Kamat Hotels (India) Ltd.

Its all about Idli, Orchid and Willpower!

Industry : Hotels Price Target : Rs.250
Analyst: Rati Pandit +91 22 22836307 rati@nsbl.co.in

CMP : Rs.154 Buy

Kamat Hotels (India) Ltd (KHIL) a pioneer of the environmentallysensitive hotel brand, Ecotel, in India is one of the fastest growing hotel companies. KHILs revenues and net profits have grown at a CAGR of 44.8% and 157.5% respectively over FY05-07. Going forward the company plans to quadruple its room capacity from 509 to 2139 rooms by FY10. Considering the robust room demand in Mumbai, expanding room capacity of KHIL and firm ARRs, we expect its revenues and profits to grow at a CAGR of 42.2% and 63.9% respectively over FY07-10. Going ahead, the successful execution of its expansion plans shall help the stock arrest its underperformance. At a CMP of Rs.154 the stock is trading at a PE multiple of 7.3x, 5.8x and 3.1x its estimated FY08, 09 and 10 earnings respectively. We recommend a buy with a 12 month price target of Rs.250.

Current Recommendation CMP (INR) Target Price (INR) Key Data Bloomberg code KHI@IN Reuters code KAMT.BO BSE code 526668 NSE code KAMATHOTEL Equity (FY07) 137.9 Equity (Post Dilution) 173.2 Face Value (INR) 10.0 Market Cap. (INR Mn.) 2667.6 52 Week High (INR) 198.8 52 Week low (INR) 137.0 Avg. daily volume (Monthly) 9347.0 Shareholding as on 30.06.07 Promoters & Promoter Group MF FII Others Total (%) 73.0 0.0 7.4 19.6 100.0 Buy 154.0 250.0

Investment Rationale
Both the key hotel properties The Orchid Hotel and Lotus Suites are strategically located near the domestic and international airports respectively, thereby helping KHIL achieve high Occupancy Rate (OR) of 85% across both the hotels. Adoption of the Ecotel concept enhances the marketability of its hotels as well as enables it to control its costs in a better way, thus commanding higher margins in the industry. KHIL has ambitious expansion plans over the next 3 yrs to penetrate in Tier-II and Tier-III locations which have a huge growth potentional. Besides this it plans to add another 135 rooms to Orchid by Q4FY09, after which we expect the EBIDTA Margins to improve to 49.3% in FY10E as the newly operational rooms will be sharing the existing facilities and employee base of KHIL. This combination of fully owned and asset light strategy for growth will see the companys ROCE jump from 12% in FY07 to 15.3%, 16.5% and 27.3% in FY08E, FY09E and FY10E respectively.

Returns (%) 1M Absolute Rel. to Sensex -13.6 -2.0 3M 7.3 6.2 6M -6.4 7.1 1Yr 3.9 32.6

Key Financials (Rs mn)

Y/E March FY06 FY07 FY08E FY09E FY10E E - Estimates Revenues 814.6 1119.3 1592.3 2077.2 3194.3 % Chg 52.2 37.4 42.3 30.5 53.8 EBIDTA % 43.2 46.7 48.9 47.3 49.3 Net Profits 155.8 205.8 372.2 460.4 865.6 % Chg 282.9 32.1 80.8 23.7 88.0 EPS (Rs) 11.3 14.9 21.1 26.6 50.0 ROE % 12.7 14.8 14.6 15.8 23.2 ROCE % 11.9 12.0 15.3 16.5 27.3 EV/EBIDTA 10.8 9.4 6.5 5.6 2.9 P/E 13.6 10.3 7.3 5.8 3.1

August 16, 2007

Initiating Coverage

Kamat Hotels (India) Ltd.

Company Background
Kamat Hotels (India) Ltd is promoted by Mr Vithal Kamat whose journey of becoming a hotelier began with the launch of various land mark restaurants in Mumbai and various other cities, with Satkar opposite to the Churchgate station being the flagship restaurants of the Kamats at one point of time. He is in this business since the past 3 decades and has been instrumental in making the environment sensitive hotel brand Ecotel popular in India. The 245 room 5-Star property of the company The Orchid, which is Asias first Ecotel hotel, is located adjacent to the Mumbai domestic airport. Since its inception in Sept 1997, the hotel has won around 52 national and international awards and is excelling in its service to its clients. The other hotel property of the company is a 190 room 4-Star Ecotel hotel Lotus Suites which is located at a brief distance from the Mumbai international airport. The company also operates the 32 room Hotel Siddharth in Nashik which is on a 35 yr management agreement and has recently acquired a 42 room hotel Sunny International in Nagpur on lease. It plans to increase the room capacity in Sunny international to 50 rooms and rebrand it as Lotus Suites Sunny International. Besides this KHIL operates a chain of Vithal Kamat Restaurants in Esselworld, Nashik, Mahad, TRC Sawantwadi and a catering unit at Bhayander. It has also acquired rights from the Rajasthan State Government for operating a restaurant in Jaipur.

