Indian Hotel Industry

- A jab on recovery
Company EIH IHCL “Tell me where I’m going to die, that is, so I don’t go there” - Charlie Munger
Recommendation BUY BUY
Past recessions warranted examining every data point to determine the pace of
97 127
CMP economic recovery. This time the effectiveness of the vaccine roll-out is more
Target Price 125 183 important than the data on near term industrial production. A successful rollout will
bring the much-affected service sector back in focus. It has still not recovered to
THEMATIC REPORT

Upside 30% 43%

anywhere near past levels.
Market Cap (Rs bn) 61 152

ROCE 5 9 Hotels have been one of the most severely affected sectors because of the
pandemic. Marred by heavy fixed, labour intensive operations, prone to high physical
ROE 5 9
interaction and inertia towards bringing the operating cost down has wiped away the
EV/ Sales 4 6 free cash flow (FCF) generated in the last few years. We have structured this report
around answering scenario on things that could go wrong and see if there is hope.
EV/ EBITDA 23 22

EV/Room (Rs mn) * 23 20

Scenarios
36
P/E 39 1. WHAT IF…The demand dynamics have changed permanently
1 Yr Return 23% 27% a. what was the nature of pre-Covid demand?
36% 41% b. what is the recovery playbook seen in other markets?
Promoters
c. what is the air-traffic data suggesting?
Source: SKP Research
*On equity ownership adjusted rooms basis d. can the digital adoption be reversed?
2. WHAT IF…Demand falls below supply growth
3. WHAT IF…Big Average Room Rate (ARR) growth doesn’t materialize at all
4. WHAT IF…Interest rate cycle reverses by the time normalcy return
Pain so far
(in Rs bn) Revenue (H1)
Thus far the recovery playbook is led by domestic leisure and marriages. Drive-to
FY21 FY20 % destinations globally have shown marked recovery, at times at higher ARRs (seen in
EIH 1.0 6.8 -85% Airbnb’s data on page 5). As per our channel check and commentary from various
stakeholders the overall operating performance of hotels can take 18-24 months to
IHCL 4.0 20.3 -80% recover to pre-Covid levels. Hence, we are preferring companies with lower financial
Chalet 1.1 4.8 -77% leverage and with better access to capital. We are initiating coverage on East India
Hotels (EIH) and Indian Hotels Company Ltd (IHCL) with a BUY rating. Key risks to
Lemon Tree 0.9 2.9 -70%
our assumptions are yet another nationwide lockdown and delay in vaccine roll out.

EBITDA (H1) Company wise investment synopsis

FY21 FY20 % East India Hotels (EIH): We like EIH for its Mumbai-Delhi exposure, considering it
EIH (2.4) 0.5 -562% draws over 50% of its revenue from these two markets. We believe Mumbai-Delhi
should be the earliest participant to business travel recovery. Further, high
IHCL (4.2) 3.3 -225%
employee-per-room ratio and high head office costs make EIH ripe candidate to
Chalet (0.1) 1.6 -105% utilize the current opportunity to bring down the operating cost down, given the inertia
Lemon Tree 0.1 0.9 -86% shown by the industry in the past. EIH’s history of maintaining low-financial leverage
Source: SKP Research and high dividend payout ratio is a rarity in the hotels space, although it has been
EBITDA is excluding Other Income
rather slow on room inventory expansion, as compared to the peer set (page 18).

Indian Hotels Company Ltd (IHCL): We like IHCL for its delivery on measurable
goals (especially since 2017). Pre-Covid it was on track to achieve the 800bps
margin expansion. Secondly, it has been aggressively expanding on management
contract model to regain its numero-uno status in India (conceded to Marriott after
January 15, 2021

Starwood merger). Thirdly, it has been able to resolve a few overhanging issues like
acquisition of Sea Rock, regaining lease of Taj Mansingh and restructuring overseas
holding. IHCL is also likely to receive a margin boost on the pre-Covid revenue level
Research Analyst:
Rajiv Bharati from the cut backs effected during the lockdown (page 33).
[email protected]

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 Indian Hotel Industry

WHAT IF…The demand dynamics have changed

permanently
To understand this, we break this into four parts (a) what was the nature of pre-Covid
demand (b) what is the recovery playbook seen in other markets? (c) what is the air-
traffic data suggesting? (d) can the digital adoption be reversed?

1(a) what was the nature of pre-Covid demand?

If we dissect the current inventory of hotels in India, gateway city hotels make for ~60%
of the branded rooms inventory (Exhibit 1). The top 10 cities have at least 3,000 chain-
affiliated hotel rooms. These hotels are based in metro cities and its adjacent regions
(Delhi National Capital Region (NCR), Bengaluru, Mumbai, Chennai, Kolkata,
Hyderabad and Pune). Delhi NCR historically has had the highest number of rooms
supported by diplomatic travel, 1982 Asian Games and 2010 commonwealth games.
Although the upcoming supply is disproportionately skewed towards smaller cities in
2:1 proportion (i.e., two rooms are added in non-metros for every new addition in metro
cities). In terms of market share four cities namely Pune, Ahmedabad, Jaipur and Goa
have grown the fastest taking away market share from top three regions Delhi NCR,
Mumbai Metropolitan Region (MMR) and Bengaluru.
Exhibit 1: Region-wise breakup - Branded rooms Exhibit 2: Most key markets were clocking fairly
healthy occupancies

Hyderabad,
Chennai, 6,965 , 5%
100%
Mumbai,
9,863 , 7% Goa, 6,828 , 77% 77%
13,687 , 10% 80% 73% 69% 72% 70% 68% 71%
5% 67% 64% 66% 65%
60%
Bengaluru, 60%
14,287 , 11% Pune, 6,460 ,
5%
40%
Gurugram,
5,866 , 5% 20%
New Delhi, Jaipur, 5,613 ,
14,730 , 11% 0%
4%
Ahmedabad
Agra

Bengaluru

Gurugram
Chennai

Pune
Goa
New Delhi

Noida

Hyderabad

Jaipur

Kolkata

Mumbai
Kolkata, 3,742 , 3%
Others, Ahmedabad, 3,000 ,
38,815 , 29% 2%
Noida,
Agra, 2,125 , 2%
1,378 , 1% Branded room occupancy (FY19)

Source: Hotelivate, SKP Research

Further the country wide inventory growth over the last decade is led by chains like
Intercontinental Hotels Group, Accor and Lemon Tree replacing Leela, Bharat Hotels
and Royal Orchid on the top 10 list. Presently, international hotel companies have ~50%
of the total chain-affiliated supply in India.
In term of supply, on average most markets have had ~5% supply growth, but
occupancies across the board pre-Covid was at a healthy level. Case in point in Chalet
Hotels, which operated five hotels and one executive apartments in MMR, Bengaluru
and Hyderabad. It had an average occupancy/ARR of 76%/Rs 8,300 respectively in
December 2018-October 2019 period. The standard deviation of 5%/Rs 605 in
occupancy/ARR implied a reasonably stable year-round demand across the three major
business districts.
Further if segregate the hotel occupants as per star-rating of the hotels, business
travellers (domestic + foreign) make for 40-50% of the hotels demand (Exhibit 3).
Foreign travellers (business + tourist) make for 25% of the traffic, at least in 4/5-star
category hotels. Comparatively, Marriott in North America has 95% domestic guests
and leisure make for about a third of the room demand.

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 Indian Hotel Industry

Exhibit 3: Guest composition (All India): Business + Foreign guests contribute over 50% of the demand

100%

80% 4%
5% 5%
9% 4%
7% 27% 16%
60% 8% 16% 20% 29%
26%
17%
17%
40% 12% 9% 8% 27%
6% 8%
17% 13%
20% 36% 37% 35% 39% 11%
18% 31%
22%
14%
0%
5-Star Deluxe 5-Star 4-Star 3-Star 2-Star 1-Star Heritage Others

Airline Crew Business Traveller - Domestic Business Traveller - Foreign

Complimentary Rooms Domestic - Tourist/Leisure FIT Foreign - Tourist/Leisure FIT
Meeting Participants ( < 100 Attendees) Meeting Participants ( > 100 Attendees) Tour Groups - Domestic
Tour Groups - Foreign Others
Source: FHRAI, SKP Research

Guest composition in the top seven cities is very heavily skewed towards business
travellers especially in Mumbai, Bengaluru, Kolkata and Pune. New Delhi and Chennai
are relatively evenly distributed. Under the current pandemic scenario Goa seems to be
the most suitably placed where the foreign tourist demand can be easily replaced by
the domestic travellers who are unable to travel abroad due to overseas travel
restrictions.
Exhibit 4: Guest composition (Key cities): Business + Foreign guests contribute over 60% of the demand

100%

80% 3%
6% 8% 16%
7%
17% 6% 26%
5% 18%
60% 10% 18%
20% 13%
12% 16% 6%
40% 14% 33% 17%
13%
42% 47%
20% 40% 6%
26% 28% 31%
14%
0%
New Delhi Mumbai Bengaluru Chennai Goa Kolkata Pune

Airline Crew Business Traveller - Domestic Business Traveller - Foreign

Complimentary Rooms Domestic - Tourist/Leisure FIT Foreign - Tourist/Leisure FIT
Meeting Participants ( < 100 Attendees) Meeting Participants ( > 100 Attendees) Tour Groups - Domestic
Tour Groups - Foreign Others
Source: FHRAI, SKP Research

Business travel segment has been the linchpin of the hotels industry in India, making
for 40-60% of the overall demand. On the group business side, MICE (Meetings,
Incentives, Conferences and Exhibition) has been a huge demand generator for full-
service hotels. MICE visitation is mainly corporate driven and happens during the
working week.

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 Indian Hotel Industry

On the social travel side, global wedding industry is estimated to be upwards of

US$300bn and India alone witnesses 10-12mn weddings annually.
Exhibit 5: MICE as % of total business

25%
M.I.C.E include
• Global congresses
19%
• Industry conferences 20%
17%
• Company meetings
• Fam trips 15% 14%
• Incentives
• Wedding & related functions
• Corporate off-sites 10%
• Social / cultural events
• Sporting events 5%

0%
Top 10 Cities Tier 2&3 Leisure destinations
Source: Hotelivate, SKP Research

As per our dip-stick channel check, yields per marriage in the Oct-Dec 2020 period has
been at par or better than even last year for hoteliers. In the next section we dwell on
the recovery seen in each of the guest segments.

1(b) what is the recovery playbook seen in other markets?

Hotel recovery in India, like in the rest of the world’s hotel markets began with domestic
leisure travel.
“China continues to be the brightest, big market in the world, the business sort of nearing 2019
levels. Now, remember, one of the reasons for that is that prior outbound business from China
has stayed in China” …. Arne Sorenson, Dec 1, 2020, conference call

Exhibit 6: Expected recovery playbook

Domestic Domestic Foreign Foreign

Marriages MICE
leisure business leisure business

Source: SKP Research

Our channel check suggests, the recent marriage season has been great but the
occupancies receded again post that. Also, large corporate MICE accounts have not
shown any inclination to conduct their regular annual affair anytime soon and visibility
till Sep-2021 is weak.
Our channel checks with hoteliers in India echoed sentiment as observed below
“…So, we’ve got full-service hotels, on beaches and in mountain destinations, which have
performed really quite well, in certainly the last number of months of the pandemic as vacationers
have gone there. But you go to New York for a leisure trip today. I don’t know, you can’t see a
play, maybe the restaurants are going to be closed, the weather’s not great. The destination,
which has got more dependence on international travel, more dependence on air travel, probably
more dependence in normal time and group business, and little to offer in terms of leisure…” ….
Arne Sorenson, Dec 1, 2020, conference call

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 Indian Hotel Industry

In the US, Airbnb historically drew 49% of the demand from cross-border travel vs 20%
for the overall travel industry. Global domestic nights and experiences for Airbnb has
been rather resilient through the pandemic. Further in value terms the gross booking
value before cancellation and alteration have been growing every month owing to higher
daily rates.
Exhibit 7: Monthly booking trends by travel corridor (in Airbnb’s portfolio globally)

54%
50 60%
41% 42% 39% 40%
37% 36% 35%
31%
40 30%

-1%
30 0%

Axis Title
mn units

19.9
17.2
16.2
20 15.0 15.2 -32% -30%
21.4
20.5 19.8
-64% 18.4
12.3
10 18.4 13.9 -60%
14.3 15.6
13.3 13.3
7.0
6.7 5.5 6.9 6.2 5.5
1.7 2.5
0 -90%
Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20

Gross nights and experience booked (Domestic)

Gross nights and experience booked (International)
Gross Booking Value (before cancellations and alterations) YoY Change in Domestic
Source: Airbnb, SKP Research

Similarly, travel trend in <500 miles radius has been very resilient and has both grown
and has been able to absorb higher prices.
Exhibit 8: Monthly booking trends by travel distance (in Airbnb’s portfolio globally)

45 90%
66%
40 72%
53% 50%
4.0
35 38%
42%
38%
54%
36%
32%
30 3.5 36%
3.6 36% 12.0
3.5 3.5
mn units

4.3
25 10.7 4.0 4.2
18%
2%
9.6 4.0
20 8.6 8.5 0%
3.6 14.6
15 3.6 13.7 12.4 10.6 -18%
6.2 -32%
22.3
10 18.6 7.6 -36%
17.3 16.2 16.4 -64%
2.7
5 9.2 2.9 8.3 9.4 9.4 9.3 -54%
3.1 5.2
0 -72%
Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10
Gross nights and experience booked (<50 miles)
Gross nights and experience booked (50-500 miles)
Gross nights and experience booked (>500 miles)
Gross Booking Value (before cancellations and alterations) YoY Change in <500 miles
Source: Airbnb, SKP Research

Further if we look up tourism data for Sri Lanka to see recovery after the Apr 2019
Easter Sunday terror attack. Tourist arrivals recovered to -4.5% by the end of 2019,
despite directives from several nations restricting travel to Sri Lanka. Notably, tourism
form ~14% of total foreign exchange earnings.

