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Hold Indian Hotels – Morgan Stanley

November 20, 2007

Unlike other sectors which are painting aggressive growth stories [we have to see their execution capabilities yet], the Hotel sector is something being invaded by Realty companies in India now. Existing big players, Indian Hotels[Taj Group by Tata] and Oberois have a very laid back expansion plans.

The demand-supply mismatch will likely continue for at least the next 18 months.

Rights Issue to Dilute Equity:The company intends to raise Rs14.4 billion through a rights issue of equity shares and non-convertible debentures. Further, it will issue warrants that will be convertible into equity 12 months after the rights offering. This should raise an additional Rs7.8-9 bn. However, these rights offerings
will dilute earnings by 30%.

MS forecasts a 29% earnings CAGR in F2007-09, EPS will be diluted due to the planned rights offering. Indian Hotels is likely to report an EPS of Rs 7.32 and Rs 7.2 for FY08 and 09 respectively. Morgan Stanley has set a target price of Rs 180 on the stock with a Long Term Outperformer rating.

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