KHIL Business Structure

Orchid Heritage (Forts and Palaces)

The Orchid (5 Star Business Hotels)

The Lotus Suites (4 Star Service Appts / Business Hotels)

Kamfotel (Kamat Budget Hotels)

Vithal Kamat Super Snacks (Veg. Restaurant chain)

Kamats Institute of Hotel Management & Catering Technology

Source : Company

The company has laid ambitious expansion plans to be executed over the next 3 yrs in the cities of Mumbai (Orchid Expansion), Pune, Nagpur, Raipur, Baddi and management agreements in some Tier-III locations which should see its room inventory jump to 2139 by FY10E, from 509 rooms currently.

August 16, 2007

Initiating Coverage

Kamat Hotels (India) Ltd.

Outlook for North Mumbai hotels to remain buoyant

Mumbai the capital city of Maharashtra where both the major hotel properties of KHIL are located, is a commercial megalopolis and also the financial capital of the country. Being well connected to global cities makes Mumbai a gateway to India.

North Mumbai a prefered destination for business travelers

Hospitality industry in Mumbai, based on the business mix, can be distinctly divided into two districts, viz. South Mumbai and North Mumbai. South Mumbai hotels like Oberoi, Taj Mahal Palace & Tower, Intercontinental the Grand, Taj President and Marine Plaza operate on a healthy mix of 20% leisure travelers and 80% business travelers visiting the business districts of Nariman Point, Port, Ballard Estate and Colaba. On the contrary, North Mumbai hotels like Orchid Hotel which is adjacent to domestic airport, Grand Hyatt at Santacruz located close to the domestic airport, The Leela Kempinski and ITC Grand Maratha in the vicinity of the international airport at Andheri, Taj Lands End at Bandra as well as JW Marriott at Juhu cater chiefly to the corporate travellers. These hotels operate on a business mix of airline crew (7-10%) and business travelers (90%) visiting the Suburban Business Districts (SBD) of Bandra Kurla, Andheri-Powai, Goregaon-Malad and the Peripheral Business District (PBD) of Navi-Mumbai. In CY 2006 approximately 40% of the estimated 4.4 mn foreign arrivals to India visited Mumbai and at present around 65% of the clientele in the premium segment hotels in North Mumbai comprise foreign business travelers. The major industries that are seen driving hotel demand in Mumbai are finance, consulates, shipping, trading (export & import), pharma (particularly in the MICE* segment), BPO, oil-related dredging and diamonds and jewelery. The Bharat Diamond Bourse an eight building massive complex with around 3,000 units will become operational in early 2008 in the Bandra-Kurla Complex, and will be among the key demand drivers for the North Mumbai hotels.

40% of Foreign Arrivals to India visit Mumbai

Source: CRISINFAC, Networth Estimates

*MICE: Meetings Incentives Conventions Exhibitions

August 16, 2007

Initiating Coverage

Kamat Hotels (India) Ltd.

Room demand in North Mumbai to grow at a CAGR of 10%

Room demand in premium segment in North Mumbai is expected to grow at CAGR of 10% over the next five years as against a CAGR of 13.2 % in the past 5 yrs. Room Supply is expected to grow at a lower rate at a CAGR of 8% as opposed to 11.5% in the past 5 yrs, as shortage of land and skyrocketing real estate prices in Mumbai has made development of new hotels economically unviable for most of the hotel companies. Thus the ORs are expected to be maintained at 80% levels over the next two years, post which we expect a drop in ORs to 77% due to some room supply from Taj Residency, Royal Orchid, Sofitel (Accor) and Royal Palms coming up in FY10. Besides this Sahara Star is expected to increase room capacity to 400 rooms by FY10 (refer Annexure I on pg. 14 for details). ORs are expected to move up again in FY11 and FY12 in line with the robust growth in demand. The ARRs (Average Room Rate) in North Mumbai are expected to grow by 20% and 7-8% in FY08 and FY09 respectively and fall slightly by 4-5% in FY10 before seeing an 8% and 10% increase in FY11 and FY12. Overall outlook for hotels located in the region remains buoyant as compared to cities like Pune, Hyderabad and Bangalore which will be seeing a lot of additional supply of rooms in the next 2 years. Amongst Tier-I cities Mumbai will be seeing the least room inventory coming in, due to which the demand will be higher than supply in the longer term.

