Indian Hotel JPM

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Asia Pacific Equity Research07 June 2010

Indian Hotels

Initiation

OverweightIHTL.BO, IH IN

Turning around: Initiate with Overweight, PT of Rs130Price: Rs97.10

Price Target: Rs130.00

India

Hotels & Lodging

Saurabh KumarAC

(91-22) 6157-3590

[email protected]

Gunjan Prithyani

(91-22) 6157-3593

[email protected]

J.P. Morgan India Private Limited

See page 22 for analyst certification and important disc losures, including non-US analyst d isclosures.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 mhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making th

investment decision.

Company data

52-wk range (Rs) 118.35 - 55.2Mkt cap. (Rs MM) 70,249Mkt cap. (US$ MM) 1,561Avg. daily volume (MM) 1.9Avg daily value (US$ MM) 4.1Shares O/S (MM) 723Index (BSE Sensex) 16,781Exchange rate 47.1

Source: Bloomberg

• Initiate with OW, Mar-11 PT of Rs130: Indian Hotels (IHCL), is thelargest play on the hospitality sector in India, with an inventory of close to12,200 rooms. Following a muted FY09/10, which saw the company reportthe biggest loss in its history, we now expect a turnaround in operatingperformance in FY11 driven by improving occupancy/ARR trends indomestic operations and stabilization of its international portfolio post there-opening of its marquee property Pierre (US). Our PT of Rs130 is basedon 13.5x FY12E EV/EBITDA, in line with the historical average. Afundamental improvement in business trends and high EBITDA/earningsgrowth will support valuations, in our view.

• Turnaround story is playing out nicely as the occupancy rates for thedomestic business picked up to 70-76% in 2H FY10. An improvingeconomy (FY11E GDP of 8.3%) and strong volume growth should drivestandalone revenue/EBITDA growth of 22%/36% over FY10E-12E. Thecompany’s international portfolio should also now start stabilizing. Recentlaunch of Pierre (New York property) received an encouraging initialresponse (occupancy at 71% in May). Further our US lodging analysts(Joseph Greff) believes that we are in the early stages of a multi-yearlodging 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: IHCL’s share price correlation with USD/INR isstriking and seems to hold for both short (three-month) to long-term (15-year) periods. Our estimate of 7% rupee appreciation by end CY10 is a

positive. Further quarterly improvement in revenue/EBITDA trends in thedomestic business and incremental data points on US portfolio performanceare likely to be the key share price drivers in the near term.

• Key risks to our view: Leverage concerns still persist: IHCL’s net D/E at1.5x is fairly elevated and will likely remain so as the company is still in aninvestment mode in the domestic business. However a Rs7.6B cash balancemakes it well funded to meet capex/interest commitments. The main fundinggap 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-than-expected turnaround period for the international business; 3) any negativeincidents (e.g. terrorist attack, swine flue).

Bloom berg: IH IN; Reuters: IHTL.BO

Rs MM, year-end March FY09 FY10 FY11E FY12E

Sales 26,861 25,210 31,891 39,894EBITDA 5,121 3,981 6,595 9,805Net profit 125 (1,369) 1,919 4,337P/E (x) 562.8 -51.3 36.6 16.2EV/EBITDA 20.9 26.9 16.3 10.9ROE (%) 0% -5% 7% 15%Net debt/Equity 133% 145% 145% 127%P/B 2.1 2.8 2.6 2.3

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

is document is being provided for the exclusive use of NGUYEN VO at VIET CAPITAL SEC JOINTTOCK COMPAN



2


Saurabh Kumar(91-22) [email protected]

Company Description Valuation and EPS sensitivity metrics EBITDA EPS

impact (%) impact (%)

Volume growth assumptionImpact of each 1% point change 1% 3%

ARR growth assumption

Impact of each 1% point change 3% 6%

Source: J.P. Morgan estimates

Price target and valuation analysis

Indian Hotels Company Ltd (IHCL) is the largest hoteloperator in South Asia with an inventory of ~12,200rooms (103 hotels) across India and internationalmarkets (USA, Australia, Maldives, Malaysia, UK, SriLanka). IHCL has presence across luxury, premium,mid-market and value segments of the market via itsvarious brands i.e. Taj, Vivanta, Gateway and Ginger.

