hotels relative valuation becomes even more attractive.
Figure 21: EV/IC and ROIC analysis

2.0 1.5 1.0 0.5 0.0% 2.0% 4.0% 6.0% 8.0% Hy att Mandarin Shangri-La Genting SGP HOT IHCL WYN

EIH Mariott

10.0%

12.0%

14.0%

Source: Company reports and J.P. Morgan estimates. Dashed line refers to adjusted IC of Indian hotels (adjusting for MTM loss on OEH)

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Share price correlation with USD/INR is striking


IHCLs share price seems to be remarkably correlated with USD/INR trends (R = 0.7, R^2 = 0.5). This correlation has held true for both long and short periods of time i.e. 15 years to 3 months, as highlighted in the charts below. The correlation holds despite long-term positive fundamentals. This then can help provide entry/exit opportunities into the stock. J.P. Morgan expects the rupee to appreciate against the US$ by 7% by year end; this should be positive for IHCL stock.
Figure 22: One-year correlation of IH vs USD INR Figure 23: Six-month correlation IH vs USD/INR

Source: Bloomberg; **White line is Indian hotels share price

Source: Bloomberg; **White line is Indian hotels share price

Figure 24: 5-year correlation IH vs USD INR

Figure 25: 15-year correlation IH vs USD INR

Source: Bloomberg; **White line is Indian hotels share price

Source: Bloomberg; **White line is Indian hotels share price

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Figure 26: Indian Hotels - Correlation of share price vs. currency change (monthly change)
40% 20% 0% -20% -40% -8% -6% -4% -2% 0% 2% 4% 6% 8%

y = -3.2x + 0.0

% ch in currency
Source: Bloomberg

Linear (% ch in currency )

Rationalizing the above behavior we think that on a fundamental basis the impact of FX changes on IHCL should be mixed. An appreciating currency typically caps ARR performance as costs to inbound visitors increase on a US$ basis. However, on the positive side an appreciating currency also coincides with improving economic growth (leading to higher inflows) and also helps reduce interest outflow on the foreign denominated debt.

Key catalysts going ahead


Key share price catalysts for the company include over the next 12 months, in our view are: a) Positive Q/Q growth in reported revenues/EBITDA in domestic business (standalone business) driven by improving ARR and occupancy trends. Any upward ARR negotiations in 2H for corporate travel will likely be a positive. b) Any commentary (positive/negative) from the management on the US portfolio performance (especially Pierre performance). IHCL does not report consolidated numbers on quarterly basis; therefore it is difficult to ascertain the performance of the international portfolio (held via subsidiaries). c) Rupee appreciation, given the strong correlation of the share price with the USD/INR FX rate as highlighted above. J.P. Morgan expects the rupee to appreciate by 7% by CY10 end.

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Financial statements and analysis


Table 10: Indian Hotels: Consolidated income statement
Rs MM, year-end March FY09 Revenue growth in FY11/12 should be aided by volume growth of 15% in standalone business and opening of Pierre hotel in New York Standalone Revenues International business Revenues Others (others subs, ginger, JV) Sales (room banquets, other services) Y/Y Growth Standalone EBITDA International EBITDA Others EBITDA (other subs, ginger, JV) EBITDA EBITDA Margin (%) Depreciation EBIT EBIT Margin (%) Interest Other income PBT Tax expense Tax rate (%) PAT pre exceptional, MI, Associates PAT Margin (%) Profit Attributable to Minority interest Share of profit of associates PAT pre exceptional Exceptional Items PAT post exceptional Y/Y Growth Shares EPS Net Margin
Source: Company reports and J.P. Morgan estimates.

FY10 14,732 4,098 6,380 25,210 -6% 3,803 (150) 328 3,981 15.8% (2,185) 1,796 7% (3,061) 322 (943) (847) -90% (1,790) -7% (139) (46) (1,975) 606 (1,369) -1197% 723 (1.9) -5%

FY11E 17,272 5,066 9,554 31,891 27% 4,543 1,013 1,039 6,595 20.7% (2,365) 4,230 13% (1,952) 354 2,632 (790) 30% 1,843 6% (153) 229 1,919 1,919 -240% 723 2.7 6%

FY12E 21,861 6,353 11,681 39,894 25% 7,032 1,525 1,248 9,805 24.6% (2,602) 7,203 18% (1,716) 390 5,877 (1,763) 30% 4,114 10% (168) 391 4,336 4,336 126% 723 6.0 11%

