Result Update

August 2, 2010 Rating matrix

Rating Target Target Period Potential Upside : : : : Buy Rs. 132 12 months 12 %

Kamat Hotels (KAMHOT)

WHATS CHANGED

Rs. 118

PRICE TARGET ............................................................. Changed from Rs 128 to Rs 132 EPS (FY11E) .................................................................................................. Unchanged EPS (FY12E) .................................................................................................. Unchanged RATING......................................................................................................................BUY

Key Financials
(Rs Crore) Net Sales EBITDA Net Profit FY09 120.0 35.8 5.7 FY10 107.8 30.4 -8.1 FY11E 131.9 43.8 3.3 FY12E 168.3 57.4 12.5

Results inline
Kamat hotels came out with better operating results for Q1FY11. The company reported operating profit of Rs.9.5 crore that remained inline with our estimates. It grew by 180.7% YoY due to rise in revenues and expansion in operating margins. Net revenues rose by 37.2% mainly on account of rise in occupancy levels, while average room rate (ARR) growth remained muted during the quarter on account of lean season. Operating costs for the quarter increased by 9.2% YoY that in turn helped the company to expand its operating margins. It improved by 1709 bps YoY to 33.4% (I-direct est: 34.4%). Among the operating costs components, fuel & power costs declined by 21% YoY to Rs.2.6 crore. With a rise in occupancy and expansion in operating margins, company has been able to post net profit of Rs.18 lacs against net loss of Rs.5.7 crore last year. However on QoQ basis, net profits recorded drop of over 97% on account of sharp rise in interest burden. Revenue growth lead by rise in occupancy This quarter witnessed gradual pick-up in the demand for hotel rooms from corporate travellers and recovery in demand from MICE segment compared with the last quarter. Occupancy levels have improved across its all four brands. As a result, overall operating income rose by 37.2% YoY to Rs.28.5 crore. Margin expansions backed by revenue growth and cost control While net sales grew by 37.2%, operating cost grew by only 9.2% YoY. Among the operating cost components, power costs declined by 20.6% to Rs.2.6 crore. As a result, its operating margins expanded by 1709bps YoY to 33.4%.

Valuation summary
FY09 PE (x) Target PE (x) EV to EBITDA (x) Price to book (x) RoNW (%) RoCE (%) 28.7 32.9 15.3 1.1 10.1 5.2 FY10 NA NA 18.0 1.2 -5.2 5.6 FY11E 59.7 68.3 12.5 1.1 2.1 6.4 FY12E 12.5 14.3 9.5 1.1 7.8 7.6

Stock data
Market Capitalisation Debt Cash EV 52 week H/L Equity capital Face value MF Holding (%) RI Holding (%) Rs 162.7 crore Rs 400 crore Rs 15 crore Rs 547.7 crore 135/49 Rs 13.8 crore Rs 10 0.01 3.8

Price movement (stock vis Nifty)

140 130 120 110 100 90 80 70 60 50 40 Jul-09 5500 5250 5000 4750 4500 4250 4000 Jul-10

Valuation
We expect FY10-12E revenue CAGR of 24.9% taking into account addition of nearly 120 rooms at its existing property in Mumbai, which is expected to get completed in phased manner during FY10-12E. At CMP of Rs.118, the stock is trading at 12.5x and 9.5x its FY11E and FY12E EV/EBITDA respectively. We remain positive on the company on account of favourable room demand-supply scenario in Mumbai compared to other metros. We value the company at 10.0x FY12E EV/EBITDA and arrive at target price to Rs.132, with BUY rating. Exhibit 1: Performance Highlights
Particulars Net Sales EBITDA EBITDA Margin (%) Depreciation Interest Other Income Net Profit EPS (Rs) Q1FY11 Q1FY11E 28.5 27.6 9.5 9.5 33.4 34.5 3.1 3.0 6.9 3.9 0.7 0.8 0.2 4.3 0.1 3.1 Q1FY10 20.8 3.4 16.3 3.1 8.9 1.1 -5.7 -4.1 Q4FY10 YoY Gr. (%) 31.3 37.2 13.6 180.7 43.5 +1709 bps 3.2 1.1 1.6 -22.9 1.4 -39.4 7.4 LP 5.4 LP QoQ Gr. (%) -8.9 -30.0 -1006 bps -3.2 338.5 -53.9 -97.6 -97.6

Oct-09

Jan-10

Apr-10 NIFTY

Kamat Hotels

Analysts name
Rashesh Shah rashes.shah@icicisecurities.com

Source: Company, ICICIdirect.com Research ICICIdirect.com | Equity Research

Kamat Hotels (KAMHOT)

Exhibit 2: Average occupancy levels across brands

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 84% 70% 51% 41% 29% 11% 48%

Occupancy levels at The Orchid and Vits have shown impressive growth in Q1FY11

44%

The Orchid

VITS Q1FY10

Fort Jadhav Gadh Q1FY11

Others

Source: Company, ICICIdirect.com Research

Exhibit 3: Quarterly trends in operating margin

8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 The Orchid VITS Q1FY10
Source: Company, ICICIdirect.com Research

7,533 6,013 5,166 3,758 3,373 1,809 1,979 5,706

Average room rates (ARRs) of The Orchid and VITS reduced by 20% and 10% YoY respectively in order to improve the revenue per available room (RevPAR)

Fort Jadhav Gadh Q1FY11

Others

Exhibit 4: Regional revenue matrix

With overall improvement in RevPAR and 34% increase in F&B income, total operating revenue from Mumbai grew by 33% to Rs.22.4 crore. Mumbai accounts for nearly 86% of total revenue of the company
Pune 3% Others 11%

Exhibit 5: Regional revenue growth

25.0 20.0 15.0 10.0 5.0 Mumbai Q1FY10 0.5 1.3 Pune 2.0 2.4 Others Q1FY11 22.4 16.8

Q1FY11

Mumbai 86%

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Capex plans The company is currently focusing on completing construction work of Orchid Expansion Hotel Project at Mumbai, which would add nearly 120 rooms to its existing 245 five star rooms in a phase manner over FY11-12. With this addition, we expect revenue CAGR of 24.9% in our forecast period FY10-12E. Apart from this, it is is also adding rooms under management contracts. The new contracts under O&M that includes resort at Udaipur (80 rooms), Karnataka (60 rooms) under Lotus brand and business hotel at Delhi (150 rooms) under VITS brand.