NAV breakdown by asset class

We are setting a Mar-11 PT of Rs130 based on 13.5x FY12E EV/EBITDAfor the consolidated which is inline with its historical average. We believe

improving fundamental trends can well propel the stock to above historicalaverages.

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

Source: Company reports

EPS: J.P. Morgan vs consensus

Rs/share J. P. Morgan Consensus

FY11E 2.7 2.0

FY12E 6.0 4.0Source: Bloomberg

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

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

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 valuation s

Name MCap Price/Earning s (x) Price/Boo k (x) EV/EBITDA (x)(US$MM) FY11E FY12E FY11E FY12E FY11E FY12E

Indian PeersIndian Hotels 1,561 37 16 2.6 2.3 16.3 10.9EIH 1,012 26 19 3.1 2.8 15.5 12.5Hotel Leela 396 19 20 1.3 1.4 21.4 15.8Global PeersMarriott International-Cl A 12,419 33 24 7.4 5.9 14.4 11.2Starwood Hotels & Resorts 8,914 52 32 4.5 4.1 14.4 12.0Hyatt Hotels Corp - Cl A 1,748 NM NM 1.4 1.4 16.5 13.0Wyndham Worldwide Corp 4,195 14 12 1.5 1.3 7.0 5.9Shangri-La Asia Ltd 5,180 28 20 1.2 1.1 15.9 13.1Genting Singapore Plc 8,954 47 25 2.8 2.5 21.4 14.2Mandarin Oriental Intl Ltd 995 29 19 1.4 1.3 26.5 17.1

Aver age 33.7 22.0 2.9 2.5 16.6

Source: Bloomberg, J.P. Morgan estimates. Price as of Jun-7, 2010




3



Investment Positives

Expect room demand to rebound sharply on the back ofimproving economic growth

We believe IHCL’s 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.

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 FY10was 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 (%)

0

2

4

6

8

10

12

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11EFY12E

-

5,000

10,000

15,000

20,000

25,000

30,000

Room Demand Real GDP % ch YoY

Source: Bloomberg, Crisil and J.P. Morgan estimates.

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




4



Figure 2: Trend in foreign to urist arri vals (FY05-10)

23%

14% 14% 13%

-3%

4%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

FY05 FY06 FY07 FY08 FY09 FY10

-5%

0%

5%

10%

15%

20%

25%

Tourist arrivals (mm) % YoY growth

Source: Crisil

Figure 3: Airport passenger traffic

0

20

40

60

80

100120

140

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

-10

0

10

20

30

40

Air passenger traffic (mm) % Growth (RHS)

Source: Airport authority of India

Occupancies levels have already started to improve…

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 (OR’s) 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 4: Occupancy across various markets (%)

78 81 84 7973

54

64 6458 59

7569 72 72

67

40

50

60

70

8090

South

Mumbai

North

Mumbai

Delhi Bangalore Chennai

Jan-08-Mar-08 Jan-09-Mar-09 Jan-10-Mar-10

Source: Crisil

Figure 5: Occupancy trend s (% ch YoY)

-16.2-12.8

-5.5 -7.2

-1.5

-7.2

-1.9 -1.4

15.210.8

5.33.8

-20

-10

0

10

20

A p r - 0 9

M a y - 0

9 J u n - 0

9 J u l - 0

9

A u g - 0

9

S e p - 0

9 O c

t - 0 9

N o v - 0

9

D e c - 0

9

J a n - 1

0

F e b - 1

0

M a r - 1 0

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.