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 Indian Hotel Industry

Exhibit 9: Tourist arrival by month in Sri Lanka

2,80,000 Tourism arrivals plunged post the Apr 2019 25%

7.0% 4.7% terror attack on 3 hotels
2.2%
2,10,000 -7.5% -9.5% 0%
passengers

-22.5% -4.5%
-28.3% -27.2%
1,40,000 -25%
-46.9%

70,000 -57.0% -50%

-70.8%
0 -75%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2018 2019 Growth %

Source: Sri Lanka Tourism Development Authority, SKP Research

Hotel room occupancy in Sri Lanka also scaled up by the year end. In terms of top ten
source markets, India (18.6%), UK (10.4%), China (8.8%), Germany (7%) and France
(4.6%) have been consistently featuring in the top traveling nationalities to Sri Lanka.
Exhibit 10: Distribution of occupancy rates by month

100%
78.4% 77.3%
73.4% 73.3%
75% 63.6%
55.9% 53.6% 74.8%
51.1%
46.1%
50%

22.8%
25% 14.9%

0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Occupancy

Source: Sri Lanka Tourism Development Authority, SKP Research

Back home, high number of Covid19 cases in India is acting as a barrier for foreign
tourist arrivals in the short term. A confidence boosting large scale event (foreign
delegation or sporting event) and a successful vaccination drive will help restore the
confidence back.
Amidst the pandemic, owing to the restrictions on foreign travel (inbound and
outbound), it is expected that the Indian vacationers who use to go overseas for foreign
travel will partly fill in for the void created by lack of inbound foreign tourist flow.
Exhibit 11: Foreign tourist arrivals Vs Indians who went overseas for vacations

25 21 22
19
20 18
mn passengers

15 16
13 14
15 11 12
10 11
8 8 9
10 6 7 7
5 6
5

0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Foreign Tourists arrival Indians travelling abroad

Source: DGCA, SKP Research

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 Indian Hotel Industry

India has been creating air bubble arrangement with various countries and has opened
up geographies (recently with Dubai, Maldives and Oman) for tourism purposes. We
believe slowly drive-to destinations will see some traffic shifting to these destinations.
To put numbers into perspective, the domestic mid-market hotels segment is utilized by
30mn families or 130mn individuals or ~10% of the Indian population. And these
individuals will have decent likelihood of getting the vaccine dosage.
Overall leisure demand and travel by road (<500 miles) has historically seen faster
recovery. It also seems that it is only matter of time the international travel will resume
as soon as pandemic gets arrested.

1(c) what is the air-traffic data suggesting?

On an aggregate basis air traffic is recovering well (Exhibit 12). But if we dis-aggregate
the data circuit-wise, it is seen that the trunk loads of Mumbai-Delhi is still far from
recovery while the gap is filled by circuits from metros to small towns. Case in point is
Mumbai-Gorakhpur and Chennai-Madurai. The growth in these circuits could be
explained by part-traffic moving away from railways, owing to stricter health safety
standards observed in air travel.
Exhibit 12: YoY domestic airline passenger growth to cities in India

20 10 12 9
2 2 4 2

-0
-20
%

-60 -53
-58 -57
-66 -63 -63 -66
-71 -72
-76
-81 -78-75 -76
-85-84 -84-82
-100 -89-88
Top 5 Top 6-10 After top 10 All India
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20

Source: DGCA, SKP Research

Ranked as per 2019 traffic flow
Domestic flights resumed operation on May 25 with 33% capacity cap, which was increased to 80% in step in Dec 2020

Exhibit 13: YoY domestic airline passenger traffic recovery in top 10 pairs

Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20

-20

-36

-52
%

-68

-84

-100

Delhi - Mumbai Bengaluru - Delhi Bengaluru - Mumbai Delhi - Kolkata Delhi - Hyderabad

Delhi - Pune Chennai - Delhi Hyderabad - Mumbai Delhi - Patna Dabolim - Mumbai

Source: DGCA, SKP Research

Ranked as per Apr-Dec2019 aggregate traffic data

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 Indian Hotel Industry

An observation made in an STR (Smith Travel Research) points to a similar

phenomenon in the US
“Previously, STR was able to explain roughly 60% of hotel rooms sold in the U.S. as
coming from air travel. That relationship has completely collapsed, and today, we are
only able to explain … one in five rooms sold as being connected to (air travel). The
smaller ratio implied that that a lot of people are driving to their destination.”
Further an observation by STR builds on the above comment
“Transport Security Administration checkpoint counts increased sharply with more than
6 million passengers during both the week before and of Thanksgiving. However, that
increased air travel volume did not translate to more hotel rooms sold as weekly
demand (13.2 million) and occupancy fell to their lowest levels since late May. This
would indicate that a bulk of travellers opted to stay with family during the holiday.”
The other reason for slow recovery in air travel is the difficulty in recovering money from
credit shells post cancellation.
Implying the immediate recovery in air travel may not be highly correlated with the hotel
occupancies, until the domestic business travel reboots. Further as was seen in the
Airbnb data in Exhibit 7 and 8, drive-to destinations are holding up pretty well on
occupancy and ARR, which will not be captured by air traffic data.

1(d) Can the digital adoption be reversed

The current health crisis has fast tracked the digital adoption for the user community
and has brought about some irreversible changes. Success seen by virtual meetings,
massive deals (e.g., Airbnb IPO) getting closed virtually, permanent work-from-home
(WFH) and work-from-anywhere (WHA) being offered to employees will have a
significant impact on occupancies of business hotels, if the trend continues. A classic
example of a prior such adoption which continued even after the event is the use of
digital wallets during demonetization. UPI (Unified Payment Interface) transactions
which took the baton from digital wallets witnesses its volume and value growth 13.6x
and 19x respectively in FY18-20.
The hybrid work model: We are of the opinion that this forced intervention will
definitely take away some meetings which were asking to be disrupted (AGMs,
Seminars, IPO meetings). But there are occasions when physical attendance is
necessary whether for team building, motivation, clarity, accountability reasons,
learning on the job, getting instant feedback especially during brainstorming and getting
nonverbal cues, and these will continue to be done face-to-face, may be with lesser
frequency.
Curtailment of travel and entertainment budgets are one of the ways for companies to
manage the reduced revenue scenario. But restoration in corporate profitability,
particularly led by revenue pickup, will inspire the companies to roll-back the travel
related cut-backs introduced during the start of the health crisis.
Further, a spin-off from WFH-WFA options is opening up of another segment which is
a combination of leisure and business. Going forward a leisure trip may involve a day
or two of business and vice versa.

SKP Securities Ltd www.skpsecurities.com 8

 Indian Hotel Industry

WHAT IF…Big supply hits the market by the time

demand recovers
In India, hotel construction usually takes anywhere between 4-5 years from planning
phase to launch. As per survey done by Hotelivate in FY19, the branded room supply
in India was expected to grow by 50,170 rooms by FY24. Even if we assume this
proposed supply will actually materialize on time, in 10 of the largest 13 cities, upcoming
supply is lesser than the demand growth observed over the past 5 years.
Exhibit 14: Supply
Sr. No. Cities Supply Occupancy Demand Proposed Supply 5-year Demand CAGR >
FY19 FY19 FY19 Supply addition FY19 - 24E demand Supply CAGR
by FY24 CAGR CAGR
FY14-19
Labels A B C = A*B D
1 Agra 2,125 67% 1,424 582 5% 13% Yes
2 Ahmedabad 3,000 64% 1,917 2006 11% 6% No
3 Bengaluru 14,287 66% 9,429 4620 6% 10% Yes
4 Chennai 9,863 65% 6,411 393 1% 10% Yes
5 New Delhi 14,730 73% 10,679 805 1% 7% Yes
6 Gurugram 5,866 69% 4,036 1808 6% 6% Yes
7 Noida 1,378 60% 827 981 11% 5% No
8 Goa 6,828 72% 4,903 2068 5% 9% Yes
9 Hyderabad 6,965 70% 4,896 728 2% 11% Yes
10 Jaipur 5,613 68% 3,811 2601 8% 9% Yes
11 Kolkata 3,742 71% 2,649 1724 8% 11% Yes
12 Mumbai 13,687 77% 10,553 4816 6% 4% No
13 Pune 6,460 77% 4,981 796 2% 5% Yes
14 Others 38,815 26,242 11%
Source: Hotelivate, SKP Research

Exhibit 15: Hotel segments

Hotels Star Rating Description

Typically refers to the absolute top tier hotels. In India, these would generally be
Luxury 5-star, deluxe and luxury
classified as five-star deluxe hotels
These are hotels which are more moderately positioned and priced than the top tier
hotels. Hotels in this category would normally have multiple dinning and
Upper-Upscale 5-star, smaller room size
recreational facilities with large and opulent public areas. In India, these would
generally be classified as five-star Hotels
These hotels are full-service hotels, typically with fewer public areas and facilities
Upscale 4-star and possibly smaller room sizes, than upper upscale hotels. In India, these would
generally be classified as four-star hotels
These are usually three-star hotels with distinctly moderate room sizes, organized
Upper Midscale / Midscale 3-4star
and pricing. Hotels in the category may have restricted services and facilities
These are typically two-star hotels providing functional accommodations and
Economy / Budget 1-3 star
limited services, while being focused on price consciousness.
Source: Samhi Hotels RHP, SKP Research

In Mumbai, upcoming supply is more skewed towards upper-midscale, midscale and

economy segment. The top two segments luxury-upper-upscale and upper-upscale
have relatively lower proposed supply. Ahmedabad is reverse of this with bulk of
incremental supply being proposed in luxury-upper-upscale and upper-upscale, while
the upper-midscale and below segment has nearly no upcoming supply.
Supply in Jaipur and Bengaluru is more skewed towards higher end segment while the
supply on the budget side is comparatively lower.

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 Indian Hotel Industry

In terms of markets which have proposed inventory growth equally spread across
upscale and budget segment are Delhi, Chennai, Pune and Hyderabad.
Overall, proposed supply paints a favourable situation for 5-star operators in Mumbai,
Delhi, Chennai, Pune and Hyderabad while budget segment operator should have an
easier run in Ahmedabad, Jaipur and Bengaluru.
Exhibit 16: Market share by room count has moved in favour of midscale from upper-upscale

100% 7% 7% 13% 16% 22% 21% 23%

15% 17% 24%
80% 17% 18%
22% 18% 19% 20% 20% 19%
60% 19% 17%
20% 20% 20% 20%
40%
56% 58% 51% 49%
20% 39% 39% 38% 36%
0%
FY01 FY02 FY08 FY09 FY15 FY16 FY17 FY18
Luxury Upper Upscale Upscale Upper-Midscale Midscale-Economy
Source: Horwath, SKP Research
Extending it further, we tested the indicated proposed supply at the time of survey and
that actually materialized from the two instances of the past. It is observed that actual
inventory is usually 45% of the proposed inventory (Exhibit17). Now if we adjust the
supply with the historical trend the demand-supply gap extends further. Additionally,
some projects may not see light of the day due to Covid related financial constraint seen
by the sector. Implying if the demand recovers, the runway for the upcycle to continue
is longer.
Exhibit 17: Gap between proposed inventory implies longer up cycle
Case 1 Case 2

Proposed Actual Active Was actual < Proposed Active Was actual <
Actual as % of Actual supply Actual as %
City supply supply development active supply development active
proposed (FY10–15) of proposed
(FY07–12) (FY07–12) of supply^ development (FY10–15) of supply^ development

E = If D<C, J = If I<H,
Label A B C D=B/A F G H I=G/H
then Yes then Yes

Agra 764 403 57% 53% Yes 510 -146 41% -29% Yes

Ahmedabad 2,230 1,456 60% 65% 2,339 1,256 69% 54% Yes

Bengaluru 12,882 5,299 61% 41% Yes 9,819 4,565 65% 46% Yes

Chennai 6,213 2,462 68% 40% Yes 5,995 3,299 72% 55% Yes

Delhi (NCR) 19,423 7,016 57% 36% Yes 20,021 8,309 75% 42% Yes

Goa 3,058 1,435 58% 47% Yes 1,736 1,415 41% 82%

Hyderabad 10,619 2,929 47% 28% Yes 5,302 1,952 63% 37% Yes

Jaipur 4,012 1,666 56% 42% Yes 2,664 2,051 77% 77%

Kolkata 3,644 433 67% 12% Yes 3,481 723 51% 21% Yes

Mumbai 11,578 4,650 49% 40% Yes 7,477 3,145 60% 42% Yes

Pune 8,072 4,895 77% 61% Yes 5,196 3,487 67% 67%

Others 17,909 13,384 58% 75% 23,427 9,245 65% 39% Yes

Total 101,971 46,028 58% 45% Yes 89,449 39,382 67% 44% Yes

Source: Hotelivate, SKP Research

^as % of proposed supply. Active development of supply is projected supply for which work has started

A sharp shortfall in actual inventory launched against planned construction implies supply-side constraints may extend further than expected,
helping the up cycle to last longer. Actual supply is even lower than active development of supply.

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 Indian Hotel Industry

WHAT IF…Big ARR growth does not materialize at all

Although occupancies in FY19 did reach near the highs seen in FY03-08 upcycle
(Exhibit 18), ARR were about 25%/55% off the previous peak in Rs/US$ terms. We do
not foresee countrywide average ARRs inching back to $200 a night, which saw rates
becoming 3x in 5 years (FY03-FY08).
Exhibit 18: Occupancy and ARR Exhibit 19: Occupancy and ARR growth

80% 240 45% 45%

60% 180 30% 30%

15% 15%
40% 120
0% 0%
20% 60
-15% -15%

0% 0 -30% -30%
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19

FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
ARR ($) Occupancy Occupancy growth ARR growth (Rs)

Source: Hotelivate, SKP Research

We believe the reasons for the apparent lack of ARR growth is due to
a. the near-complete price transparency that online travel agents (OTAs)
bring. In the 1990s and mid-2000s, a hotel could change its rates without
a competitor finding out until a day or even a week later. Today, decreases
in rates are immediately picked up and then broadcast via rate-scraping
programs for all competitors to see, prompting them to act accordingly.

b. stiff competition from now politically stable Sri Lanka, Nepal and Thailand.
All of these destinations are now well connected from most Indian metro
cities. Moreover, these are equally economical and the food is very
likeable to the Indian palate.

There has been fear of ever-growing clout of OTAs, especially on the budget segment.
It is pertinent to touch upon the source of booking for some of the guest categories.
Business travel is usually done via the Global Distribution System (GDS) and other
corporate travel management platforms. While, OTAs have traditionally been stronger
in the leisure space and less strong in the business transient space. Third is the direct
channel, which comes through hotel’s website, loyalty programs or guests dialling-in.
“I think, it is less about OTA versus a brand or OTA versus GDS, for example than it is
about the mix of business and the hotels. And when it’s the leisure travel or
fundamentally doing drive-to vacations that is disproportionately important to the
volume of the hotels today, you’re going to see that the OTA has come with them. It’s
not so much that there is a share shift within the segments that is clearly pronounced
at this point in time.” …. Arne Sorenson, Dec 1, 2020, conference call

SKP Securities Ltd www.skpsecurities.com 11

 Indian Hotel Industry

In terms of cost to the company, OTAs charge about 10-15% of the ARR to 5 -star
chains and 15-22% to budget chains. A like to like cost for members coming via the
loyalty members is ~3-4%, which explains the push towards such programs globally.
Over half of the Marriott’s business pre-pandemic was from the loyalty members.
Further we highlight that there are distinct strategies at work in business district and
leisure destinations. Leisure destinations have adopted a rate strategy, allowing slight
fluctuations in occupancies while taking constant price hikes. Contrary to this is the
volume strategy adopted by city hotels, focussing on increasing occupancies even at
times by sacrificing ARRs.
Exhibit 20: Rate strategy - Leisure hotels* Exhibit 21: Volume strategy - City hotelsⴕ

17,500 75% 75%

17,500

14,000 72% 72%

14,000

10,500 69% 10,500 69%

7,000 66% 7,000 66%

3,500 63% 3,500 63%

0 60% 0 60%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
ARR RevPAR Occupancy ARR RevPAR Occupancy

Source: Hotelivate, SKP Research, *Sample size of 60 hotels, ⴕSample size of 20 hotels

It is extremely difficult to say if city hotels will go back to ARR hiking trajectory at all at
the cost of sacrificing occupancy. The industry waited for it in 2016-19 only to be dented
by external events (demonetization, GST rollout, IL&FS, Covid19) shaking confidence
of hoteliers to take bold price hikes, like they did in the past.
But this issue of lack of ARR led revenue growth is partly negated by the cost cuts
introduced during the pandemic, discussed below.

