Indian Hotels + Leela Venture – BUY

In an exclusive report released just few minutes ago by Citigroup analysts on the Indian Hotels Sector, they continue to be bullish on Indian Hotels [Taj] and Hotel Leela Ventures and a HOLD on EIH India Ltd[Oberoi Hotels].

Indian Hotels Company Ltd [Taj]:
Indian Hotel (IHC) is the top pick with target price of Rs187 based on 21x Sept ’08E P/E (vs. 22x FY08E P/E) to factor in risk of increased room supply; but given scale, stronger earnings growth visibility, IHC’s pan-India presence, it is expected to trade at premium to the sector (16x).

Expansion Plans:
Plans to add six hotels (1,656 rooms) to the portfolio over FY08-10E – key being in Bangalore, Mumbai and Hyderabad. Besides this, IHC plans to increase number of ‘Ginger’ hotels to 30 by FY09-10E, up from eight now. Further tied up for management contracts in domestic (2,055 rooms) and international markets (584 rooms); all should be operational by FY08-11E.

Hotel Leela Ventures Ltd:
Stock Upgraded to BUY with 1M Rating [Medium Risk]
65% earnings growth, vs. 38% for the sector, in FY08E with additional rooms operational in Mumbai and Bangalore (ahead of supply in mid-2008); and 2) the stock’s 22% underperformance vs. the Sensex over the last three months. Our lower target price of Rs62 is set at 18x Sept 08 P/E, and offers 23% upside potential.

Expansion Plans:
Leela has capex of Rs19.5bn for building hotels over FY08E-11E, key locations being: Udaipur, Chennai, Pune, Hyderabad and South Delhi (recently acquired three acres at Rs6.1bn, this is a concern for ROCE, in our view).

The stock is currently trading at 15x Sept 08E P/E, at discount to sector’s 16x. With strong earnings growth momentum and the stock trading at lower end of its two-year historical P/E band of 16-25x.

EIH India Ltd [Oberoi Hotels]
Citi downgraded EIH to a Hold/Low Risk (2L). While earnings growth is still strong for FY08E, with stock up 13% over last 4-months, upside appears limited at 11% even at a price target of Rs.115 based on lower target multiple of 19x Sept’08E P/E, at 19% premium to sector valuations.

With the stock already trading at 17.5x Sept’08E P/E, at a premium to sector valuations of 16x, much of the 33% earnings growth of FY08E is priced in.

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