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




5



Table 2: Room demand and supply in Mumbai/NCR

(nos ) 2007-08 2008-09 2009-10 2010-11P 2011-12PMumbai

Room availability (nos) 6,682 6,829 7,529 8,491 9,300Room demand (nos) 4,845 4,265 4,467 5,060 5,924Occupancy rate (%) 73 62 59 60 64

NCR

Room availability (nos) 7,162 7,071 7,787 8,669 9,611Room demand (nos) 5,085 4,879 5,172 5,948 6,959Occupancy rate (%) 71 69 66 69 72

Source: Crisil

Crisil now expects a total room addition of 7000 rooms, or a 10% CAGR over 2010-

12. 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 suppl y trends

-

10,000

20,000

30,000

40,000

50,000

F Y 0 0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

-

2040

60

80

Room availability (nos) Room demand (nos)

Occupancy rate % (RHS)

Source: Crisil

Figure 7: Breakdown of upcoming supply

Extended

stay

3%

Budget

19%

Luxury

20%

Mid market

31%

First class

27%

Source: Industry reports

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.

Demand growth of 13-14% is

expected to outdo the inventory

growth of 10%

Luxury segment

accounts for only 20%

of the upcoming supply




6



Figure 8: ARR growth t rends (% ch Y/Y)

-40%

-30%

-20%

-10%

0%

10%

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 healthyIH 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)

7,942 8,2199,182

9,93110,464

11,54612,243

14,015

16,335

5,000

7,000

9,00011,000

13,000

15,000

17,000

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

FY04-10 CAGR of 8%


ARRs across key markets likeMumbai, Delhi and Bangalore

have started to increase

marginally Q/Q

We expect IH to register a 15%

CAGR growth in inventory over

FY10-12E primarily driven by

management contracts (MC)




7



Table 3: Expansio n plans f or FY11

No of rooms FY11

IHCLTaj Falaknuma Palace, Hyderabad 60Vivanta by Taj, Yeshwantpur 331

Taj GroupTaj Cape Town 172Vivanta by Taj Begumpet 175Fishcove Expansion, Chennai 64Vivanta by Taj, Corrg 62Ginger Hotels - 5 cities 463

Management con tractVivants by Taj, Bekal 72Vivanta by Taj, Srinagar 89Gateway Hotel, OMR, Chennai 159Total 1647


Management contracts to dominate the future expansion plansIHCL 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 m anagement contract s over FY08-12E

14% 14% 15%19%

23%

-

1,000

2,000

3,000

4,000

FY2008 FY2009 FY2010 FY2011 FY2012

0%

5%

10%

15%

20%

25%

Rooms under MT As % of total inventory

Source: Company, J.P. Morgan estimates

Management contracts as a %

total inventory is expected toincrease to ~20% by FY12 end

vs. 15% currently




8



Earnings and revenue growth should start improving fromdomestic 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 growt h (%)

15%

-8% -9%

17%

27%

-

5,000

10,000

15,000

20,000

25,000

FY08 FY09 FY10 FY11E FY12E

-20%

-10%

0%

10%

20%

30%

Standalone revenues YoY growth


Figure 12: Standalone EBITDA (Rs MM) and YoY gro wth (%)

9%

-29% -22%

19%

55%

-

2,000

4,000

6,000

8,000

FY08 FY09 FY10 FY11E FY12E

-40%

-20%

0%

20%

40%

60%

Stanalone EBITDA YoY growth


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 certainmarkets and segments.

Figure 13: Improving economic growth shoul d help room demand recover in US

Source: Smith travel research and JPMorgan Estimates




9



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 rateincreases 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

IHCL’s 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 company’s 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:

Table 4: International subsidiary performance

Rs MM, year end March FY11E FY12EInternational subsidiary revenue 5,066 6,353as % of total revenues 16% 20%EBITDA 1,013 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.