Cost (OPEX & CAPEX)

A look at a segmental revenue and margins should help understand the profitability of
hotels. Understandably room revenue is the highest yielding revenue segment with
relatively low manpower requirement and heat, light, power and water as the main cost
items.
Revenue Streams Flowthrough

Room Revenue 70-80%

F&B Revenue 50%

Management Fees 70%

Memberships, Spa, Saloons 55-60%

SKP Securities Ltd www.skpsecurities.com 12

 Indian Hotel Industry

Exhibit 22: Revenue breakup Exhibit 23: Segmental gross marginⴕ

100% 93%
Food & 81%
Beverages, 80%
26% 57%
60% 49% 49%
Banquet & 40% 33%
Conferences Minor
, 14% Operated*, 20%
3% 0%

Telephone &
Rooms

Conferences

Rental & Other

Beverages

Minor operated
Banquet &
Food &

Other

Income
Rooms, Rental &
54% Other
Income, 3%

Source: SKP Research

*Minor operated departments include laundry, gift shop, business center, news stand, sport, health club, garage, parking and so forth
ⴕOverall gross margin is in 65-67% range

Reduction in operating expenditure: Hotels in India hotels have historically displayed

massive inertia in bringing down cost and the current pandemic has forced their hands
to relook at some of these costs. Presented below is the cost structure of hotels (Exhibit
24 & 25).
Exhibit 24: Departmental expenses (variable cost) Exhibit 25: Cost breakup (fixed + variable)

Food & Othersⴕ,

Beverages, Banquet & 29%
52% Conferences, Employee,
14% Telephone & 36%
Others, 3%
Minor
Operated*, Rent, 3%
1% Pow
Rental & er & F&B
Rooms, 29%
Other Repairs, 6% Fuel, consumed,
Income, 2% 10% 16%

Source: FHRAI, SKP Research

*Minor operated departments include laundry, gift shop, business center, news stand, sport, health club, garage, parking and so forth
ⴕOthers include commission on sales, rates & taxes, professional fee, airport levy expenses and miscellaneous expenses

It is observed that owing to the pandemic most listed hotel companies were able to
reduce the employee cost by 20-40% and all other expenses (excl. F&B which is a
variable expense) by ~50% on an absolute basis in H1FY21. On the higher side full
service five-star players have employee per room at 2 (e.g., EIH). Further, measures
like pay cuts, mandatory leave encashments, sending employees on furlough (in UK)
have help bring down the cost temporarily and the industry hopes to permanently keep
some of these savings.
“we expect total corporate G&A costs in 2021 could be around 20% lower than our
original 2020 guidance…... we’ve been able to reduce breakeven profitability rates at
our managed properties by three to five percentage points of occupancy….” …. Marriott
Q3CY20 conference call

SKP Securities Ltd www.skpsecurities.com 13

 Indian Hotel Industry

Back of the envelop calculation based on Exhibit 22-25 implies a 5-star hotel without
corporate overheads should be able to breakeven at 42-45% of the pre-Covid RevPAR
(Revenue Per Available Room), including corporate overheads. IHCL and EIH
management did indicate that their operating hotels have achieved breakeven in early
Q3FY21.
Some temporary allowances by some governments allowed more breathing space to
the hoteliers. E.g., Under the Coronavirus Job Retention Scheme in UK a hotel can
claim 80% of an employee’s usual salary for hours not worked, up to a maximum of
£2,500 per month. This scheme is now extended till 31 March 2021.
Exhibit 26: Employee per room Exhibit 27: Aggregate hotel sector performance
(H1FY21 vs H1FY20)

36,010
2.5 48,000

22,480

22,080
2.0 2.0

16,450
2.0 1.8

13,530
32,000
1.6

8,810

8,320

8,130
1.5

5,200
4,930
1.4

-15,520
-7,640
1.5 16,000
1.1 Rs mn

50
1.0 0

44,560
0.5 -16,000

0.0 -32,000
Five-star deluxe Four-star Two-star Heritage Revenue Other costs EBITDA PBT

H1FY20 H1FY21

Source: FHRAI, ICRA, SKP Research

Further in a recent development, Government of Maharashtra granted industry status

to the hospitality sector. This would come with incentives such as reduction in the unit
pricing of many utility payments and duties to the state which were till now being
charged at commercial tariff rates.
Government of Delhi issued an order dated November 3, 2020 notifying the termination
of the process of granting approvals to standalone restaurants in the capital.
On the flip side, luxury hotels have also stated short term increase in staff per guest as
below
“We need, in fact, more staff (per guest) to welcome the clients because the ceremony
of the welcoming is reinforced. We need more to clean the room because with COVID,
before we needed 45 minutes to clean the room; now we need one hour and 15 minutes.
We need more staff to clean more often. Every 30 minutes, we need to clean all the
public areas, etc.”
Other initiatives: Menus of all kind are replaced with QR codes which the guest can
scan and view the details on their smartphone. Some hotels also talked about making
the complementary consumables (toothpaste, toothbrush, combs, slippers) available
only on request. Keyless check-in help save the cost of magnetic strip key cards. The
buffet spread has been rationalized
Reduction in capital expenditure: Similar has been the case on the capex front where
hotels in India are still constructed in traditional time and cost consuming ways while
globally utilization of technology has helped to bring down both. E.g., using
prefabricated steel framing system instead of wood frame structures allows rough-in
crew to begin work earlier. Technologies such as aluminium formwork, tunnel formwork,
prefabricated buildings, building information modelling, among others are newer

SKP Securities Ltd www.skpsecurities.com 14

 Indian Hotel Industry

adoption in hotel construction to bring down the cost. Marriott’s AC Nomad hotel, New
York which was constructed in 90 days using offsite construction in a popular example
of deploying these new technologies.
As per HVS the cost of construction a hotel by format varies as shown in Exhibit 28. It
is visible that the lack of standardization impacts a lot of parameters later on, case in
point is the ARR expectation to recover the cost, the expectation of the buyer and seller
in a M&A transaction as both the parties are hinged to a different cost structure
(replacement vs construction cost).
Exhibit 28: Construction cost inches up several notches in FY10–14

11.4
48 12
42.5

36 9

23.2
in Rs. mn

22.3
24 6
20 17.8 4.4
3.9 15.9
13.9 14 2.9
9.9 4.3 9.8 12.4 2.5
12 7.8 3
8.2 8.8 6
2.8 4.6 4.5 5.6 5.2
3.1 3.5
2.8 1.4 1.8 2.8 1.6 1.7
1.1
0 0
Luxury Upper Upscale Upscale Upper Midscale Midscale Budget Economy

Minimum (FY10-14) Maximum (FY10-14) Weigted Average (FY10-14) Average Cost (FY16) Max/Min Ratio

Source: HVS, SKP Research

WHAT IF… Interest rate cycle reverses by the time

normalcy return
Typical to most cyclical sectors, hotels industry has moved in tandem with the
contraction and expansion of demand-supply gap. Historically demand has remained
strong throughout and the influx of supply (planned during the heydays) leads to
contraction of the demand-supply gap and the cycle reverses.
The correction this time has been different from what we have previously seen and so
has been the recovery. A statement from AQR’s macro wrap-up explains it succinctly
“The 2020 recession stands out as very different from others in recent memory. Each
of the past few recessions featured excesses in the financial system followed by the
unwinding of those excesses. The recessions were often preceded by rises in oil prices
and small upticks in consumer prices which triggered tighter monetary policy from the
Fed. The recoveries from these recessions were slow, but the periods of expansion
grew longer each time. Policy makers were more willing to add support in the face of a
health crisis than one thought to be caused by excesses in the housing or equity market.
The stimulus has been so big that household disposable income increased this year as
the fiscal transfers have outweighed losses in pay. That is very unusual for a recession
year.”
We believe the current glut of liquidity will eventually be withdrawn as growth catches
up globally with a credible risk of interest rate cycle reversing. But we also believe this
event is at least a year away, going by federal reserve’s commentary, and we shall
revisit our assumptions if this risk materialized faster impacting demand for cyclicals.

SKP Securities Ltd www.skpsecurities.com 15

 Indian Hotel Industry

An added comfort is from the supply side as discussed earlier in Exhibit 16. There will
be projects delays owing to cash flow constraints, allowing longer runway for the
incumbents.

Conclusion
To sum it all up, we believe the Indian hotel industry has gone two steps forward and
three steps backward. Branded occupancy touching 67% in FY19 and demand CAGR
outpacing supply CAGR were the positive step which should have culminated on a
series of ARR hikes, as seen in the past. But several external events impacting
corporate profitability did not allow hotels to bargain any sizeable price hike on the
negotiated business for the last 4 years. Covid further removed the little bargaining the
hotel industry had. It slowly has to work its way up through the recovery. The best
outcome for hotel sector would be, if they are able to retain some of the cost savings
permanently. We believe it will be a gradual elongated recovery and hence have
preference for players with lower leverage, lesser probability of shelving expansion
plans and those with access to capital. Further, we have inclination towards trusted
brands as safety has jumped in priority for travellers.

SKP Securities Ltd www.skpsecurities.com 16

 Indian Hotel Industry

COMPANIES

SKP Securities Ltd www.skpsecurities.com 17

 January 15, 2021

East India Hotels Ltd.

The uber luxury hotelier

CMP Rs 97 Target Rs 125 Initiating Coverage - BUY

Key Data “We don’t want to be the biggest, we want to be the best. Our goal is to
BSE 500840 operate profitable hotels that offer exceptional service and this needs to be
NSE EIHOTEL
considered while taking a decision to develop new hotels” …Vikram Oberoi
Bloomberg EIH IN
Reuters EIH.BO
(from the HBS case study on Oberoi Hotels)
Sector Hotels
Face Value (Rs) 2 Company Background
Equity Capital (Rs mn) 1,251
Oberoi and Trident Group of hotels under East India Hotels (EIH) was
Mkt Cap (Rs mn) 60,565
52w H/L (Rs) 150 / 54
promoted by Late Mr. Mohan Singh Oberoi and is currently managed by his
Avg Daily Vol (BSE+NSE) 9,19,948
grandson, Mr. Vikram Oberoi. The overall portfolio encompasses 30 hotels
(including seven overseas hotels), and two luxury cruiser boats, with 4,572
Shareholding Pattern (as on Dec 2020)
room operational inventory. It currently has over 700 rooms in development
Others
pipeline.
12%

Promoters
Investment Rationale
36% A Mumbai-Delhi business hotel play
EIH inventory is heavily skewed towards business hotels and that too bulk in
Bodies
Mumbai (45%) and Delhi NCR (11%). It also reflects in EIH’s ~50% of the
Corporate revenue generated from the two cities. Further, top 6 metro cities make up
36%
for 72% of the hotels room inventory for EIH and hence it directly becomes a
play on the recovery of business travel in these destinations.
Institutions
16%

Key Financials (Rs mn) Could be biggest beneficiary of opex reduction

Standlaone FY20 FY21E FY22E FY23E Building more room per hotel and keeping the F&B low in a business district
Net Sales 13,503 3,563 7,273 14,361
has been the secret of keeping the operating cost low for most new builds by
Growth (%) -12.5% -73.6% 104.1% 97.5%
EBITDA 2,254 (2,925) (1,210) 3,285
the competition. EIH scores low on both front because of lack inventory
PAT 1,245 (3,660) (2,166) 1,552
growth and aging staff. The pandemic has given an opportunity to EIH to
Growth (%) 9.8% -394.0% -40.8% -171.7% rationalize some of its cost permanently. In H1FY20 it was able to reduce
EPS (Rs) 2.2 -5.9 -3.5 2.5 employee, power and admin cost by 24%, 46%, 50% respectively.
BVPS (Rs) 51.1 46.7 43.3 44.7 Incidentally, EIH maintains an employee per room ratio of ~2, which is 2x of
Key Financial Ratios
Lemon Tree and Chalet Hotels. We are building in 200bps operating margin
Standalone FY20 FY21E FY22E FY23E
improvement in FY23 over FY19, stemming from staff cost management
P/E (x) 39.2 (17.5) (28.0) 39.0
P/BVPS (X) 1.9 2.1 2.2 2.2
(contractual and on roll) and reduction in corporate overheads.
EV/Sales (X) 4.4 17.7 8.8 4.4
EV/EBITDA (X) 26.4 (21.6) (52.7) 19.2 Stands tall on survivability and has consistently maintained high payout
ROCE (%) 4.9% -11.3% -6.6% 6.4%
ratio and low D/E
ROE (%) 4.9% -11.8% -7.7% 5.6%
EBITDA Margin (%) 16.7% -82.1% -16.6% 22.9% Post the rights issue (Rs3.5bn in Oct’20) and debt raise in Sep’20, EIH has
PAT Margin (%) 10.4% -97.0% -29.8% 10.8% ~Rs4bn cash on its book which should help it absorb losses in FY21 and
Debt - Equity (x) 0.1 0.2 0.2 0.2 FY22, assuming no major capex going ahead. The current net debt-to-equity
Source: Company, SKP Securities stands at 0.2, healthiest in the peer set. EIH has added room inventory at
1 Yr price performance 2.5% in FY10-20 period, and bulk of it is also management contract. This has
150 allowed the company to maintain low financial leverage and a healthy
125 dividend payout, a rarity in the hotels space. In terms capital requirement,
100 EIH has three big projects on the anvil, namely The Oberoi Rajgarh Palace
75 (Khajuraho), The Oberoi Goa and a mix use project at Hebbal (Bengaluru).
50
25
- Valuation
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21
EIH has traditionally traded at a premium to the market. We understand this
EIH Nifty Smallcap100
is partly due to the market giving it value based on the replacement cost of
the asset method. On EV/room basis it is trading at Rs23mn vs last 5 years
average of Rs30mn. This metric is not adjusted for any value assigned to the
flight catering business.

