Indian Hotels (Q3 FY12)

CMP Rs63, Target Rs69, Upside 8.8%

• Indian Hotels reported a tepid ~7% yoy growth in what is traditionally strong quarter for the industry; company attributed sub par Q3 revenue growth to an inability to push up room rates in the busy H2 due to combination of room supply as well as subdued domestic economy
• Margin declined 275bps yoy due to across the board rise in costs; staff expense up 53bps yoy includes some pre operating expense related to new hotel openings; cushioned by lower interest expense yoy, reported PAT remains flat
• Performance of Pierre property in NY remains the key focus area and mgmt has guided for a time line of 16-17 months to bridge the ~US$200 gap between Pierre and its comparable properties; barring ‘Blue’ in Sydney (+1% yoy) other foreign properties have posted decent 7-12% yoy rise in ARR for 9M FY12
• No fresh debt to be raised for capex and the company to invest only to the extent its cash flow can support; Taj Dwarka and Vivanta at Guwahati are the only 2 key owned properties requiring funding; Taj Dwarka capex seen at Rs3bn of which Rs1.5bn already incurred while rest required over next 18 months; inventory expansion through mgmt contract and Ginger hotels to continue
• We had earlier assumed Pierre losses to be significantly trimmed by FY13 but post Q3 results we now raise the loss estimate for the property in both FY12/13; domestic operations too have shown a margin dip of 69bps over 9M FY12 which leads us to cut our FY12/13 consolidated OPM and earnings estimates and downgrade the stock to Market Performer with revised 9-mth TP of Rs69 (earlier Rs88)