International portfolio has been

a drag on company’s

performance over the last two

years. Incrementally, this should

start to reverse primarily on the

back of Pierre re-opening




10



Figure 15: Pierre performance post its renovation

494 499509 529

54935% 37%43%

64% 71%

460

480

500

520

540

560

Jan Feb Mar Apr May

0%

20%

40%

60%

80%

ARR (US$MM) Occupancy (%)


Table 5: Marriott and Ritz Carlton (comparable hotel) operating stats show improvement in

FY11/12

% 2009 2010E 2011E

Ritz Carlton Occupancy 60.4% 64.6% 66.9%Ritz Carlton ADR Y/Y change -9.5% -1.0% 4.5%Ritz Carlton RevPar Y/Y change -21.9% 6.0% 8.4%Total Marriott US portfolio Rev Par change -12.5% 7.1% 7.6%


(b) Improvement in occupancies/ARRs across its international portfolio asglobal 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 Acquisition Cost (US$MM) No of RoomsThe Pierre, New York 100 (cost of renovation) 201Taj Boston 170 273Campton Place, San Fransico 60 110Blue Sydney 27 100St. James, London NA 342

Source: Company presentation

(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 theinterest burden there.

Pierre launch has receivedencouraging initial response

with occupancy rates

increasing to 71% in May

US analyst forecasts for Marriott

and specifically Ritz Carltonimply improvement in operating

metrics. This implies positive

operating trends for IHCL's US

portfolio




11



Investment risks

Debt levels to remain elevated…

IHCL’s 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 company’s capex and interest commitments thereby leaving limited room to de

leverage the balance sheet.

IHCL’s 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 9-

10%).

Table 7: Indian Hotels: Debt profil e

Rs MMGross Debt 44,610Non Committed Liability 7,590Net Debt 37,020

Share holders funds 25,451Net Debt/Equity 1.5x

Source: Company

Figure 16: Indian Hotels: Gearing levels to r emain high

0.6

0.9

1.41.3

1.5 1.4

-0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

FY06 FY07 FY08 FY09 FY10 FY11E


Net debt at 1.5x is high.

However, liquidity of Rs7.6B on

hand enough to fund capex and

meet commitments

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




12



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 asconstruction 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 existinghotel (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

Rs BInitial cost of acquisition 6.8Number of the rooms 350Estimated construction capex 5.2Interest expense (for 3 years) 2.5Total cost 15Outflow for IHCL to the completed property 11.8


Orient Express Hotels is a meaningful MTM loss still notrecognized

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 IH’s holding works out to US$65MM. This is against the total acquisition

cost of US$250MM+ (all debt funded). IH’s 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 pric e perform ance (US$)

0

10

20

30

40

5060

70

6 / 1 / 2 0 0 7

8 / 1 / 2 0 0 7

1 0 / 1 / 2 0 0 7

1 2 / 1 / 2 0 0 7

2 / 1 / 2 0 0 8

4 / 1 / 2 0 0 8

6 / 1 / 2 0 0 8

8 / 1 / 2 0 0 8

1 0 / 1 / 2 0 0 8

1 2 / 1 / 2 0 0 8

2 / 1 / 2 0 0 9

4 / 1 / 2 0 0 9

6 / 1 / 2 0 0 9

IH picked up 11.5% stake for

US$248MM

IH acquired additional shares

for ~US$10M.

Current hoding stands at

7.9% on account of dilutionpost the rights issues.

Source: Bloomberg

Potential acquisition of Sea

Rock (likely 2013/14) would

require additional capital of

Rs11-12B on our estimates

Value of IH's holding in OEH at

current market price works outto ~US$65MM. This is against

the total acquisition cost of

US$250MM




13



OEH’s recent 1Q results were bad largely as a result of one-time, weather/flood-

related 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. JPM’s

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.




14



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-than-

expected turnaround period for international business, 3) any more terrorist attacks in

India.