We use the Income Approach to value EIH by assigning a 15x EV/EBITDA,

to FY23E EBITDA, arriving at a 24-month target price of Rs 125 per share,
Research Analyst: implying an 30% upside from the CMP. We initiate coverage on EIH with a
Rajiv Bharati BUY rating.
[email protected]

SKP Securities Ltd www.skpsecurities.com 18

 East India Hotel Ltd

Background
“While the Oberoi and the Trident compete with different hotels in different cities, they
are among the top three in most regions” …HVS
Exhibit 29: EIH’s journey

1968:
Acquires 2
Oberoi and 3
other key
properties
via merger of
1949: The
Promoted Associated
and Hotels of
incorporated India and 2008: Ends 2018: Oberoi
by MS Hotels Pvt alliance with New Delhi
Oberoi Ltd. Hilton reopens

1965: 2004: Enters 2010: 2019:

Commences into strategic Reliance Commences
operations alliance with acquires operations at
at The Hilton; 18.53% The Oberoi
Oberoi, New Trident stake in EIH Marrakech
Delhi hotels for Rs 12bn
rebranded
as Trident
Hilton

Source: SKP Research

The two brands are owned by the promoters and EIH pays royalty to them for using the
same. The initial 20-year royalty agreement was signed on 22 Apr 1994 and 31 Oct
2002 for “Oberoi” and “Trident” brands respectively. Royalty for Oberoi was renewed
further for a 10-year period on 1 Apr 2014.
Exhibit 30: Royalty is at ~1% of Revenue

160

120
Rs mn

80

40

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Royalty

Source: Company, SKP Research

Roping in white knight: By 2009, ITC had accumulated a 14.98% stake in EIH. This
prompted EIH to look for a white knight to ward off any takeover attempts by ITC. In
2009-10, Mr. Analjit Singh (Max India founder), a close friend of Mr. PRS Oberoi, picked
up a 9% stake in EIH and was said to be interested in buying more. However, in August
2010, Reliance Industries acquired 14.2% interest in EIH for Rs 72bn, which was
followed by Mr. Analjit Singh reducing his stake to 4%. Currently, RIL owns an 18.53%
stake in EIH.

SKP Securities Ltd www.skpsecurities.com 19

 East India Hotel Ltd

Exhibit 31: Company structure

Owned Mashobara Resorts (79%) Wildflower Hall, Shimla

1. Oberoi New Delhi

2. Oberoi Mumbai Within EIH
3. Oberoi Bangalore EIH Flight Services, Mauritius (100%)
4. Oberoi Grand Kolkata
(9 owned hotels, 4 EIH managed
5. Oberoi Udaivilas property, 1 luxury cruiser)
6. Oberoi Vanyavilas
7. Trident Nariman Point, Mumbai
8. Trident BKC, Mumbai Oberoi Kerala Hotel & Resorts (80%)
9. Maidens, New Delh
10. Oberoi M.V. Vrinda (Luxury Cruiser)

Golden Jubilee Hotels (16%)

Managed
1. Oberoi Sukhvilas (Chandigarh) Mercury Car Rentals (67%)
2. Oberoi Gurgaon
3. Trident Gurgaon
4. Trident Hyderabad
1. Oberoi Bali Oberoi Flight Services
2. Oberoi Lombok
3. Oberoi Mauritius
4. Oberoi Dubai (UAE)
5. Oberoi Sahl Hasheesh (Egypt) Others EIH Printing Press
6. Oberoi Beach Resort, Al Zohra, Ajman (UAE)
EIH Ltd 7. Oberoi Marrakech (Morocco)
8. Oberoi Zahra (Egypt Nile Cruiser)
Air Charter Services

EIH International (100%)

EIH Holdings Ltd (100%)
7 hotels and 1 luxury cruiser

Oberoi Amarvilas (Agra)

Mumtaz Hotels (60%)

Oberoi Rajvilas (Jaipur), Oberoi Cecil (Shimla), Trident Chennai, Trident Bhubaneshwar,
EIH Associated Hotels (36%) Trident Agra, Trident Jaipur, Trident Udaipur, Trident Cochin

1.
Source: SKP Research 2.

As of Sep’20, EIH has 30 hotels, including seven hotels outside India, as well as two
luxury cruisers representing an aggregate of 4,572 rooms. ~84% of the room inventory
is in India and ~45% of the rooms are fully owned by the company.
Exhibit 32: Hotel count under EIH family Exhibit 33: Ownership and region wise room count

Oberoi Trident Total Oberoi Trident Total

Fully Owned Domestic 8* 2 10 Fully Owned Domestic 1,050* 991 2,040
Partly Owned Domestic 4 7 11 Partly Owned Domestic 333 1,051 1,384
Only Managed Domestic 2 1 3 Only Managed Domestic 263 136 399
Total Domestic 14 10 24 Total Domestic 1,646 2,178 3,823
Partly Owned International 5 5 Partly Owned International 381 381
Only Managed International 3ⴕ 3 Only Managed International 368ⴕ 368
Total International 8 8 Total International 749 749
Overall 22 10 32 Overall 2,395 2,178 4,572
Source: Company, SKP Research
*includes The Oberoi M.V. Vrinda (Luxury Cruiser, 8) and Maidens Hotel, New Delhi
ⴕ
includes The Oberoi Zahra (Egypt Luxury Nile Cruiser, 27)

15 of the hotels (owned or operated by EIH or its subsidiaries) and four of the facilities
used to provide flight catering services are located on leased or licensed land.
Ownership is defined based on equity interest in freehold or leasehold assets. In India,
Taj leads the ownership model followed by IT Hotels, Oberoi and Lemon Tree Hotels.

SKP Securities Ltd www.skpsecurities.com 20

 East India Hotel Ltd

A Mumbai-Delhi business hotel play

Similar to the pan India hotel inventory, EIH also has ~2/3rd of the inventory in business
hotels. Adjusting for equity ownership and management contract the ratio gets skewed
even further to ~3/4th in business hotels. Within the top 6 metro cities, EIH has ~72% of
the inventory (equity weighted inventory = room count x equity ownership).
Exhibit 34: Room classification Exhibit 35: Top 6 cities form 72% of the inventory*

Delhi
Leisure 10%
26% Mumbai
47% Bangalore
6%
Chennai
2%

Business Kolkata
74% 8%

Others Hyderabad
25% 2%

Source: SKP Research

*We adjusted the inventory to the equity ownership in each hotel. Unadjusted Business: Leisure ratio is 2:1. On an unadjusted basis top 6 cities form 53% of the inventory

Incidentally, hotels in Mumbai and New Delhi have contributed to bulk of the revenue
for EIH historically. During FY20, Mumbai and New Delhi generated ~34% and 15% of
the revenue respectively. This is no coincidence as 57% of the inventory (adjusted for
equity ownership is in these two cities, Exhibit 34).
As Trident is more dependent on revival of Mumbai market. EIH has 991 room under
the Trident brand in Mumbai (555 room Trident Nariman Point and 436 room Trident
BKC).
Exhibit 36: City wise inventory: Oberoi* Exhibit 37: City wise inventory: Trident*

Chennai
Delhi
5%
20% Bangalore
11%
Hyderabad
4%
Mumbai
Mumbai Kolkata 75%
20% 15%
Others
16%

Others
34%

Source: Company, SKP Research

*We adjusted the inventory to the equity ownership in each hotel

SKP Securities Ltd www.skpsecurities.com 21

 East India Hotel Ltd

Further if the two main products offering of EIH are compared on operating metrics,
Oberoi’s lean season RevPAR (revenue per available room) has been higher than the
peak season for Trident, largely led by leisure destinations.
Exhibit 38: Oberoi’s RevPAR Exhibit 39: Trident’s RevPAR

25,000 100% 10,000 100%

82% 80%
77% 68%
20,000 71% 73% 71% 73%
66% 65% 75% 8,000
61% 63% 50% 75%
56% 53% 56%
15,000 6,000
50% 50%
10,000 4,000
12,599

15,341

21,422
13,485

20,411
13,494

14,937

15,167

21,223
13,837

21,529
10,827
25%
7,736

8,514

7,918

8,448

25%

7,473
5,314

7,169
5,232

8,987
6,878

8,713
7,176

7,371
5,230

7,221
5,294

8,809
7,065

8,784
5,944
5,000 2,000

0 0% 0 0%
Q1FY19

Q2FY19

Q3FY19

Q4FY19

Q1FY20

Q2FY20

Q3FY20

Q4FY20

Q1FY19

Q2FY19

Q3FY19

Q4FY19

Q1FY20

Q2FY20

Q3FY20

Q4FY20
ARR RevPAR Occupancy ARR RevPAR Occupancy

Source: Company, SKP Research

And it is observed that the non-metro hotels led the recovery so far post the national
lockdown owing to Covid19. A spike in the September month in Trident Metro’s
performance is due to IPL linked business at Trident Nariman Point (Mumbai).
Exhibit 40: Monthly occupancy movement post lockdown
53%

60%
45%
44%

48%
37%

37%
36%

33%
31%

28%
26%

36%
25%
23%

22%
19%
18%

17%

17%

16%
15%

14%
24%
13%

13%

13%
11%

11%
10%
9%

9%
8%

8%
7%

7%

7%
6%
6%

6%

6%

6%
5%

5%

12%
4%

3%
1%
0%
0%

0%
0%
0%

0%

0%
Oberoi Leisure Oberoi Metro Others Trident City Trident Leisure Trident Metro Total
(Vilas)
Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Total

Source: SKP Research

In the past demand in Mumbai fell by ~30% after the 26 Nov 2008 terrorist attack and
recovered very fast. Similarly, recovery after April 2019 terror attack in Sri Lanka was
pretty smart (Exhibit 9 & 10 in the industry section).
Revenue breakup: EIH derives its revenue from Hotels (including income from
restaurants, bars, banquets, room service, in-room mini bars), in-flight catering, airport
services (lounges) and other services. Others services consist of revenue from shop
license fee, miscellaneous services, including laundry, telephones, internet services,
health clubs, beauty salons, spa services, income from the hotels’ business centres.
Further it includes management and marketing fees received from managed properties.
It also includes the technical services fees received during the construction phase of
managed hotel. EIH also has a revenue stream from sale of printed material contributing
~3% of the revenue with an installed capacity of 850mn impressions.

SKP Securities Ltd www.skpsecurities.com 22

 East India Hotel Ltd

Exhibit 41: Revenue breakup

20,000

16,000
Grounding of Jet Airways
12,000 resulted in 45% drop in flight
Rs mn

catering revenues and

8,000 EBITDA tending to zero

4,000

-
FY19 FY20

Room nights F&B Flight Services Other Services Sale of Printed Material

Source: Company, SKP Research

Could be the biggest beneficiary of opex reduction

Room revenue growth has three parts – ARRs (average room rate), occupancy and
inventory of rooms (including pipeline). We already touched upon the split of EIH’s
4,572/ 2763 rooms unadjusted/equity adjusted capacity across formats and geography
and the pre-Covid and prevalent ARR-Occupancy in Exhibit 32-37. Other aspects which
drive the profitability per room of a hotel is operating leverage. There is an increasing
trend of exploiting this by having a higher rooms per hotel ratio and lower employee per
room ratio as seen in the peer set data (Exhibit 42). The full-service business design of
EIH also results in higher manpower deployment (highest cost in a hotel’s P&L). The
ethos of Oberoi group is captured by a remark made by an ex-president of Oberoi Group
“If you look at the hospitality industry, there are only four things to be done. Everything
revolves around four things – a warm welcome, a zero-defect product, anticipatory
service, and a fond farewell. That’s the business, really.” …Kapil Chopra (Ex-President,
Oberoi Group, HBS Study)
Chalet Hotel, a business district hotel owner, has exploited this on two counts (a)
average age of its hotel are <10 years, so most of its manpower is younger hence
average cost per employee is lower. (b) it constructed room heavy hotels limiting the
number of F&B outlets, which by design are more employee heavy. Unfortunately, EIH
score low on both these counts and has relatively higher cost structure and this is where
the current crisis could be utilized to bring the opex down.
Exhibit 42: Room per hotel Exhibit 43: Employee per room

500 466 1.9

2.0

400 1.6
1.3
279
300 1.2 1.0 1.0 1.0

200 150 0.8 0.7

142
101 120 0.5
88
100 0.4

- -
EIH Lemon Indian Chalet Park Samhi Asian EIH Lemon Indian Chalet Park Samhi Asian
Tree Hotel Hotel Hotels Hotels Hotels Tree Hotel Hotel Hotels Hotels Hotels
(East) (East)

Source: Company, SKP Research

Park’s room per hotel is depressed owing to Zone by the Park portfolio, excluding which the numbers increase to 145. This compares against IHCL (non-Ginger) average at 139

SKP Securities Ltd www.skpsecurities.com 23

 East India Hotel Ltd

Trident’s employee per room is ~1.6 while for Vilas properties it is higher than 2. There
is opportunity in the Trident’s portfolio to bring down the employee count and also in the
corporate back office support. Management is hoping to save ~20% of the current cost,
in the ongoing restructuring.
Exhibit 44: Cost per employee Exhibit 45: Revenue and EBITDA per room

1.5 7.5 125%

1.3 100% 100%
1.2 5.5 5.8
1.2 1.1 1.1 6.0 100%
4.1 68%
4.5 60% 93% 75%

Rs mn
0.9 3.6 3.6
Rs mn

38% 64%
3.0 2.1 50%
0.5
0.6 1.2 1.5 1.3 1.4
1.5 0.4 0.5 0.7 0.8 25%
0.3 0.3
0.3
- 0%
EIH (S) Lemon Indian Chalet Park Samhi Asian
- Tree Hotel (S) Hotel Hotels Hotels Hotels
EIH Lemon Indian Chalet Park Samhi Asian (East)
Tree Hotel (S) Hotel Hotels Hotels Hotels Revenue per room
(East) EBITDA per room
F&B revenue as % of room revenue
Source: Company, SKP Research
Calculated as employee cost /No. of owned rooms. IHCL’s consol cost per employee is Rs0.63mn
Chalet’s EBITDA per room is higher owing to higher rooms per hotel coupled with high average occupancy
Samhi’s revenue and EBITDA per room numbers are estimated numbers post the ramp-up assets stabilize. The current metrics is 1.6/0.5.
Park’s F&B is higher owing to its high wine and liquor income from discotheques

Further EIH’s focus on providing uber-luxury experience has kept it away from budget
positioning. There is an opportunity to add another upper-midscale brand to serve that
need.
Inventory: On this aspect, EIH over the years has been slow, 2.5% room addition
CAGR between FY10-20, as compared to other players like IHCL (4.5% CAGR). Accor,
Intercontinental Hotels Group and Lemon Tree grew at ~40.6%, 30.1% and 29.5%
respectively in FY07-17 period. Room addition for EIH both under Oberoi and Trident
brands (owned or managed) has been few and far between, barring the renovation of
older assets.
Exhibit 46: EIH has grown the room inventory at 2.5% CAGR in the last 10 years

4,489 4,489 4,489 4,573 480

4800 4,339 4,339 4,339
3,562 3,562 3,764 3,764
3600 360
No equity interest

2400 240

1200 120
436

202

252
323

150

84
-

-
-

-
-

-
-

-
-

-
-

-
-

0 -
2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Oberoi Trident Cumulative Room Count

Source: SKP Research

*323 room Trident Hyderabad is now owned by Blackstone Group with EIH having the management contract.