Two Hotels in Prime Locations Yielding Gold ARRs at Orchid & Lotus Suites on an upward trend
The companys flagship property The Orchid Hotel is strategically located adjacent to the domestic airport. The hotel commenced operations in Sept 1997 with an initial capacity of 21 rooms, which was increased to 245 rooms in a phased manner. The land on which the hotel has been built has been taken on 30 yr lease (renewable for further 30 yrs) from Plaza Hotels Private Ltd one of the promoters of KHIL. The company has planned a further capacity addition of 135 rooms on a piece of land adjacent to Orchid. Out of these over 100 rooms are expected to be operational by Q4FY09 and remaining by early FY10. At present Orchid contributes to around 70.3% of total revenues of KHIL and 55-60% of its clients comprise foreign business travelers. 70% of the business is on corporate tie-ups with a repeat clientele of around 55.9% made up of more than 3,500 corporate clients. In line with other industry peers the company has recently migrated to single rupee tariff system, whereby it will be charging uniform rates for both domestic and foreign guests.
Orchid Hotel
12000 10000 ARR (Rs.) 8000 6000 4000 2000 FY06 FY07 FY08E FY09E OR (%) FY10E 95% 90% 85% 80% 75% 70% 65% 60% 55% 50%

ARR (Rs)

Being strategically located Orchid is one of the highest occupied hotel in Mumbai throughout the year with OR of around 88% in FY07 and ARR (Average Room Rate) of Rs 8139. The second phase of renovation of Orchid Hotel has been completed in Q1 FY08 and as a result we see a healthy improvement in ARRs in FY08. Assuming the ORs to remain constant at around 85-86% from FY08-FY10 in view of limited supply entering the city, the ARRs are expected to go up by 15% in FY08E, 8% in FY09E and 5% in FY10E.

Source: Company, Networth Estimates

August 16, 2007

OR (%)

Initiating Coverage

Kamat Hotels (India) Ltd.

Lotus Suites, Mumbai

7000 6000 ARR (Rs.) 5000 4000 3000 2000 1000 FY06 FY07 FY08E FY09E OR (%) FY10E 90% 85% 80% 75% 70% 65% 60% 55% 50%

ARR (Rs)

Source: Company, Networth Estimates

The second property of the company, the 190 room Lotus Suites (an ecotel hotel) is located near the Mumbai international airport and a major business district (Andheri-Kurla Road). Currently this is the only 4-star service apartment hotel in the area. This hotel came under the fold of KHIL in July 2005 with the merger of HIMCO (India) Ltd a loss making entity which fully owned the hotel (including land). This merger was planned keeping in view the synergies in operations between the two companies, saving in cost and income tax resulting from the merger. Post merger the property turned around in the first year itself and reported an EBIDTA Margin of around 55% in FY07, aided by a healthy improvement in ORs to 81% and ARRs of Rs 4814 in FY07, from Rs 3,128 in FY06. Going forward we assume the ORs to remain constant at 79-80% during FY08-FY10 and ARRs to see an increase of 10%, 7% and 5% in FY08E, FY09E and FY10E respectively.

OR (%)