Figure 18: Indian Hotels: Price to Book

0.0

1.0

2.0

3.0

4.0

O c t - 0 1

O c t - 0 2

O c t - 0 3

O c t - 0 4

O c t - 0 5

O c t - 0 6

O c t - 0 7

O c t - 0 8

O c t - 0 9

P/B Avg

Average - 1.8x

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

Figure 19: Indian Hotels: EV/EBITDA

6.0

10.0

14.0

18.0

22.0

O c t - 0 1

O c t - 0 2

O c t - 0 3

O c t - 0 4

O c t - 0 5

O c t - 0 6

O c t - 0 7

O c t - 0 8

O c t - 0 9

EV/EBITDA Avg stdev+1 sdev-1

Average - 13.5x

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

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





15



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 asgrowth 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 valuation s

Name MCap Price/Earnin gs Price/Boo k EV/EBITDA(US$MM) FY11E FY12E FY11E FY12E FY11E FY12E

Indian PeersIndian Hotels 1,561 37 16 2.6 2.3 16.3 10.9EIH 1,012 26 19 3.1 2.8 15.5 12.5Hotel Leela 396 19 20 1.3 1.4 21.4 15.8Global PeersMarriott International-Cl A 12,419 33 24 7.4 5.9 14.4 11.2Starwood Hotels & Resorts 8,914 52 32 4.5 4.1 14.4 12.0Hyatt Hotels Corp - Cl A 1,748 NM NM 1.4 1.4 16.5 13.0Wyndham Worldwide Corp 4,195 14 12 1.5 1.3 7.0 5.9Shangri-La Asia Ltd 5,180 28 20 1.2 1.1 15.9 13.1Genting Singapore Plc 8,954 47 25 2.8 2.5 21.4 14.2Mandarin Oriental Intl Ltd 995 29 19 1.4 1.3 26.5 17.1

Aver age 33.7 22.0 2.9 2.5 16.6

Source: Bloomberg, J.P. Morgan estimates. Price as of Jun-06, 2010

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

Mariott

HOTHyatt

Shangri-La

Genting SGP

WYN

Mandarin

IHCL

EIH

-

0.5

1.0

1.5

2.0

0.0% 2.0% 4.0% 6.0% 8.0% 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)




16



Share price correlation with USD/INR is striking

IHCL’s 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 timei.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 IHCLstock.

Figure 22: One-year correlation of IH vs USD INR

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

Figure 23: Six-month co rrelation IH vs USD/INR


Figure 24: 5-year correlation IH vs USD INR


Figure 25: 15-year correlation IH vs USD INR


.




17



Figure 26: Indian Hotels - Correlation of share price vs. currency change (monthly change)

y = -3.2x + 0.0

-40%

-20%

0%

20%

40%

-8% -6% -4% -2% 0% 2% 4% 6% 8%

% ch in currency Linear (% ch in currency)

Source: Bloomberg

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.




18



Financial statements and analysis

Table 10: Indian Hotels: Consolid ated income statement

Rs MM, year-end March

FY09 FY10 FY11E FY12E

Standalone Revenues 16,195 14,732 17,272 21,861International business Revenues 4,589 4,098 5,066 6,353Others (others subs, ginger, JV) 6,077 6,380 9,554 11,681

Sales (room banquets , other servi ces) 26,861 25,210 31,891 39,894Y/Y Growth -8% -6% 27% 25%

Standalone EBITDA 4,886 3,803 4,543 7,032International EBITDA (500) (150) 1,013 1,525Others EBITDA (other subs, ginger, JV) 735 328 1,039 1,248

EBITDA 5,121 3,981 6,595 9,805EBITDA Margi n (%) 19.1% 15.8% 20.7% 24.6%

Depreciation (1,885) (2,185) (2,365) (2,602)EBIT 3,232 1,796 4,230 7,203EBIT Margi n (%) 12% 7% 13% 18%

Interest (2,305) (3,061) (1,952) (1,716)Other income 705 322 354 390

PBT 1,633 (943) 2,632 5,877

Tax expense (1,558) (847) (790) (1,763)Tax rate (%) 95% -90% 30% 30%

PAT pre excepti onal, MI, Associates 75 (1,790) 1,843 4,114PAT Margin (%) 0% -7% 6% 10%

Profit Attributable to Minority interest (158) (139) (153) (168)Share of profit of associates 255 (46) 229 391