SKP Securities Ltd www.skpsecurities.com 24

 East India Hotel Ltd

Exhibit 47: Inventory CAGR of other hotel chains

50%
41%
40%
30% 30%
30%
22% 21% 20%
20% 17% 16% 17%
12% 11% 13%
11%
10% 7% 7%
5%

0%
Accor Carlson Hyatt Intercontinental ITC Hotels Lemon Tree Marriott Sarovar
Hotels Group Hotels (including
Starwood)
FY07-17 FY13-17

Source: Horwath, SKP Research

For the past 5 years EIH has largely focussed on beefing up its international portfolio
via its wholly owned subsidiary (EIH International). Unfortunately, there has been
steady delay in projects from the stated commencement estimates, case in point is
Oberoi Marrakech. As per management’s commentary in FY11 annual report
“Planning of The Oberoi, Marrakech (Morocco) has been completed and construction
is expected to commence shortly; this hotel will be managed by a wholly owned
overseas subsidiary company. The hotel is expected to open in 2014.”
Some other projects which have missed the indicated commencement date and are still
work-in-progress are Oberoi Gir, Oberoi Doha. To its credit Oberoi Marrakech
commenced operations in Dec 2019 at an indicated ARR of $1,000 per night and
management expected to clock ~50% EBITDA margin on steady state basis (as per
Q3FY20 earnings concall).
Exhibit 48: Investment in La Roseraie De LÁtlas SA

40 60%
46% 48%

30 45%
23
30% 30%
19
$ mn

20 30%

10 6 6 15%

0 0%
2017 2018 2019 2020

Investment in La Roseraie De LÁtlas Ownership

Source: Company, SKP Research

Upcoming pipeline: As of FY20, EIH has a pipeline of over 700 room at various stages
of development (Exhibit 49). The three main projects under EIH’s own fold are The
Oberoi’s at Rajgarh, Goa beachfront and Hebbal (Bengaluru). Going by EIH’s building
trend, we estimate these three projects will need ~Rs10bn investment. Management
may bring in other equity partners to help execute these projects. Oberoi Rajgarh
Palace is a unique project which is expected to have experience level above the Vilas
properties of EIH. The Oberoi, Hebbal is expected to be a mix use property with a hotels
and commercial spaces.

SKP Securities Ltd www.skpsecurities.com 25

 East India Hotel Ltd

Exhibit 49: Expansion plan

Other Owned/
S.No. Property details Rooms Status
details Managed
1 The Oberoi Rajgarh Palace, Khajuraho 70* 62 acres Owned Under construction
(MP)
2 The Oberoi, Goa 55 acres Owned Awaiting environmental approvals
Owned Awaiting approval of new planning
3 The Oberoi, Bengaluru 225
(Mix use project) guidelines
4 The Oberoi, Doha 282 Managed Under construction
On hold due to prevailing market
5 Oberoi Resort, Kenya (Maasai Mara) 32 Managed
conditions
6 The Oberoi Wildlife Resort Bandhavgarh 22 acres Managed Under construction
7 Oberoi Koh Tan, Koh Samui, Thailand Managed Awaiting environment approvals
8 Trident Koh Tan, Koh Samui, Thailand Managed Awaiting environment approvals
9 Oberoi, Kathmandu 80 6 acres Managed In planning stage
The Oberoi, Bardiya Wildlife Resort,
10 20 30 acres Managed In planning stage
Bardiya National Park, Nepal
709
Source: Company, SKP Research, *tentative count

Amongst other revenue segment, EIH operates airport lounges in Mumbai, Chennai,
Kolkata, Cochin and Bengaluru airport. It operates in-flight catering services in Mumbai,
New Delhi, Chennai, Cochin, Kolkata. With growing market share of no-frill airlines and
stoppage in operations of Jet Airways in 2019 (50% revenue contributor to EIH’s flight
catering business), the profitability of flight catering business plunged and since then
EIH is looking to fill this void including using it as a cloud kitchen.
To showcase the potential of the flight catering business we present the performance
of Vietnam’s Noibai Catering Services. It derives 80% business from in-flight catering
and nearly at Oberoi Flight Kitchen’s scale. The impact of covid19 reflects on the
revenue drop and operating loss in the company’s performance (Fig 50). A bigger
example is Dubai National Air Transport Association’s (dnata) catering division which
operates at a gross margin of 59% and operating margin of ~20%.

Exhibit 50: Noibai Catering Services Performance

800
22%
20%
600 15% 15%
bn VND

400

200
-7%

0
2016 2017 2018 2019 9MCY20
Revenue Operating Margin

Source: Company, SKP Research

Globally also there has been a lot of consolidation in-flight catering business especially
with buy-on-board gaining traction. Overtime, European airline disposed of their kitchen
leading up to to consolidation in LSG Skychef and Gate Gourmet. Recently, Lufthansa
sold its flight catering to Gate Gourmet and dnata bought over Qantas’s flight catering
operations. Earlier Gategroup had acquired Air France’s in-flight catering business in
2017.

SKP Securities Ltd www.skpsecurities.com 26

 East India Hotel Ltd

Stands tall on survivability and has consistently

maintained high payout ratio and low D/E
Post the rights issue (Rs3.5bn in Oct’20) and debt raise in Sep’20, EIH has ~Rs4bn
cash on its book which should help it absorb losses in FY21 and FY22, assuming no
major capex going ahead. The current net debt-to-equity stands at 0.2, healthiest in the
peer set. Being unperturbed by the aggression shown by competition in inventory
addition also shows up in the financials in terms of high dividend pay-outs in a sector
where most players make losses while EIH has maintained a well-controlled debt
position.
Exhibit 51: Dividend payout ratio Exhibit 52: Financial leverage

80% 75% 70% 0.19

66% 65% 8,000 0.20
57% 0.15
60% 49% 6,000 0.15
46% 0.12
38% 37%
40% 0.09 0.09
28% 4,000 0.08 0.10
0.06 0.06
0.05
20% 0.04
2,000 0.05
0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 -
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Payout ratio
Gross Debt Net Debt/Equity

Source: Company, SKP Research

Overall EIH’s conservatism on room additions, operating in uber-luxury segment and
preference towards new builds also reflects in lack of revenue and EBITDA growth.
Further external shocks like terror attack on its key Mumbai assets, economic slowdown
and grounding of its anchor client in the flight catering business has impacted the ROCE
at various points in time.
Exhibit 53: Revenue and margin movement

20,000 32% 32% 32% 36%

23% 24% 24% 22% 22%
20% 20% 20% 21% 22% 20% 21%
15,000 18% 18% 19% 17% 19% 18% 24%
12% 12% 11%
Rs mn

9%
8% 9% 9% 8% 7% 9%
10,000 6% 7% 7% 12%
4% 3% 4%
1%
-4% -1%
5,000 0%

0 -12%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue Operating Margin PAT Margin

Source: SKP Research

Exhibit 54: ROCE and interest coverage movement

16 30%
20% 22% 21%
12 16% 20%
10% 10% 12%
8% 8% 8% 7% 8% 7% 9% 7%
8 4% 4% 6% 6% 10%
3%

4 0%
7 4 2 2 2 4 4 6 4 2 2 4 3 4 6 9 12 10 6 4
0 -10%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Interest Coverage Ratio ROCE ROE

Source: SKP Research

SKP Securities Ltd www.skpsecurities.com 27

 East India Hotel Ltd

We are expecting revenue recovery by FY23, both on room revenue and flight catering
business (by FY24). We are not baking in any new supply addition in our estimates.
Given the losses made so far in FY21, we assume all dividend and capex deferment till
FY23.
Exhibit 55: Revenue to follow occupancy improvement Exhibit 56: Assuming capex will begin only in FY23

70% 68% 68% 71%

20,000 75% 6,000 30%
18%
16,000 60% 12% 14%
4,000
45% 8% 15%
12,000 45% 2,000

Rs mn
Rs mn

30% 0%
8,000 30% -
-15%
4,000 15% -2,000 -14%
-4,000 -22% -30%
- 0%
FY19 FY20 FY21E FY22E FY23E FY24E FY19 FY20 FY21E FY22E FY23E FY24E
Revenue Occupancy EBITDA (excl. Other Income) FCF ROIC

Source: Company, SKP Research. Note: charts are for standalone business

We are expecting 10% absolute reduction in employee cost in FY23 over FY19.
Presented below is the proportion of staff at various levels. It remains to be seen what
part of the cost saving will be permanent in nature given EIH’s hospitality is very human
touch heavy.
Exhibit 57: Employee by level Exhibit 58: YoY Reduction in expenses in H1FY21

3,200 100%
Executive
1% 2,330
Supervisor 2,400 50%
14% 1,780 1,760
Rs mn

1,600 0%
Asst manager 1
-24% 880
3% 790
800 -50% 520 -46% -50%
Asst manager 2 160 280
5% -80%
Entry Level - -100%
74% Employee Administrative Consumption Power, Fuel &
Cost & Other of Provisions, Light
Manager Expenses Wines &
3% Others
H1FY20 H1FY21 YoY change

Source: Company, HBS Study, SKP Research

Although we do like to sight how steeped in are priority on guest experience from an
anecdote from the Harvard Business School case study on Oberoi Hotels
”The Oberoi Rajvilas, being an entirely new concept, was operating at close to 10%
occupancy in the first few months following its opening. Mr. Oberoi wanted to ensure
that I did not turn off the lights in a section of the property visible to guests, but where
no rooms were occupied, to conserve energy or control costs. He did not want the guest
experience compromised by a section of the resort being dark.” …Huvida Marshall
(Hotel Manager, Hotel Rajvilas)

SKP Securities Ltd www.skpsecurities.com 28

 East India Hotel Ltd

O&MO Alliance
The Oberoi Group has tied up with Mandarin Oriental Hotel Group (MOHG, Hong Kong)
via which the members of Fans of M.O. and Oberoi One loyalty program will have
privileged access to over 50 luxury hotels. MOHG has 33 hotels and seven residences
in 23 countries. As of now, we have not assigned any value to the benefits of this
arrangement.
To touch upon history of more such arrangement in the past. In 2004, EIH and Sheraton
had an arrangement which was snapped (http://bit.ly/2MH2Ege) in 2014.
Earlier in 2003, EIH had a tie-up with Hilton (https://bit.ly/2LxHsbJ) for international
marketing and co-branding of Trident-Hilton brand in India. As per this arrangement
nine of Oberoi Group hotels (~1900 rooms) were branded as Trident Hilton while Oberoi
Towers in Mumbai became Hilton Towers. This alliance was ended on 31 Mar 2008
and all Trident Hilton hotels were rebranded as Trident hotels. Both these arrangements
coincided with the partner international operator courting another hotel chain (ITC in
case of Sheraton) or an asset builder (DLF in case of Hilton).

Valuation
EIH has traditionally traded at a premium to the market. We understand this is partly
due to the market giving it value based on the replacement cost of the asset method.
On EV/room basis it is trading at Rs23mn vs last 5 years average of Rs30mn. This
metric is not adjusted for any value assigned to the flight catering business.

Exhibit 59: EV/Room trajectory (Rs mn)

50

40

30

20

10
Jul-15

Jul-20
Mar-12

Jan-13

Jun-13

Mar-17

Jan-18

Jun-18
Sep-14

Feb-15

Feb-20
Aug-12

Nov-13

Dec-15

Aug-17

Nov-18

Sep-19

Dec-20
May-16

Oct-16
Apr-14

Apr-19

Source: SKP Research

* is not adjusted for any value assigned to the flight catering business.

SKP Securities Ltd www.skpsecurities.com 29

 East India Hotel Ltd

EIH is trading at 22x FY20 EV/EBITDA multiple on a consolidated basis. We use the
Income Approach to value EIH by assigning a 15x EV/EBITDA (FY23E), arriving at a
12-months target price of Rs 125 per share, implying an 30% upside from the CMP. We
initiate coverage on EIH with a BUY rating.

Exhibit 60: Valuation calculation

FY23E
Label Criteria Factor Value
Valuation

EV (Standalone) A 15 x EBITDA EBITDA 3,285 49,279

EIH Associated (36.8% stake) B 30% discount to market value 2,182
EIH International C 15 x EBITDA EBITDA 1,428 21,415
Net Debt D 2,355
Fair Value (Standalone) E=A+B+C-D 70,521
Fair Value (Other Subs) F 7,908
Fair Value G=E+F 78,429
Number of Shares Outstanding (million) H 625
Value per Stock I=G/H 125
CMP J 97
Upside K=I/J-1 29.5%

Key risks
1. Mumbai’s business district shifting away from south Mumbai to suburbs.
EIH sources 50% of the revenue from its Mumbai hotels.
2. More project delays: EIH has been slow in building up room inventory,
owned or managed. Already the existing pipeline is relatively small.
3. Disruption of key client: Grounding of Jet Airways and lack of any full-
service airline alternative impacted the economics already. Similarly,
bankruptcy of Thomas Cook impacted dnata’s profitability.

SKP Securities Ltd www.skpsecurities.com 30

 East India Hotel Ltd

Exhibit 61: Income Statement & Balance Sheet

Income Statement (Standalone)

Y E March (Rs Mn) FY19 FY20 FY21E FY22E FY23E
Net Sales 15,432 13,503 3,563 7,273 14,361
Growth (%) 14.3 -12.5 -73.6 104.1 97.5
Operating Expenses 12,211 11,249 6,488 8,483 11,075
Operating Profit 3,221 2,254 -2,925 -1,210 3,285
Other Operating Income 0 0 0 0 0
EBITDA 3,221 2,254 -2,925 -1,210 3,285
Growth (%) 47.3 -30.0 -229.7 -58.6 -371.5
Depreciation 1,230 1,342 1,354 1,354 1,354
Other Income 840 840 71 95 428
EBIT 2,831 1,752 -4,207 -2,469 2,360
Finance cost 464 495 283 344 344
Exceptional items -731 -166 -203 0 0
Profit before tax 1,637 1,091 -4,692 -2,813 2,016
Tax (current + deferred) 504 -154 -1,033 -647 464
Profit / (Loss) for the period 1,133 1,245 -3,660 -2,166 1,552

Reported net profit 1,133 1,245 -3,660 -2,166 1,552

Extraordinary item 0 0 0 0 0
Adjusted net profit 1,864 1,411 -3,457 -2,166 1,552
Growth (%) 66.0 -24.3 -345.0 -37.3 -171.7

Balance sheet (Standalone)

Y E March (Rs Mn) FY19 FY20 FY21E FY22E FY23E
Share Capital 1,143 1,143 1,251 1,251 1,251
Reserves & Surplus 27,408 28,049 27,981 25,815 26,725
Net Worth 28,551 29,192 29,232 27,066 27,975
Minority Interest
Total Liabilities 4,049 4,583 5,269 5,289 5,309
Lease liabiities - 1,180 1,180 1,180 1,180
Long-term borrowings 2,099 1,832 2,500 2,500 2,500
Deferred tax liabilities 1,599 1,236 1,236 1,236 1,236
Other long term Liabilities 351 334 353 372 393
Long term provisions - - - - -
Current Liabilities 5,920 5,363 5,775 6,302 7,260
Short term borrowings 2,700 2,319 3,954 3,954 3,954
Trade payables 1,958 1,704 450 918 1,813
Other current liabilities 1,101 1,148 1,192 1,248 1,307
Short term provisions 162 191 179 182 187
Total Liabilities and Equity 38,520 39,138 40,276 38,657 40,545