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Kamat Hotels (KAMHOT)

ICICIdirect.com Coverage Universe (Hotels)

IHCL FY09 Idirect Code MCap (Rs Cr) EIH FY09 Idirect Code MCap (Rs Cr) Hotel Leela FY09 Idirect Code MCap (Rs Cr) Taj GVK Hotels FY09 Idirect Code MCap (Rs Cr) Kamat Hotels FY09 Idirect Code MCap (Rs Cr) Viceroy Hotels FY09 Idirect Code MCap (Rs Cr) Royal Orchid FY09 Idirect Code MCap (Rs Cr) *EV/E - EV/EBITDA ROYORC 195.8 CMP Target 80.0 94.0 FY10 FY11E FY12E PALHEI 167.5 CMP Target 55.0 49.0 FY10 FY11E FY12E KAMHOT 162.7 CMP Target 118.0 132.0 FY10E FY11E FY12E TAJGVK 1009.5 CMP Target 162.0 186.0 FY10 FY11E FY12E HOTLEE 1889.1 CMP Target 49.0 55.0 FY10 FY11E FY12E EIH 4,518.9 CMP Target 127.0 128.0 FY10 FY11E FY12E INDHOT 7,161.7 CMP Target 100.0 118.0 FY10 FY11E FY12E Sales (Rs Cr} 2686.4 2516.5 3158.1 3679.9 Sales (Rs Cr} 1199.2 1038.3 1220.8 1379.5 Sales (Rs Cr} 459.8 436.2 558.7 691.1 Sales (Rs Cr} 238.2 229.1 270.9 318.6 Sales (Rs Cr} 123.1 107.8 131.9 168.3 Sales (Rs Cr} 103.0 93.9 122.3 157.6 Sales (Rs Cr} 140.2 120.4 141.2 203.8 EPS (Rs) 0.2 -2.7 3.5 5.3 EPS (Rs) 4.3 1.7 2.5 4.2 EPS (Rs) 3.8 1.1 2.0 3.0 EPS (Rs) 8.4 5.8 7.1 9.3 EPS (Rs) 4.1 -4.9 2.0 9.4 EPS (Rs) 1.6 0.3 1.1 2.2 EPS (Rs) 7.3 2.6 3.7 5.4 PE (x) 580.6 -36.6 28.9 18.9 PE (x) 29.4 75.3 51.3 30.2 PE (x) 12.8 45.1 24.8 16.6 PE (x) 19.3 28.0 22.8 17.5 PE (x) 28.7 NA 59.7 12.5 PE (x) 34.5 206.1 51.4 25.3 PE (x) 10.9 31.3 21.7 14.7 EV/E* (x) RoNW (%) 19.5 27.6 13.5 0.4 -6.4 7.5 RoCE (%) 4.7 2.6 7.6 10.4 RoCE (%) 13.8 7.2 10.1 12.2 RoCE (%) 4.7 1.6 3.1 4.4 RoCE (%) 14.4 10.5 9.8 12.8 RoCE (%) 5.2 5.6 6.4 7.6 RoCE (%) 2.1 1.7 2.3 3.0 RoCE (%) 7.9 2.8 4.1 5.0

Upside (%) 18%

10.3 11.4 EV/E* (x) RoNW (%) 13.7 20.0 17.6 13.7 26.6 34.1 21.5 16.6 11.1 13.1 11.5 9.3 15.3 18.0 12.5 9.5 25.1 27.1 19.8 15.3 6.4 12.8 12.5 10.4 12.0 4.8 6.7 11.9 7.5 2.0 3.3 4.9 19.5 12.4 13.2 17.2 10.1 NA 2.1 7.8 2.8 0.5 1.8 3.6 9.8 3.3 4.7 6.7

Upside (%) 1%

EV/E* (x) RoNW (%)

Upside (%) 12%

EV/E* (x) RoNW (%)

Upside (%) 15%

EV/E* (x) RoNW (%)

Upside (%) 12%

EV/E* (x) RoNW (%)

Upside (%) -11%

EV/E* (x) RoNW (%)

Upside (%) 18%

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Kamat Hotels (KAMHOT)

RATING RATIONALE

ICICIdirect endeavours to provide objective opinions and recommendations. ICICIdirect assigns ratings to its stocks according to their notional target price vs current market price and then categorises them as Outperformer, Performer, Hold, and Underperformer. The performance horizon is 2 years unless specified and the notional target price is defined as the analysts' valuation for a stock. Outperformer: 20% or more; Performer: Between 10% and 20%; Hold: +10% return; UnderPerformer: -10% or more; Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka Andheri (East) Mumbai 400 093 research@icicidirect.com ANALYST CERTIFICATION
We /I, Rashesh Shah CA-BCOM research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

pankaj.pandey@icicisecurities.com

Disclosures:
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ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of three months following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that Rashesh Shah CA-BCOM research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business. ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. 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