16,195 4,589 6,077 26,861 -8% 4,886 (500) 735 5,121 19.1% (1,885) 3,232 12% (2,305) 705 1,633 (1,558) 95% 75 0% (158) 255 172 (48) 125 -96% 723 0.2 0%

Margins are expected to improve meaningfully given growth in domestic business and improvement in international business Depreciation charges will likely increase because of opening of new property in US

Clarity on future tax benefits still low as recently govt. of India has announced investment-linked tax benefit for hotel chains

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Table 11: Indian Hotels: Consolidated balance sheet


Rs MM, year-end March Balance sheet Room additions will mean growing FA base MTM loss on OEH not recognized in investments Fixed Assets Goodwill on consolidation Investments Inventories Sundry debtors Cash and bank balance Loans and Advances Current Asset, Loans and Advances Liabilities Provisions Current Liabilities & Provisions Net Current Assets Total Assets Secured Loans Unsecured loans Loan Funds Shareholders Funds Total Liabilities ROEs are expected to improve on the back of higher profitability and expansions Net Debt BPS ROE ROCE Net D/E
Source: Company reports and J.P. Morgan estimates.

FY09 48,156 3,612 24,077 641 1,778 2,528 8,865 13,932 5,556 2,015 7,570 3,833 83,956 26,596 19,873 46,469 32,979 83,956 43,940 46 0% 3% 1.3

FY10 48,035 3,304 12,866 602 1,422 7,590 4,165 14,317 5,042 2,015 7,057 (329) 73,215 34,546 10,061 44,607 25,451 73,215 37,017 35 -5% 2% 1.5

FY11E 50,808 3,304 12,866 761 2,551 2,560 4,165 10,037 6,378 2,015 8,393 (377) 70,910 31,046 10,061 41,107 26,647 70,910 38,547 37 7% 5% 1.4

FY12E 55,053 3,304 12,866 952 3,192 2,624 4,165 10,933 7,979 2,015 9,994 (1,146) 74,451 31,046 10,061 41,107 30,187 74,451 38,483 42 15% 8% 1.3

Rs7.6B of FY10 cash balance enough to take care of all ongoing commitments and new capex

Debt levels likely to remain fairly constant over the next two years. Operational cash flows are largely used to fund ongoing capex and interest commitments

Table 12: Indian Hotels: Cash flows


Cash Flow EBITDA Taxes Minority and associates Other income Change in Working Capital Cash Flow from operations Net Capex Change in investments/Goodwill Free Cash Flow Interest Paid Dividend Change in Debt Others Change in net cash
Source: Company reports and J.P. Morgan estimates.

FY09 5,121 (1,558) 97 705 (4,142) 223 (10,380) (9,299) (19,456) (2,305) (1,016) 11,801 2,519 (48)

FY10 3,981 (847) (185) 322 4,163 7,434 (2,064) 11,518 16,888 (3,061) (723) (1,862) (6,161) 5,061

FY11E 6,595 (790) 76 354 48 6,283 (5,138) 1,145 (1,952) (723) (3,500) (0) (5,030)

FY12E 9,805 (1,763) 223 390 769 9,423 (6,847) 2,576 (1,716) (796) (0) 65

FCF post interest unlikely to reduce debt materially

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Company brief
Indian Hotels Company Ltd (IHCL) is the largest hotel operator in South Asia with an inventory of ~12,200 rooms (103 hotels) across India and international markets (USA, Australia, Maldives, Malaysia, UK, Sri Lanka). IHCL has a presence across luxury, premium, mid-market and value segments of the market via its various brands i.e. Taj, Vivanta, Gateway and Ginger. IHCL also operates Taj Sats Air Catering Ltd which is involved in airline catering service in South Asia.
Figure 27: Indian Hotels: Room inventory breakdown
Associate/JV 28% IHCL 31% International 11% Gatew ay Subsidiaries 26%
Source: Company, J.P. Morgan

Figure 28: Taj Group: Room inventory breakdown by category


Ginger 15% Lux ury 24%

MTs 15%

15% Premium 35%


Source: Company, J.P. Morgan

Figure 29: Indian Hotels: Shareholding pattern


Others 23% Insurance companies 5% Body corporate 5% Financial Institutions/Mutual Funds 23%
Source: NSE

Promoter/Promoter group 30%

FII 14%

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Indian Hotels: Summary of financials