Non Current Assets 35,061 35,825 34,550 33,279 33,105

Net Block 20,027 19,446 18,093 16,739 16,478
Right of Use Assets - 3,874 3,874 3,874 3,874
Non-current Investments 9,392 9,206 9,206 9,206 9,206
Long-term loans and advances 2,583 2,477 2,509 2,543 2,578
Deferred tax Assets - - - - -
Other non current Assets 3,059 820 867 917 969
Current Assets 3,459 3,313 5,726 5,378 7,440
Inventories 504 523 500 500 488
Sundry Debtors 2,249 1,907 900 1,027 2,028
Cash & Bank Balances 91 85 3,835 3,245 4,098
Other current Assets 389 543 236 351 570
Loans & Advances 226 255 255 255 255
Current Investments - - - - -
Total (Assets) 38,519 39,138 40,276 38,657 40,545
Source: Company, SKP Research

SKP Securities Ltd www.skpsecurities.com 31

 East India Hotel Ltd

Exhibit 62: Cash Flow Statement & Key Ratios

Cash flow statement (Standalone)

Y E March (Rs Mn) FY19 FY20 FY21E FY22E FY23E
Profit before tax 1,637 1,091 -4,692 -2,813 2,016
Depreciation 1,230 1,342 1,354 1,354 1,354
Change in working capital -394 69 82 252 -286
Interest expenses 464 495 283 344 344
Total tax paid -666 -209 1,033 647 -464
Cash flow from operations (a) 2,271 2,788 -1,942 -216 2,964
Capital expenditure 292 -762 0 0 -1,092
Change in investments -1,762 186 0 0 0
Others -72 -1,636 -47 -49 -52
Cash flow from investing (b) -1,542 -2,212 -47 -49 -1,144
Free Cashflow (a+Capex) 2,563 2,026 -1,942 -216 1,872
Equity raised / (repaid) 0 0 3,497 0 0
Debt raised / (repaid) 408 -648 2,303 0 0
Current maturity of long term debt 0 0 0 0 0
Dividend (incl. tax) -620 -589 0 0 -643
Interest expenses -464 -495 -283 -344 -344
Others -41 1,150 221 19 21
Cash flow from financing ( c ) -716 -582 5,738 -324 -967
Net change in cash (a+b+c) 12 -6 3,749 -590 854
Reconciliation of Other balances 79 91 85 3,835 3,245
Cash as per Balance Sheet 91 85 3,835 3,245 4,098

Key ratios (Standalone)

Y E March FY19 FY20 FY21E FY22E FY23E
Growth Rates (%)
Net Sales 14.3 -12.5 -73.6 104.1 97.5
EBITDA 47.3 -30.0 -229.7 -58.6 -371.5
Adjusted PAT 66.0 -24.3 -345.0 -37.3 -171.7
Valuation Ratios (x)
Adjusted EPS (Rs) 3.3 2.5 -5.5 -3.5 2.5
PER 29.7 39.2 -17.5 -28.0 39.0
Price / Cash EPS 17.9 20.1 -28.8 -74.6 20.8
Book Value / Share (Rs) 50.0 51.1 46.7 43.3 44.7
Price / Bookvalue 1.9 1.9 2.1 2.2 2.2
EV/EBITDA 18.6 26.4 -21.6 -52.7 19.2
Margins (%)
EBITDA 20.9 16.7 -82.1 -16.6 22.9
EBIT 18.3 13.0 -118.1 -33.9 16.4
Net Margin 12.1 10.4 -97.0 -29.8 10.8
Tax rate 30.8 -14.1 22.0 23.0 23.0
Du Pont Analysis
ROE (%) 6.6 4.9 -11.8 -7.7 5.6
Net margin (%) 12.1 10.4 -97.0 -29.8 10.8
Assets turnover (x) 0.4 0.3 0.1 0.2 0.4
Leverage factor (x) 1.3 1.3 1.4 1.4 1.4
ROCE (%) (Post Tax) 6.6 4.9 -11.8 -7.7 5.6
Working Capital Ratios (Days)
Inventory 11.9 14.1 51.2 25.1 12.4
Sundry Debtors 53.2 51.5 92.2 51.5 51.5
Trade Payables 46.3 46.1 46.1 46.1 46.1
Working Capital -58.2 -55.4 -5.0 -46.4 4.6
Others
Net Debt / Equity (x) 0.2 0.1 0.1 0.1 0.1
Dividend Payout (%) 45.4 41.5 0.0 0.0 36.3
Dividend / Share (Rs) 0.9 0.9 0.0 0.0 0.9
Source: Company, SKP Research

SKP Securities Ltd www.skpsecurities.com 32

 January 15, 2021

Indian Hotels Company Ltd.

The luxury scale operator

CMP Rs 127 Target Rs 183 Initiating Coverage - BUY

Key Data Company Background

BSE 500850 Jamsetji Tata incorporated Indian Hotels Company Ltd (IHCL) in 1899 and
NSE INDHOTEL
opened its first hotel - The Taj Mahal Palace in Mumbai, in 1903. Presently,
Bloomberg IH IN
it has over 200 hotels (including pipeline) comprising over 25,000 rooms. It
Reuters IHTL.BO
is India’s second largest hotel chain by room count, behind Marriott. Further,
Sector Hotels
1
it is also the market leader in the in-flight catering business in India with 34%
Face Value (Rs)
Equity Capital (Rs mn) 1,189
market share, delivering over 23mn meals annually.
Mkt Cap (Rs mn) 1,51,517
52w H/L (Rs) 147 / 62 Investment Rationale
Avg Daily Vol (BSE+NSE) 33,05,362 Strong vintage portfolio
IHCL’s standalone core portfolio which makes up for over 56% of the overall
Shareholding Pattern (as on Sep 2020) revenue is dominated by hotels in Mumbai and Delhi. Combined they make
Others
up for over 50% of the standalone or over a quarter of company’s revenue.
17% Average vintage of the core portfolio is over 30 years. Assuming a 70%
Bodies flowthrough of management contract business, 26 hotels in the standalone
Corporate
1% Promoters
form 20% of the room inventory and contribute 66% to the overall company’s
41% EBITDA. Implying the hotels in the standalone entity is the pivot around
which IHCL has based all its expansion (overseas and Ginger). A recovery
in corporate travel will directly have a positive bearing on the base business
segment performance of IHCL.
Institutions
41%
Aggressive pipeline buildup and commissioning
IHCL’s annual addition to inventory pipeline has grown at 4x in FY19-20
Key Financials (Rs mn) period as compared to FY16-18. Non-Ginger portfolio is expected to grow by
Standalone FY20 FY21E FY22E FY23E 40% leading to commensurate increase in management fee income, which
Net Sales 27,435 11,602 16,318 28,425 has a flow through of 70%. Similarly, managed room on Ginger’s platform is
Growth (%) -1.3% -57.7% 40.7% 74.2% also expected to become 3x by FY23 helping improve the profitability of
EBITDA 7611 -918 2027 8778
Roots Corporation.
PAT 4014 -2900 -1355 3406
Growth (%) 52.2% -172.2% -53.3% -351.3%
EPS (Rs) 3.4 -2.4 -1.1 2.9 Adhering to milestones
BVPS (Rs) 38.5 36.1 35.0 37.2 IHCL had set out multiple goals in 2017 and pre-Covid it was delivering on
Key Financial Ratios several of them. It was on track to achieve 800bps improvement in operating
Standalone FY20 FY21E FY22E FY23E margin. Secondly, it has been aggressively signing management contracts
P/E (x) 36.3 (52.3) (111.8) 44.5 inline with its asset light expansion target. It also forged an arrangement with
P/BVPS (X) 3.3 3.5 3.6 3.4
GIC Singapore to acquire ready assets. Third, it has successfully resolved
EV/Sales (X) 6.0 14.6 10.4 5.8
quite a few teething issues including gaining control of Taj Mansingh and
EV/EBITDA (X) 21.7 (185.0) 83.4 18.9
Sea Rock. It is fair to believe the trajectory will continue as the demand
ROCE (%) 9.3% -1.8% 1.8% 9.9%
ROE (%) 9.2% -6.5% -3.2% 7.9%
situation improves.
EBITDA Margin (%) 27.7% -7.9% 12.4% 30.9%
PAT Margin (%) 15.2% -25.0% -8.3% 12.0% Opex reduction amidst recovery
Debt - Equity (x) 0.4 0.6 0.6 0.6 IHCL has been able to affect ~40% YoY employee cost reduction in H1FY21
Source: Company, SKP Securities
as compared to H1FY20. Bulk of this is stemming from US and UK hotels
1 Yr price performance
where government supported the terminated and furloughed employees.
150 Further IHCL has managed to bring hotel level expenses down as well, it
125 remains to be seen how much of it they are able to retain post the recovery.
100 We believe this will aid IHCL to return to the pre-Covid EBITDA faster.
75
50 Valuation
25 We value IHCL using the SOTP method, assigning the asset-heavy business
- a 15x EV/EBITDA on FY23E EBITDA and 30% discount to the market value
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 of 1.1% Tata Sons stake owned by IHCL. We arrive at a 24 months target
IHCL Nifty MIDCAP100 price of Rs 183 per share, implying an upside of 43% from the CMP.

Research Analyst:
Rajiv Bharati
[email protected]

SKP Securities Ltd www.skpsecurities.com 33

 Indian Hotels Company Ltd

Background
As of FY20, IHCL (including its subsidiaries & associates) has 158 operational hotels
comprising 18,924 rooms. It has 10% market share amongst branded rooms. It
operates its hotels under four brands Taj, Vivanta, Ginger and a named collection of
hotels under a concept called “SeleQtions”. Another brand “Gateway” is being
subsumed into Taj or Vivanta.
Exhibit 63: Number of hotels and % of
Exhibit 64: Inventory by contract Exhibit 65: Inventory by brand
rooms

Domestic,
141
Holding
Ginger
Management Company
22%
International, 23%
Contract
17
31%

Taj
54%
Vivanta
17%
Domestic
86% Group
Companies
46%
International
14%
SeleQtions
6%

Source: SKP Research

In IHCL’s corporate structure apart from the parent entity IHCL, three more listed
entities are part of the group: Benares Hotels, Taj GVK Hotels and Resorts Ltd, and
Oriental Hotels. Notable pieces are Roots Corporation, which houses all hotels under
the Ginger brand (owned and managed); IHOCO BV, which houses majority of the
international hotels; Taj SATS Air catering which houses all the catering businesses;
and Skydeck Properties & Developers which holds the 99 years lease starting from 5
May 1976 from Governor of Maharashtra for a land measuring 9,500 sqm.
Exhibit 66: Corporate structure

Indian Hotels Company Limited

(Tata Sons holds 38.09%; combined holding of promoter group is 40.75%)

Subsidiaries Joint ventures Associates

Roots Corporation Ltd

Taj GVK Hotels and Resorts Ltd
Piem Hotels Ltd
Taj Kerala Hotels and Resorts Ltd
United Hotels Ltd
Taj SATS Air Catering Ltd Oriental Hotels Limited
Benares Hotels Ltd
Kaveri Retreats and Resorts Ltd Taj Madurai Ltd
Skydeck Properties and Developers Pvt
Taj Karnataka Hotels & Resorts TAL Lanka Hotels PLC
Ltd
Taj Safaris Ltd Lanka Island Resorts Ltd
IHOCO B.V.
Taj International Hotels (H.K.) Ltd IHMS Pty Ltd
St James' Court Hotels Limited TAL Hotels & Resorts Ltd
Taj International Hotels Limited

If we classify the operational rooms under IHCL network, ~80% are in business districts
and ~40% residing in top six cities.

SKP Securities Ltd www.skpsecurities.com 34

 Indian Hotels Company Ltd

Exhibit 67: Classification by use* Exhibit 68: City wise inventory

Mumbai
9%
Delhi
10%

Leisure Business Bangalore

20% 80% Others 8%
61%
Chennai
6%

Kolkata
2%
Hyderabad
4%

Source: SKP Research

*For the non-Ginger portfolio Leisure is 27% of the overall inventory

Strong vintage portfolio

IHCL’s standalone core portfolio which makes up for over 56% of the overall revenue
is dominated by hotels in Mumbai and Delhi. Combined they make up for over 50% of
the standalone or over a quarter of consolidated company’s revenue. Average vintage
of the core portfolio is over 30 years. Assuming a 70% flow through of management
contract business, 26 hotels in the standalone form 20% of the room inventory and
contribute 66% to the overall company’s EBITDA (Exhibit 70). Implying a strong
business outlook will directly have a positive bearing on the base business
performance.
Exhibit 69: Capital Employed Breakup Exhibit 70: Consol EBITDA bridge (Pre-IndAS)
(FY20 = Rs72bn)
Standalone

Consol
9
IHOCO BV St. James
(US Assets) Court
9% 15%
United Overseas Holdings

6 Others & Related party

St. James Court

Taj SATS
4%
Benares Hotels

Standalone
Rs bn

Taj SATS

29% Skydeck 3
6%
Piem

Roots

Investments ELEL
8% -
(Taj GVK,
Oriental, Piem Hotels
Others) 9%
Roots Corp
16% 4%
-3

Source: SKP Research

Capital allocated in a few subsidiaries are yet to bear fruits for IHCL and are a net drag
currently, either in terms of contributing cash losses (The Pierre, New York), very low
margin (Roots Corporation) or completely unproductive currently (Hotel Sea Rock). The
three put together form ~27% of the capital employed of the company. The standalone
business, which houses 26 hotels, does the heavy lifting with some help from a few
profitable subsidiaries (Piem Hotels, Benares Hotels).
Further large impairments in a few overseas investments have depleted the otherwise
healthy profitable growth of the parent company. Excluding the investments in
subsidiaries, the standalone assets on their own generated ~20% ROIC in FY18 &

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 Indian Hotels Company Ltd

FY19. It was on this profitability that inspired IHCL to go overseas to buy assets in US,
it was largely capitalizing on free cash flow (FCF) generated by the group in FY04-08
period.
Exhibit 71: FCF (excluding exceptional items from overseas investments) ramped up supported by core hotels

8 40%

6 32%

4 24%
Rs. bn

2 16%

0 8%

-2 0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

EBIT FCF EBITDA Margin

Source: SKP Research

It also shows up in capital employed tripling within 6 years (FY03-FY09), banking on

the performance of the core hotels in the standalone entity.
Exhibit 72: Capital employed tripped in FY03-FY09 period

100 20000

79 77 79
80 75 75 75 75 74 75 74 16000
70
63
58
60 12000
Rs. bn

42
40 32 33 35 8000
25 25
14 16
20 10 11 4000
9

0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Capital Employed Room Inventory

Source: SKP Research

Flowthrough: Historically, the capital-intensive room and F&B segment has been the
largest contributor to the revenue for IHCL. Although, better flowthrough and asset light
nature of management contract led expansion has been an inspired change over the
last decade.
Exhibit 73: Segment wise revenue contribution Exhibit 74: Flowthrough

Revenue Streams Flowthrough

F&B and Banquets

39% Room Revenue 70%

Management
Fee F&B and Banquet Revenue 50%
Room 5%
Revenue Membership
48% Fees & Others Management Fees 70%
8%

Memberships, Spa, Saloons 60%

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 Indian Hotels Company Ltd

Further during the ongoing Covid crisis management has explored other avenues to
generate revenue. Under “Hospitality at home” initiative the company delivers hampers
while under “Qmin” Taj delivers select signature dishes to patrons. These two initiatives
helped generate Rs240mn revenue in H1FY21, with a flowthrough of over 50%, as
guided by the management.