The Ecotel advantage Ecotourism growing at a CAGR of 20%

According to International Ecotourism Society, Ecotourism started in 1990s and is growing globally at around 20% which is more than thrice the growth rate of tourism industry as a whole. As compared to Sunand-sand resort tourism which has already matured as a market, experimental form of tourism like ecotourism, nature, heritage, cultural and soft adventure tourism, as well as sub-sectors such as rural and community tourism is among the sectors expected to grow most quickly over the next 2 decades. More than two-thirds of US and Australian travelers, and 90% of British tourists, consider active protection of the environment, including support of local communities, to be a part of a hotels responsibility. A survey of US, British, and Australian travelers revealed that 70% would pay up to $150 more for a two-week stay in a hotel with a responsible environmental attitude. (Source: www.ecotourism.org). The Ecotel certification has been granted to Orchid and Lotus Suites by HVS Eco Services, a US based environment consulting firm. The certification requires adherence to five global environmental standards: energy conservation, water conservation, solid waste management, employee environmental education and environmental commitment. On one hand where environment friendliness enhances the marketability of a hotel (55.9% repeat clientele at Orchid) and leads to an increase in inbound traffic, on the other hand the hotel is also able to control its costs in a better way. Especially the power and fuel costs through installation of energy efficient equipment and practices can be very well kept under control and result in savings of 20% even in newly established hotels. Thus by way of such a cost cutting KHIL is able to command the third highest EBIDTA Margins (46.7% in FY07) amongst all the listed hotel companies, just next to Hotel Leela (47.9%) and TajGVK (47.3%).

Cost Benefits from adoption of Ecotel concept

Power & Fuel Cost as % of Sales (FY07)

7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00
7.08% 5.67% 5.38% 4.73% 5.20% 5.45% 4.84%

KHIL

Asian Hotels

Indian Hotels

EIH

Hotel Leela

Royal Orchid

TajGVK

Source: BSE, Networth Research

August 16, 2007

Initiating Coverage

Kamat Hotels (India) Ltd.

Rich expertise in F&B business F&B contribution to increase to 25% by FY10E

KHIL currently operates around 7 F&B outlets and 6 banquet halls in Orchid Hotel and Lotus Suites. It has a variety of F&B outlets in its hotels namely Boulevard, Gourmet, Vindhyas, Mostly Grills, Merlins, Cirkus Cirkus and Behind Bars which add to its revenues and creates wide publicity for both the hotels. Presence of these outlets ensures that the company has an active clientele apart from their room guests and provide stability to revenues in case of a fall in occupancy rates and room rates. F&B revenues from Orchid and Lotus Suites contributed to 24.21% of total revenues in FY07. Based on our conservative estimates we expect the contribution from F&B business in its various 5-Star and 4-Star hotels to increase slightly to 24.5% of total revenues by FY10E.
Service-wise Revenue Contribution (Current)
0.2% 1.7% 24.2% 70.7%
67.7% 24.5%

Service-wise Revenue Contribution (Post Expansion)

1.6% 1.3% 4.9%

3.2%

Room Revenues Restaurant Division Other Revenues

F&B revenues Management fees

Room Revenues Restaurant Division Other Revenues

F&B revenues Management fees

Source: Company, Networth Estimates

The contribution from the restaurant outlets in Sawantwadi, Esselworld, Nashik and catering unit at Bhayander has been around 1.72% of the total revenues in FY07.

Well charted out expansion plans Room Inventory to quadruple to 2139 rooms by FY10
KHIL has recently announced its ambitious expansion plans to be executed over the next 3 yrs in the cities of Mumbai, Pune, Nagpur, Raipur, Baddi and management agreements in some newer geographies in the states of Maharashtra, Gujarat, Jammu and Karnataka which have a huge growth potential in the years ahead (refer annexure II on pg 15). The mix of these greenfield and brownfield projects should see the companys room inventory jump to 1095 rooms by FY08 and 2139 rooms by FY10, from current 509 rooms (incl. rooms from management agreements). KHIL also plans to open a chain of environment friendly budget hotels called Kamfotels (Kamat+Comfort+Hotels) in various cities in India. Each Kamfotel will follow a franchise model, with KHIL providing the know-how to build and manage the hotel and it will be charging a management fee based on turnover/GOP/Fixed royalty for the brand. As an initial step in its direction it is refurbishing its hotel in Nashik (on management agreement for 35 yrs) and plans to re-christen it as a Kamfotel in the current year.

August 16, 2007

Initiating Coverage

Kamat Hotels (India) Ltd.