Profit and Loss statement Rs in millions, year-end March Revenues % change Y/Y EBITDA % change Y/Y EBITDA Margin (%) EBIT % change Y/Y EBIT Margin (%) Net financial income Earnings before tax % change Y/Y Tax as % of EBT Net Income (adjusted) % change Y/Y Shares Outstanding EPS (adjusted) % change Y/Y Balance sheet FY09 Cash and cash equivalents Accounts receivable Inventories Loans and advances Current assets Total Investments Net fixed assets Liabilities Provisions Total current liabilities Total assets Total debt Other liabilities Total liabilities Shareholders' equity BVPS 2,528 1,778 641 8,865 13,932 24,077 48,156 5,556 2,015 7,570 83,956 46,469 4,508 50,977 32,979 45.6 FY10 7,590 1,422 602 4,165 14,317 12,866 48,035 5,042 2,015 7,057 73,215 44,607 3,157 47,764 25,451 35.2 FY11E 2,560 2,551 761 4,165 10,037 12,866 50,808 6,378 2,015 8,393 70,910 41,107 3,157 44,264 26,647 36.8 FY12E 2,624 3,192 952 4,165 10,933 12,866 55,053 7,979 2,015 9,994 74,451 41,107 3,157 44,264 30,187 41.7 FY09 26,861 -8% 5,121 -43% 19% 3,232 -55% 12% (1,599) 1,633 -73% (1,558) 95% 125 -96% 723 0.2 -97% FY10 25,210 -6% 3,981 -22% 16% 1,796 -44% 7% (2,739) (943) -158% (847) -90% (1,369) -1197% 723 -1.9 -1197% FY11E 31,891 27% 6,595 66% 21% 4,230 136% 13% (1,597) 2,632 -379% (790) 30% 1,919 -240% 723 2.7 -240% FY12E 39,894 25% 9,805 49% 25% 7,203 70% 18% (1,326) 5,877 123% (1,763) 30% 4,336 126% 723 6.0 126% EBIT Depreciation & amortisation Change in working capital Taxes Others Cash flow from operations Capex Change in investments Interest Free cash flow Equity raised/ (repaid) Debt raised/ (repaid) Dividends paid Beginning cash Ending cash Cash flow statement FY09 3,232 1,888 (4,142) (1,558) 802 223 (10,380) (9,299) (2,305) (21,760) 8,500 11,801 (1,016) 2,576 2,528 FY10 1,796 2,185 4,163 (847) 137 7,434 (2,064) 11,518 (3,061) 13,827 (1,862) (723) 2,528 7,590 FY11E 4,230 2,365 48 (790) 430 6,283 (5,138) (1,952) (807) (3,500) (723) 7,590 2,560 FY12E 7,203 2,602 769 (1,763) 612 9,423 (6,847) (1,716) 860 (796) 2,560 2,624

Ratio Analysis %, year-end Mar EBITDA margin EBIT margin Net profit margin FY09 19% 12% 0% FY10 16% 7% -5% FY11E 21% 13% 6% FY12E 25% 18% 11%

Sales growth Net profit growth

-8% -96%

-6% -1197%

27% -240%

25% 126%

Interest coverage (x) Net debt to total capital Net debt to equity Sales/assets Assets/equity ROE ROCE

3.9 52% 133% 0.3 2.5 0% 3%

1.7 51% 145% 0.3 2.9 -5% 2%

2.0 54% 145% 0.4 2.7 7% 5%

3.8 52% 127% 0.5 2.5 15% 8%

Source: Company reports and J.P. Morgan estimates.

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Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures
Client of the Firm: Indian Hotels is or was in the past 12 months a client of JPMSI.

Indian Hotels (IHTL.BO) Price Chart

270

225

180 Price(Rs) 135

90

45

0 Oct 06 Jul 07 Apr 08 Jan 09 Oct 09

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Saurabh Kumar: Ascendas India Trust (AINT.SI), DLF Limited (DLF.BO), Housing Development and Infrastructure Ltd. (HDIL) (HDIL.BO), Indiabulls Real Estate (INRL.BO), Ishaan Real Estate Plc (ISH.L), Puravankara Projects Ltd (PPRO.BO), Sobha Developers (SOBH.BO), Unitech Ltd (UNTE.BO)

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J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2010 Overweight (buy) 45% 48% 42% 70% Neutral (hold) 42% 46% 49% 58% Underweight (sell) 13% 32% 10% 48%

JPM Global Equity Research Coverage IB clients* JPMSI Equity Research Coverage IB clients*

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

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Copyright 2010 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.

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This document is being provided for the exclusive use of NGUYEN VO at VIET CAPITAL SEC JOINT STOCK COMPAN
Saurabh Kumar (91-22) 6157-3590 saurabh.s.kumar@jpmorgan.com

Asia Pacific Equity Research 07 June 2010

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