Aggressive pipeline build-up and commissioning

As of FY20, management fee forms only 5% of the consolidated revenue but EBITDA
contribution is ~19%, assuming 70% flowthrough (Exhibit 76).
Exhibit 76: ~19% of the EBITDA is contributed by
Exhibit 75: Revenue trajectory
management fee*

45,000 5,000 25%

21%
3,844 20% 20% 20%
19%
36,000 3,454 3,360 3,415 4,000 20% 18%
3,202 3,176
15%
27,000 2,650 3,000 15%
2,043 2,132 2,127
1,606 1,774
18,000 2,000 10%
1,227 1,364

9,000 1,000 5%
35,981 37,163 35,974 35,230 35,817 39,574 38,661
- - 0%
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Room + F&B - Rs mn -5%
Management fees contritbution to EBITDA
Management Fees (RHS) - Rs mn
EBITDA Margin
Others (RHS) - Rs mn
PBT Margin

Source: Company, SKP Research

*assuming 70% flowthrough as indicated by the management.
Also, the proportion is on pre-IndAS EBITDA excluding Other Income. On post IndAS 116 basis the proportion is 15.4%

About 3/4th of the incremental rooms added and operationalized in the last three years
are managed rooms.
Exhibit 77: 3/4th of the rooms operationalized in last three
Exhibit 78: And the current pipeline is promising
years are managed rooms

25,000 31% 31% 35% 25,000 50%

42%
28% 39%
20,000 25% 25% 28% 20,000 40%
31% 32%
28%
15,000 21% 15,000 30%

10,000 14% 10,000 20%

13,487

16,848

17,145

17,888

18,917

19,043

16,920

18,361

18,965

22,231

25,168

5,000 7% 5,000 10%

- 0% - 0%
Mar-14 Sep-17 Apr-18 Apr-19 Jul-20 Oct-20 FY16 FY17 FY18 FY19 FY20
Operational Rooms Operational + pipeline Rooms
Managed as % of total rooms Managed as % of total rooms (incl in pipeline)

Source: Company, SKP Research

~6,300 rooms pipeline has ~2,400 Ginger rooms. Implying the remaining 3,900 are non-Ginger platform.
Assuming all of these are in group companies, the current inventory in group companies will swell from 10,000
rooms to ~14,000 rooms. Assuming a 70% flowthrough, we estimate additional EBITDA of over Rs600mn
from these non-Ginger managed rooms. Further, managed room under Ginger’s platform will become 3x,
aiding the profitability of Roots Corporation.

SKP Securities Ltd www.skpsecurities.com 37

 Indian Hotels Company Ltd

This asset light EBITDA expansion has inspired an aggressive pickup in annual pipeline
build-up, ~3,000 rooms each in FY19 and FY20 vs FY16-18 average of ~750 rooms
(Exhibit 79). We believe this will also reflect in opening in subsequent years.
Exhibit 80: …and followed up with accelerated
Exhibit 79: Ramped up pipeline build-up
openings*

4,000 22 25 2,000 15
21
12
3,200 20 1,600 12
10
14
2,400 15 1,200 8 9

1,600 8 8 10 5 5
800 6
5 3
800 5 400 3
632 1,174 468 3,258 2,937 740 1,065 442 625 524 1,565 119
- - - -
FY16 FY17 FY18 FY19 FY20 YTD Oct FY16 FY17 FY18 FY19 FY20 YTD Oct
FY21 FY21
Rooms added Hotels added Rooms opened Hotels opened

Source: Company, SKP Research

*IHCL guided to open 10 hotels in FY21

Extending it further, Ginger hotels signed up ~40 hotels in FY16-20. Assuming an

average room count of 90 each, it amounts to ~3,600 room in the last 5 years or ~9,500
room pipeline. Alternatively stated, ~38% of the new supply has been on the Ginger
platform.
All the Ginger hotel are operated by IHCL’s subsidiary, Roots Corporation. Ginger has
seen its revenue grow at 12% CAGR in the FY10-20 period, but the profitability has not
kept pace. Despite contribution of management and operating fee rising, overall
EBITDA margin has plunged. It should improve as the newly added rooms gain vintage.
A significant part of the recent decline in EBITDA per owned room is due to higher
employee expenses per room
Exhibit 81: Roots Corp has clocked 12% revenue CAGR in the last 10 years

2,500 25%

2,000 20%

1,500 15%

1,000 10%

500 5%

- 0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Revenue (Rs mn) EBITDA Margin Cash profit margin Management fee as % of revenue

Source: Company, SKP Research

Given 2,400 room pipeline for Ginger, if each of these fetch Rs50,000 annual EBITDA
(1/3rd of Taj and Vivanta) it will amount to Rs120mn EBITDA. This is be ~90% growth
on FY20 EBITDA. Further, EBITDA from the 371 room Ginger Santacruz will additional
boost (guided to get launched in FY22) as it a flagship hotel and ARRs could be
materially higher than the existing portfolio. Implying, if the hotel commissioning
remains on schedule, Ginger could witness its profitability doubling in 3-4 years.

SKP Securities Ltd www.skpsecurities.com 38

 Indian Hotels Company Ltd

Though, Ginger is yet to become self-sustainable but it has been making cash profit
(Exhibit 81). Support from promoters is only sought to fund capex.
Exhibit 82: Ginger’s room inventory mix Exhibit 83: Depleting reserves were propped recently

5,000 3,500 0.6

4,000 790 2,800 0.5

584 584
580
3,000 525 2,100 0.4
300 406
198
2,000 Raised Rs750mn
1,400 0.2
via Rights issue
1,000 700 0.1

- - -
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Owned rooms Managed rooms
Net worth D/E

Source: Company, SKP Research

Adhering to milestones
Pre-Covid, IHCL was on track to achieve most of its targets
a. achieving 800bps improvement in operating margin,
b. aggressive asset light expansion,
c. restructuring the company structure and sale of underperforming assets.
We believe it is fair to assume the trajectory will continue as the demand situation
improves.
Exhibit 84: Standalone performance: TTM EBITDA margin increased by 465bps between Sep’17-Dec’19

30,000 32%
26% 26% 26% 27%
25% 25% 25%
24% 24%
22% 22% 23%
21,000 22% 24%
Rs mn

12,000 16%
12%

3,000 8%
Sep-17

Dec-17

Sep-18

Dec-18

Sep-19

Dec-19

Sep-20
Jun-17

Jun-18

Jun-19

Jun-20
Mar-18

Mar-19

Mar-20

(6,000) 0%

TTM Revenue TTM EBITDA TTM EBITDA Margin

Source: Company, SKP Research

Note: All data except Jun-20 and Sep-20 is on pre IndAS-116 Basis

Hotels in US (now forming 9% of the capital employed as shown in Exhibit 69) have
been a consistent drag. Excluding the same, the operating performance of all other
subsidiaries have been steady (Exhibit 86). It is largely contributed by St James Court,
Piem Hotels and Benares Hotels. The other drag has been Roots Corporation, which is
expected to recover as the pipeline hotels get commissioned and gain vintage. Also,
the success of Ginger Santacruz, scheduled to commission in FY22, will also decide
the fate of Ginger model.

SKP Securities Ltd www.skpsecurities.com 39

 Indian Hotels Company Ltd

Exhibit 85: Impairments Exhibit 86: Excluding US, other subs have been steady
2013 2014 2015 2016 2017 2018 2019 2020 H12021

-
- 12,500 30%
24%

(317)
10,000 24%
(571)

(1,000) 21%

(643)

(690)

(704)
(805)
17%
7,500 15% 18%
(1,500)

(2,000) 15%

Rs mn
5,000 12%
(3,000)
(2,870)
(3,050)

2,500 6%
(4,000)
(4,000)

- 0%

2016

2017

2018

2019

2020
(5,000)

Impairment in US investments Taj International (H.K.)

Revenue* EBITDA* EBITDA Margin

Source: Company, SKP Research

*estimated

Exhibit 87: Interest coverage ratio improvement (pre-Covid)

6.0

5.0

4.0

3.0

2.0

1.0

-
Dec-17

Dec-18

Dec-19
Sep-17

Sep-18

Sep-19

Sep-20
Jun-17

Jun-18

Jun-19

Jun-20
Mar-18

Mar-19

Mar-20
TTM EBIT/Interest (S) TTM EBIT/Interest (C)

Source: Company, SKP Research

Note: All data except Jun-20 and Sep-20 is on pre IndAS-116 Basis

Prior to 2016, the operating performance was impacted by losses in Orient Express
Hotel Ltd (Exhibit 88, also seen in Exhibit 85 as impairments in Taj International (H.K.)).
Exhibit 88: EBIT (including exceptional items)

4
Rs. bn

-2

-4
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

EBIT

Source: SKP Research

Around the year 2008, IHCL invested US$261.83mn in 6.89% Class A common shares
of Belmond Ltd (formerly Orient-Express Hotels Ltd) which were listed on New York
Stock Exchange. On this transaction, over the 10-year period IHCL took a hit of
US$194mn, in terms of diminution in value.

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 Indian Hotels Company Ltd

Excerpt from 2017 annual report explains the divestment

“During the year, the Group has divested its entire remaining stake in the Belmond Ltd.
through the NYSE aggregating to a total sale proceeds of $53.97mn (March 31, 2016
$14.21mn),”
Exhibit 89: Belmond Ltd’s stock price

70

60

50

40

30

20

10

0
Dec-07
Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17
Sep-07

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17
Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18
Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18
Stock Price

Source: Bloomberg, SKP Research

Second, on the aggressive inventory expansion front, in 2019 IHCL forged a partnership
with Government of Singapore Investment Corporation (GIC). Under this framework an
investment of US$600mn or Rs40bn will be made over 3 years period to acquire fully
operational hotels in luxury, upper upscale and upscale segment. IHCL will bring in 30%
equity while the rest will be brought by GIC. Also, the framework involved SPV level
debts in each transaction. Assuming a 1:1 debt to equity this will entail Rs6bn equity
contribution by IHCL in 3-4 years. This may cause group level debt to go up at the cost
of faster expansion.

Third, on the goal to simply the holding structure, IHCL’s management has showcased
some effort in the recent past

1. During FY20, IHCL sold its 50% stake in Taj Madras Flight Kitchen (TMFK)
for Rs298mn to TajSATS Air Catering Ltd (TACL), resulting in a profit of
Rs21.3mn. Accordingly, TMFK became a 100% subsidiary of TACL and an
indirect subsidiary of IHCL. IHCL owns 51% in TACL. Being in the same
business this transaction should help reduce duplication of compliance
and regulatory cost. TMFK started as a JV between IHCL (20%), Oriental
Hotels (20%), SATS (30%) and Malaysian Airline (20%).

2. Hotel Sea Rock: IHCL has recently signed an agreement to buy the
balance 14.28% in ELEL, removing the overhang. They are likely to rope
in a partner to construct an asset there. More clarity on the same will
emerge in due course. We have drawn the timline of events which
eventually culminated in 2020.

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 Indian Hotels Company Ltd

Exhibit 90: Timeline and holding structure

Hotel Sea Rock was built in 1978 by Lutharia brothers, namely Girdharilal, Udharam, Shyam and Manohar under a
company called Elel Hotels and Investment Limited (EHIL)

The Sea Rock hotel had suffered severe damage in the 1993 Mumbai bomb blasts.

In 2005, it was acquired by the Claridges Group, owned by industrialist Suresh Nanda for Rs400mn

In 2009 Claridges sold 85% stake in ELEL to IHCL for R6.8bn containing the Sea Rock asset.

In 2010, IHCL shifted its investment in ELEL into a SPV with an option to take the asset back in its balance sheet in 3
years

The main asset under Sea Rock is the gains after revaluation of leasehold land (back in 2006) and intangible assets
representing cost of re-acquiring management rights over the hotel property. Lease of the 9500 sqm property is originally
held by M/S Lutharia & Lalchandani and was sub-leased by them to ELEL Hotels & Investment in 1976
Rs15bn raised in FY16 rights issue was used to pay off the debt including Rs8bn for Skydeck (the vessel in which the
Sea Rock Hotel is present). Shifted from ELEL to a SPV, Skydeck in 2010. In the same vein Skydeck also did a rights
issue of Rs8.93bn to raise the funds and replace the debt with equity.

In 2020, IHCL agreed to buy balance 14.28% in ELEL, paying in staggered manner.

Skydeck

ELEL Hotels &

Sheena Investments Lutharia & Lalvhandani
Investments
(100% sub) Hotel & Properties Pvt Ltd
(46.44% sub)

Skydeck effectively
controls 85.72% in
Holds 39.28% in ELEL Hotels. 48% of ELEL This is the entity which holds the
which i.e. 18.7% of ELEL is held by 99 years lease starting from 5 May
Sheena Investments in escrow on 1976 from Governor of
behalf of Claridges which shall be Maharashtra for a land measuring
transferred on fulfillment of a certain 9,500 sqm
condition
14.11% of ELEL is held
by Excalibur Asset &
Capital Mgmt Pvt Ltd

0.17% of ELEL is held

by Claridges Pvt Ltd

3. Restructuring of overseas investments: IHOCO BV, the 100% offshore

subsidiary company has become IHCL’s apex offshore investment holding
company. Holding in the USA, UK, Sri Lanka, Maldives hotels and two
London restaurants have been shifted to IHOCO BV. This restructuring
allows efficiency in upstreaming of funds and a potential fund raise.

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 Indian Hotels Company Ltd

More recently IHOCO BV purchased Taj Cape Town from Tata Africa
Holdings and hence it is now wholly owned by IHCL.

It is pertinent to touch upon the evolution of the current structure. In its

global expansion drive in the year 2005 IHCL bought “The Pierre” in New
York for Rs 2bn, it was followed by Ritz Carlton in Boston for Rs7.7bn (later
sold) and Campton Place in San Francisco for Rs2.7bn. Currently these
assets are held in the structure as below (Exhibit 91). The parent company
IHOCO B.V. also houses IHCL’s 1980’s acquisition St. James (later
rechristened as St. James Court) and Buckingham Gate Suites.