PAT pre excepti onal 172 (1,975) 1,919 4,336

Exceptional Items (48) 606 - -

PAT post excepti onal 125 (1,369) 1,919 4,336Y/Y Growth -96% -1197% -240% 126%Shares 723 723 723 723EPS 0.2 (1.9) 2.7 6.0Net Margin 0% -5% 6% 11%


Margins are expected to improve

meaningfully given growth in

domestic business and

improvement in internationalbusiness

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

Revenue growth in FY11/12

should be aided by volume

growth of 15% in standalone

business and opening of Pierre

hotel in New York




19



Table 11: Indian Hotels: Cons olidated balance sh eetRs MM, year-end March

Balance sheet FY09 FY10 FY11E FY12E

Fixed Assets 48,156 48,035 50,808 55,053

Goodwill on consolidation 3,612 3,304 3,304 3,304Investments 24,077 12,866 12,866 12,866

Inventories 641 602 761 952Sundry debtors 1,778 1,422 2,551 3,192Cash and bank balance 2,528 7,590 2,560 2,624Loans and Advances 8,865 4,165 4,165 4,165Current Asset, Loans and Advan ces 13,932 14,317 10,037 10,933

Liabilities 5,556 5,042 6,378 7,979

Provisions 2,015 2,015 2,015 2,015Current Liabil ities & Provis ions 7,570 7,057 8,393 9,994Net Current Assets 3,833 (329) (377) (1,146)Total Asset s 83,956 73,215 70,910 74,451

Secured Loans 26,596 34,546 31,046 31,046Unsecured loans 19,873 10,061 10,061 10,061Loan Fund s 46,469 44,607 41,107 41,107

Sharehold ers Funds 32,979 25,451 26,647 30,187Total Liabil ities 83,956 73,215 70,910 74,451

Net Debt 43,940 37,017 38,547 38,483BPS 46 35 37 42ROE 0% -5% 7% 15%ROCE 3% 2% 5% 8%Net D/E 1.3 1.5 1.4 1.3


Table 12: Indian Hotels: Cash fl ows

Cash Flow FY09 FY10 FY11E FY12EEBITDA 5,121 3,981 6,595 9,805Taxes (1,558) (847) (790) (1,763)Minority and associates 97 (185) 76 223Other income 705 322 354 390Change in Working Capital (4,142) 4,163 48 769Cash Flow from operati ons 223 7,434 6,283 9,423

Net Capex (10,380) (2,064) (5,138) (6,847)Change in investments/Goodwill (9,299) 11,518 - -Free Cash Flow (19,456) 16,888 1,145 2,576

Interest Paid (2,305) (3,061) (1,952) (1,716)Dividend (1,016) (723) (723) (796)Change in Debt 11,801 (1,862) (3,500) -Others 2,519 (6,161) (0) (0)Change in net cash (48) 5,061 (5,030) 65


Room additions will mean

growing FA base

MTM loss on OEH not

recognized in investments

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

ROEs are expected to improve

on the back of higher

profitability and expansions

FCF post interest unlikely to

reduce debt materially




20



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

IHCL

31%

MTs

15%

Associate/JV

28%

Subsidiaries

26%

Source: Company, J.P. Morgan

Figure 28: Taj Group: Room inventory breakdown by category

Premium

35%

Gateway

15%

Luxury

24%International

11%

Ginger

15%

Source: Company, J.P. Morgan

Figure 29: Indian Hotels: Sharehold ing pattern

FII

14%

Financial

Institutions/Mutual

Funds

23%

Promoter/Promoter

group

30%

Others

23%

Insurance

companies

5%

Body corporate

5%

Source: NSE




21



Indian Hotels: Summary of financials

Profit and Loss statement Cash flow s tatement

Rs in millions, year-end March FY09 FY10 FY11E FY12E FY09 FY10 FY11E FY12E

Revenues 26,861 25,210 31,891 39,894 EBIT 3,232 1,796 4,230 7,203

% change Y/Y -8% -6% 27% 25% Depreciation & amortisation 1,888 2,185 2,365 2,602

Change in working capital (4,142) 4,163 48 769

EBITDA 5,121 3,981 6,595 9,805 Taxes (1,558) (847) (790) (1,763)