Summary of Expansion / New Hotel Projects

Location No of Rooms 135 Star Category 5-Star Ownership Est. Capex (Rs mn) 750 Est. ARR (Rs) 10,614 Est. OR % 85% Commencing on Q4 FY09

Orchid Mumbai - Expansion

Land on lease from PHPL Fort on Lease Owned Owned Owned Owned

Orchid Heritage - Pune Orchid Raipur Orchid Nagpur Lotus Suites Baddi Lotus Suites Nagpur Sub Total Management Agreements* Lotus Suites Aronda Orchid Vaishnavdevi Lotus Suites - Belgaum Lotus Suites Amboli Orchid & Lotus Balewadi (JV with BSEL Ltd & Unity Infrastructure) Lotus Vedant, Aurangabad Lotus Suites, Baroda Sub Total Grand Total Source: Company

42 120 120 94 100 611

Heritage 5-Star 5-Star 4-Star 4-Star

150 600 460 350 450

15,000 4,500 4,500 2,350 3,500

60% 64% 65% 62% 60%

Nov-07 Apr-09 Apr-09 Oct-08 Oct-08

34 200 60 60 407

4-Star 5-Star 4-Star 4-Star 4-Star & 5-Star 4-Star 4-Star

140

2,000 3,000 2,250 2,500 7,500

55% 60% 60% 60% 63%

Nov-07 Aug-07 Oct-07 Oct-08 Apr-09

100 150 1011 1622

2900

2,500 3,000

60% 55%

Nov-07 Jan-08

*All the management agreements are for a duration of 10 to 30 yrs and the company will be charging a management fee based on turnover/GOP/Fixed royalty for the brand.

Funding of capital expenditure

KHIL has recently raised around Rs.800mn by issuing 5.5% Foreign Currency Convertable Bonds for the part funding of its 3 hotel projects in Mumbai, Pune and Baddi. The minimum conversion price is Rs.225 and the maturity period of bonds is 5 yrs and one day. The rest of the capex will be financed by way of internal accruals and raising additional debt.

August 16, 2007

Initiating Coverage

Kamat Hotels (India) Ltd.

Some other distant plans MOU with CSSC

KHIL has entered into an MOU with the Centre for Study of Social Change (CSSC) for the management of their proposed star category hotel on a plot of land in Bandra-Kurla Complex belonging to CSSC. The company plans to construct a 110 room business hotel (expected to be under the Lotus Suites brand) on this 2.6 acre plot (1,14,000 sq ft) at an appropriate point of time. The capex for developing this hotel is estimated to be around Rs 1.1 bn. Any development on the same front will be another positive for the company.

Expansion Locations

plans

in

other

The company has around 10 acres of land in Kerala, in Alappuzha district on which it plans to construct a 5 star hotel, for which it is considering a tie-up with a foreign brand. Apart from this KHIL is actively exploring opportunities for entering Navi Mumbai (near the site of proposed international airport), Delhi and Chennai markets. These ventures would lead to revising our estimates upwards.

Rollout of Vithal Kamat Veg. Restaurants Target of 90+ VKSS Restaurants over the next 5 years
KHIL has embarked upon to achieve a target of 50+ restaurants under the Vithal Kamat Super Snacks (VKSS) brand name in various locations in Maharashtra, Gujarat, Rajasthan, Goa and Karnataka over a period of next 5 yrs. The company is open to adopting a franchise model in case of its food retail outlets, whereby it will be managing the outlets and charging a management fee based on turnover/GOP/Fixed royalty for the brand. In our view the promoters of KHIL have a proven track record of establishing independent restaurant outlets, which have become important landmarks in the respective cities in which they are currently operating. Also other good thing about this business is that it is less capital intensive with daily turnover in the range of Rs 15k to 25k dependent on the location and EBIDTA Margin of around 20-25%. The rollout of restaurants is much faster than that of hotels which normally take around 2-5 yrs to commence operations. With capex in the range of Rs 4 mn to Rs 10 mn per outlet the payback period is expected to be around 2 yrs which according to us is quite low. The company had entered into a tie-up with ONGC last year for operating motels and restaurants at selected ONGC & MRPL retail petrol outlets. But due to delay in ONGCs retail plans restaurant rollout has suffered a setback. Subsequent to this the company has entered into a similar tie-up with HPCL for operating environment friendly budget hotels called Kamfotels and opening around 40 VKSS outlets alongside HPCL retail petrol outlets. So in future as the rollout of VKSS outlets speeds up and benefits from the profitability of its restaurant operations start coming in, it will provide for a further upside in the valuation of KHIL.

August 16, 2007

Initiating Coverage

Kamat Hotels (India) Ltd.