Exhibit 91: IHCL’s significant overseas subsidiaries

Taj overseas subsidiaries

United Overseas Holdings (100%) St James' Court Hotels Limited (72.25%)

The Pierre New York St James' Court London

(189 rooms) (338 rooms)

Taj Campton Place, San Francisco Buckingham Gate Suites

(110 rooms) (85 rooms)

Source: SKP Research

United Overseas Holdings started operations in October 2015. Currently, the entity is
recording losses at the EBITDA level. The entity acquired a property in Boston for
US$175mn in 2006 and sold it for US$125mn in 2016. However, IHCL retained the
management contract of the property with the new owner, which was eventually
terminated on 1 Nov 2019.
Exhibit 92: The Pierre - New York Exhibit 93: Taj Campton Place – San Francisco

100 20 17 18 18
16 16 17
80 76
74 71 72 69 73 15
75 15
USD mn

USD mn

50 10

25 5 2 2 2 2
1 1 1 0 1 0 1 1 1 1
0
- 0
-14 -18 -17 -20 -18 -14 -15 0 -1 -1 0
-8 -9 -11-12 -9 -11 -13 -9 -9 -10-10 -2 -1
-25 -15 -11-13 -5
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Revenue EBITDA PAT Cash Profit Revenue EBITDA PAT Cash Profit

Source: Company, SKP Research

SKP Securities Ltd www.skpsecurities.com 43

 Indian Hotels Company Ltd

As per FY20 financials, United Overseas Holdings’ cash loss stood at Rs607mn, which
needs to be covered by the Rs 7bn cash flow from operations (CFO) of the rest of the
business. A performance improvement in the US-based properties will make funds
available for IHCL’s planned inventory expansion and debt reduction. We prefer to
value the loss-making international subsidiaries at book value minus present value of
the annual cash loss, till the life of the contract. We value St James’ Court at 10x
EBITDA (given the steady improvement in its ROCE and consistently healthy EBITDA
margin of ~20% in the last four years).
Unlocking non-core assets: IHCL has a total land bank of 759 acres, of which 535
acres is freehold land and the balance is leasehold land. Of these 535 acres, 44 acres
can be monetized. Developable land totals 236 acres, and the balance would be held
for future use, according to management. Apart from the land bank, IHCL is looking to
use unutilized FSI space of 1mn sq. ft.
Exhibit 94: Total land bank of 759 acres

Source: Company, SKP Research

Opex reduction amidst recovery

Since the Lockdown, there has been steady recovery on both occupancies and ARR.
Resulting in RevPAR crossing Rs1000 mark in June.
Exhibit 95: Occupancy movement since lockdown

100%
76% 77%
80% 68% 66%
61% 63%
60%
40% 32% 33% 32% 31% 35% 32%
26% 27%
19%
20% 9%
0%
IHCL Standalone (2019) IHCL Standalone (2020) Domestic Network

Jan-Feb Mar Apr May Jun Jul Aug Sep

Source: Company, SKP Research

SKP Securities Ltd www.skpsecurities.com 44

 Indian Hotels Company Ltd

Exhibit 96: RevPAR is steadily recovering from sub Rs1,000 levels

13,106
11,637

12,912
11,646
14,000

10,000

9,967
9,811
8,849
8,726
12,000

7,870
7,656
10,000

6,544

6,515

5,516
5,370
5,087
4,890
8,000

4,568

4,140
4,048

3,760

3,645
3,344
6,000

2,258
1,572
1,439
1,352

1,340
4,000

975
921

869
705
2,000
-
IHCL Standalone IHCL Standalone IHCL Standalone IHCL Standalone Domestic Network Domestic Network
(ARR-2019) (ARR-2020) (RevPAR-2019) (RevPAR-2020) (ARR) (RevPAR)

Jan-Feb Mar Apr May Jun Jul Aug Sep

Source: Company, SKP Research

On the fixed cost front, IHCL has used its growing inventory to its advantage by
redeploying its staff to new properties and other group companies, which is the best
outcome considering the retrenchment observed in other corporates. On quarterly
basis, IHCL reported Rs835bn EBITDA (including Other Income) loss in Q2FY21 vs
Rs2,343mn in Q1FY21. Further the management indicated that it was profitable at
EBITDA level in Sep’20. We are baking in recovery in FY23 and IHCL to be EBITDA
positive in H2FY21.
Exhibit 97: Revenue* to follow occupancy improvement Exhibit 98: Assuming capex will begin only in FY23

69% 71%
40,000 68% 67% 67% 75% 16,000 16%
12%
32,000 60% 11%
50% 12,000 9% 9% 10% 12%

24,000 35% 45% 8,000 8%

Rs mn

Rs mn

16,000 30% 4,000 4%

8,000 15% - 2% 0%

- 0% -4,000 -2% -4%

FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY19 FY20 FY21E FY22E FY23E FY24E FY25E
Revenue Occupancy EBITDA (excl. Other Income) FCF ROCE

Source: Company, SKP Research. Graphs are for IHCL standalone

We are expecting 10% absolute reduction in employee cost in FY23 over FY19. It
remains to be seen how much of the other admin expenses the company is able to
retain once normalcy returns, we are not assuming any saving here.
Exhibit 99: YoY Reduction in expenses in H1FY21

10,000 50%
7,358 7,880
Bulk of the employee cost 8,000 20%
reduction is from the US and 6,000 4,441 -10%
Rs mn

UK hotels, where employees 3,415

4,000 -40%
-40% 1,697
was terminated or furloughed. 2,000 -70%
-57% 310
This is under the government
- -82% -100%
support program
Employee Cost Administrative & Other Consumption of Provisions,
Expenses Wines & Others
H1FY20 H1FY21 YoY change

Source: Company, SKP Research

SKP Securities Ltd www.skpsecurities.com 45

 Indian Hotels Company Ltd

Valuation
We value IHCL using the SOTP method, assigning the asset-heavy business a 15x
EV/EBITDA on FY23E EBITDA and 30% discount to the market value of 1.1% Tata
Sons stake owned by IHCL. We arrive at a 24 months target price of Rs 183 per share,
implying an upside of 43% from the CMP. As highlighted earlier bulk of the value rests
on the performance of hotels under the standalone entity.
Exhibit 100: EV/Room trajectory (Rs mn)

30

25
20

15

8
Jun-13

Nov-13

Dec-15

Jun-18

Nov-18

Dec-20
Feb-15

Sep-19
Jul-15

Oct-16

Jul-20
Sep-14

Feb-20
Aug-12

Apr-14

Aug-17

Apr-19
Mar-12

Jan-13

May-16

Mar-17

Source: SKP Research Jan-18

*calculated on equity adjusted non-ginger rooms. EV of management contract business is ignored

Exhibit 101: Valuation calculation

FY23
Ownership/ Valuation Per share
Label Criteria Factor Shares Held Value (Rs mn) (Rs mn) value
Owned Asset A 15 x EBITDA EBITDA 7,145 1,07,174 90
Managed Asset B 15 x EBITDA EBITDA 1,847 27,705 23
Piem Hotels C 10 x EBITDA EBITDA 51.6% 1,054 5,440 5
Benares Hotels D 30% discount to (Debt+Market value of investments) 51.7% 1,723 623 1
Oriental Hotels E 30% discount to (Debt+Market value of investments) 35.7% 5,545 1,385 1
TajGVK Hotels & Resort F 30% discount to (Debt+Market value of investments) 25.5% 10,214 1,825 2
Taj Sats G 10 x EBITDA EBITDA 51.0% 350 1,786 2
Roots Corporation H EV 63.7% 3,691 2,352 2
St James Court I 10 x EBITDA EBITDA 72.4% 1,027 7,429 6
Other International Subs J Book Value 13,268 11
US subs cash loss K CFO (607) (4,871) (4.1)
Tata Sons stake L 30% discount to (NW+Market value of investments) 1.1% 70,01,652 77,961 66
EV (Rs. mn) M=Sum (A:L) 2,42,076
Net Debt (Rs. mn) N 25,000 21
Potential cash from land sale and other non-core assets (Rs. mn) Unknown
Valuation of Equity (Rs. mn) O=M-N 2,17,076
Number of Shares Outstanding (mn) P 1,189
Fair Value Q=O/P 183
CMP R 127
Upside S-Q/R-1 43%
Source: SKP Research

Key risks
1. Long delay in business travel resumption
2. Delay in commissioning the pipeline inventory: IHCL’s profitability is highly
dependent on the growth in management contract business hence timely
commissioning and filling up the pipeline will be key.
3. Increase in overseas losses

SKP Securities Ltd www.skpsecurities.com 46

 Indian Hotels Company Ltd

Exhibit 102: Income Statement & Balance Sheet

Income Statement (Standalone)

Y E March (Rs Mn) FY19 FY20 FY21E FY22E FY23E
Net Sales 27,804 27,435 11,602 16,318 28,425
Growth (%) 7.6 -1.3 -57.7 40.7 74.2
Operating Expenses 20,510 19,824 12,520 14,292 19,648
Operating Profit 7,294 7,611 -918 2,027 8,778
Other Operating Income 0 0 0 0 0
EBITDA 7,294 7,611 -918 2,027 8,778
Growth (%) 16.0 4.3 -112.1 -320.8 333.1
Depreciation 1,691 2,038 1,963 1,981 2,069
Other Income 905 1,344 1,384 1,426 1,469
EBIT 6,508 6,917 -1,497 1,471 8,178
Finance cost 1,586 2,376 2,588 3,380 3,380
Exceptional items -747 -164 0 0 0
Profit before tax 4,175 4,377 -4,084 -1,909 4,798
Tax (current + deferred) 1,538 363 -1,184 -554 1,391
Profit / (Loss) for the period 2,637 4,014 -2,900 -1,355 3,406

Reported net profit 2,637 4,014 -2,900 -1,355 3,406

Extraordinary item 0 0 0 0 0
Adjusted net profit 3,384 4,178 -2,900 -1,355 3,406
Growth (%) 66.7 23.5 -169.4 -53.3 -351.3

Balance sheet (Standalone)

Y E March (Rs Mn) FY19 FY20 FY21E FY22E FY23E
Share Capital 1,189 1,189 1,189 1,189 1,189
Reserves & Surplus 43,648 44,646 41,746 40,391 43,086
Net Worth 44,837 45,836 42,936 41,580 44,275
Minority Interest
Total Liabilities 18,627 31,671 37,219 37,220 37,221
Lease liabiities - 9,949 9,949 9,949 9,949
Long-term borrowings 12,482 17,086 23,039 23,039 23,039
Deferred tax liabilities 3,681 1,797 1,797 1,797 1,797
Other long term Liabilities 1,756 1,972 1,756 1,756 1,756
Long term provisions 708 867 679 679 680
Current Liabilities 15,341 11,560 11,279 11,601 12,260
Short term borrowings 5,358 2,347 2,347 2,347 2,347
Trade payables 1,901 2,552 2,000 1,788 2,025
Other current liabilities 6,902 5,439 5,752 6,286 6,708
Short term provisions 1,180 1,222 1,180 1,180 1,180
Total Liabilities and Equity 78,805 89,066 91,434 90,402 93,756

Non Current Assets 70,078 77,954 79,070 77,150 76,684

Net Block 25,203 25,887 25,021 23,442 23,317
Right of Use Assets - 8,605 8,265 7,924 7,584
Non-current Investments 39,193 37,428 37,428 37,428 37,428
Long-term loans and advances 2,141 2,901 5,229 5,229 5,229
Deferred tax Assets - - - - -
Other non current Assets 3,541 3,134 3,127 3,127 3,127
Current Assets 8,727 11,112 12,364 13,252 17,072
Inventories 512 591 531 550 526
Sundry Debtors 2,500 2,509 1,907 2,012 2,726
Cash & Bank Balances 960 1,482 2,815 3,564 6,657
Other current Assets 1,148 984 984 984 984
Loans & Advances 1,673 1,458 1,826 1,841 1,879
Current Investments 1,934 4,087 4,300 4,300 4,300
Total (Assets) 78,805 89,066 91,434 90,402 93,756
Source: Company, SKP Research

SKP Securities Ltd www.skpsecurities.com 47

 Indian Hotels Company Ltd

Exhibit 103: Cash flow statement & Key Ratios

Cash flow statement (Standalone)

Y E March (Rs Mn) FY19 FY20 FY21E FY22E FY23E
Profit before tax 4,175 4,377 -4,084 -1,909 4,798
Depreciation 1,691 2,038 1,963 1,981 2,069
Change in working capital 207 -1,080 -2,504 185 -68
Interest expenses 1,586 2,376 2,588 3,380 3,380
Total tax paid -1,345 -2,248 1,184 554 -1,391
Cash flow from operations (a) 6,315 5,463 -853 4,191 8,787
Capital expenditure -2,259 -2,722 -1,098 -402 -1,943
Change in investments 488 -388 -213 0 0
Others -780 407 348 340 340
Cash flow from investing (b) -2,551 -2,702 -963 -62 -1,602
Free Cashflow (a+Capex) 4,056 2,742 -1,951 3,789 6,844
Equity raised / (repaid) 0 0 0 0 0
Debt raised / (repaid) -4,793 4,540 5,953 0 0
Current maturity of long term debt 4,794 -2,947 0 0 0
Dividend (incl. tax) -533 -712 0 0 -712
Interest expenses -1,586 -2,376 -2,588 -3,380 -3,380
Others -1,976 7,861 -216 0 0
Cash flow from financing ( c ) -4,094 6,366 3,150 -3,380 -4,092
Net change in cash (a+b+c) -330 9,127 1,333 749 3,093
Reconciliation of Other balances 1,290 960 1,482 2,815 3,564
Cash as per Balance Sheet 960 1,482 2,815 3,564 6,657

Key ratios (Standalone)

Y E March FY19 FY20 FY21E FY22E FY23E
Growth Rates (%)
Net Sales 7.6 -1.3 -57.7 40.7 74.2
EBITDA 16.0 4.3 -112.1 -320.8 333.1
Adjusted PAT 66.7 23.5 -169.4 -53.3 -351.3
Valuation Ratios (x)
Adjusted EPS (Rs) 2.8 3.5 -2.4 -1.1 2.9
PER 44.8 36.3 -52.3 -111.8 44.5
Price / Cash EPS 29.9 24.4 -161.8 242.1 27.7
Book Value / Share (Rs) 37.7 38.5 36.1 35.0 37.2
Price / Bookvalue 3.4 3.3 3.5 3.6 3.4
EV/EBITDA 22.8 21.7 -185.0 83.4 18.9
Margins (%)
EBITDA 26.2 27.7 -7.9 12.4 30.9
EBIT 23.4 25.2 -12.9 9.0 28.8
Net Margin 12.2 15.2 -25.0 -8.3 12.0
Tax rate 36.8 8.3 29.0 29.0 29.0
Du Pont Analysis
ROE (%) 7.6 9.2 -6.5 -3.2 7.9
Net margin (%) 12.2 15.2 -25.0 -8.3 12.0
Assets turnover (x) 0.4 0.3 0.1 0.2 0.3
Leverage factor (x) 1.8 1.9 2.0 2.2 2.1
ROCE (%) (Post Tax) 7.6 9.2 -6.5 -3.2 7.9
Working Capital Ratios (Days)
Inventory 6.7 7.9 16.7 12.3 6.8
Sundry Debtors 32.8 33.4 60.0 45.0 35.0
Trade Payables 25.0 33.9 62.9 40.0 26.0
Working Capital -16.5 25.3 108.0 89.4 91.9
Others
Net Debt / Equity (x) 0.3 0.3 0.4 0.4 0.3
Dividend Payout (%) 18.0 14.8 0.0 0.0 17.5
Dividend / Share (Rs) 0.4 0.5 0.0 0.0 0.5
Source: Company, SKP Research

SKP Securities Ltd www.skpsecurities.com 48

Notes:
The above analysis and data are based on last available prices and not official closing rates. SKP Research is also
available on Bloomberg and Thomson First Call.

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