% change Y/Y -43% -22% 66% 49% Others 802 137 430 612

EBITDA Margin (%) 19% 16% 21% 25% Cash flow from operations 223 7,434 6,283 9,423

EBIT 3,232 1,796 4,230 7,203 Capex (10,380) (2,064) (5,138) (6,847)

% change Y/Y -55% -44% 136% 70% Change in investments (9,299) 11,518 - -

EBIT Margin (%) 12% 7% 13% 18% Interest (2,305) (3,061) (1,952) (1,716)Net financial income (1,599) (2,739) (1,597) (1,326) Free cash flow (21,760) 13,827 (807) 860

Earnings before tax 1,633 (943) 2,632 5,877

% change Y/Y -73% -158% -379% 123% Equity raised/ (repaid) 8,500 - - -

Tax (1,558) (847) (790) (1,763) Debt raised/ (repaid) 11,801 (1,862) (3,500) -

as % of EBT 95% -90% 30% 30%

Net Income (adjusted) 125 (1,369) 1,919 4,336 Dividends paid (1,016) (723) (723) (796)

% change Y/Y -96% -1197% -240% 126% Beginning cash 2,576 2,528 7,590 2,560

Shares Outstanding 723 723 723 723 Ending cash 2,528 7,590 2,560 2,624

EPS (adjusted) 0.2 -1.9 2.7 6.0

% change Y/Y -97% -1197% -240% 126%

Balance sheet Ratio Analysis

FY09 FY10 FY11E FY12E %, year-end Mar FY09 FY10 FY11E FY12E

Cash and cash equivalents 2,528 7,590 2,560 2,624 EBITDA margin 19% 16% 21% 25%Accounts receivable 1,778 1,422 2,551 3,192 EBIT margin 12% 7% 13% 18%

Inventories 641 602 761 952 Net profit margin 0% -5% 6% 11%

Loans and advances 8,865 4,165 4,165 4,165

Current assets 13,932 14,317 10,037 10,933

Sales growth -8% -6% 27% 25%

Total Investments 24,077 12,866 12,866 12,866 Net profit growth -96% -1197% -240% 126%

Net fixed assets 48,156 48,035 50,808 55,053

Liabilities 5,556 5,042 6,378 7,979

Provisions 2,015 2,015 2,015 2,015

Total current liabilities 7,570 7,057 8,393 9,994 Interest coverage (x) 3.9 1.7 2.0 3.8

Total assets 83,956 73,215 70,910 74,451 Net debt to total capital 52% 51% 54% 52%

Net debt to equity 133% 145% 145% 127%

Total debt 46,469 44,607 41,107 41,107 Sales/assets 0.3 0.3 0.4 0.5

Other liabilities4,508 3,157 3,157 3,157 Assets/equity 2.5 2.9 2.7 2.5

Total liabilities 50,977 47,764 44,264 44,264 ROE 0% -5% 7% 15%

Shareholders' equity 32,979 25,451 26,647 30,187 ROCE 3% 2% 5% 8%

BVPS 45.6 35.2 36.8 41.7





22



Analyst Certification:The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarilyresponsible 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 reportaccurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the researchanalyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by theresearch 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.

0

45

90

135

180

225

270

Price(Rs)

Oct06

Jul07

Apr08

Jan09

Oct09

Indian Hotels (IHTL.BO) Price Chart

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 theaverage total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelvemonths, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)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 analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated researchanalysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSEAll Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’scoverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifyinganalyst(s) coverage universe.

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




23



J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2010

Overweight(buy)

Neutral(hold)

Underweight(sell)

JPM Global Equity Research Coverage 45% 42% 13%IB clients* 48% 46% 32%

JPMSI Equity Research Coverage 42% 49% 10%IB clients* 70% 58% 48%

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

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jurisdiction unless governing law permits otherwise.

“Other Disclosures” last revised March 1, 2010.

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







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Indian Hotel JPM

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