51% Stake in Concept Hospitality Another Potential Trigger

The company is in the process of acquiring 51% stake in Concept Hospitality

Ltd, thereby making it a subsidiary of KHIL. Concept Hospitality is a company promoted by Mr Vithal Kamat and Mr K.P. Kannampilly (technical director, KHIL) and at present it is actively engaged in offering consultancy for hotel projects, management of hotels, clubs, resorts, timeshare schemes and other undertakings. Currently following are the major hotel properties managed (or under development) by the target company
S. no 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Hotels managed by Concept Hospitality Rodas An Ecotel, Hiranandani, Powai (owned by Hiranandani Group) Uppals Orchid An Ecotel, Delhi (owned by Uppal Group) Lotus Suites An Ecotel, Goa The Lagoona Resort An Ecotel, Lonavala Floatel Kolkatta The Wall Street Hotel, Jaipur Season Service Appartment Hotel, Koregaon Park, Pune Seasons Appartment Hotel, Aundh, Pune A resort at Munnar, Kerala (under development) Kamats Silvassa Resort Bhaskars Orchid, Hyderabad (under development) The Ganga Orchid, Bangalore (under development) The White Orchid, Vaishnavdevi (in a JV with KHIL) Chinggis Khaan, Mongolia, Ullanbaatar Orchid Gold Reef, Johannesburg, South Africa (under development) 2 projects in China (under development) * Category 3-Star 5-Star 4-Star 5-Star 4-Star 3-Star N.R* N.R N.R N.R 5-Star 5-Star 5-Star N.A 4-Star N.A Rooms 36 84 32 120 67 32 27 Appts 50 100 cottages 32 N.A** N.A 200 190 159 850

Source: company, www.concepthospitality .com; Networth Research * Not Rated **Not Available

Any significant development on the same front will prove to be another potential trigger for the stock.

Financial analysis Revenues & Profits to grow at CAGR of 42.2% and 63.9% over FY07-10
We expect KHILs topline to grow by 42.3%, 30.5%, 53.8% to Rs 1592.3 mn, Rs 2077.2 mn and Rs 3194.3 mn in FY08E, FY09E and FY10E respectively, aided by a healthy improvement in the ARRs across both its hotels in Mumbai and expansion plans in other cities. With the commencement of the new hotel projects of the company in Pune, Baddi, Nagpur and Raipur and properties on management agreement the dependence of the company on Orchid and Lotus Suites which contributed to around 70.3% and 25.4% of total revenues in FY07, will come down to 56.8% and 14.6% respectively by FY10E. Assuming the funds from FCCB to be converted into equity in FY08, the interest cost will reduce by 12.6% to Rs 132 mn in FY08. The interest cost is expected to increase again in FY09 to Rs 172.9 mn with borrowing s expected to go up for the funding of the companys expansion plans in Baddi, Raipur and Nagpur. On the tax front the company has received a tax holiday in case of its hotel project in Baddi for a period of 10 yrs from the date of commencement of the project. Net profit is estimated to grow at a rate of 77.9%, 25.7% and 88% in FY08E, FY09E and FY10E respectively.
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August 16, 2007

Initiating Coverage

Kamat Hotels (India) Ltd.

Q1FY08 Performance
The operating revenues increased by 39.7% in Q1 FY08 to Rs.293.4mn on the back of a 48.4% increase in room revenues to Rs.195.2 mn and 34.5% increase in F&B revenues to Rs 74.5 mn. The other revenues stood at Rs 23.6 mn. The net profit jumped by 139% to Rs 41 mn.

One of the most profitable hotel companies in India

KHIL has been enjoying comparatively higher margins in the industry due favorable industry environment in Mumbai and considerable savings on the cost front by successful adoption of the ecotel concept. Going forward we expect the EBIDTA margins to improve to 48.86% in FY08E as the OR and ARRs remain healthy and the costs stabilize. In FY09E we have projected a slight decline in margins to 47.3%, as the company will be in an expansion phase with most of the new projects becoming operational in the second half of FY09. Besides this we anticipate some competition coming up for Orchid Hotel, with the recent launch of the Hotel Sahara Star (formerly Airport Centaur Hotel) owned by the Sahara group, located near the domestic airport. However the impact on ORs will be marginal as the demand growth remains robust.

EBIDTA Margins of KHIL vis-a-vis other hotel companies

Hotel Leela TajGVK KHIL Asian Hotels Royal Orchid Viceroy Hotels Sinclairs Hotels Indian Hotels EIH AH Oriental Hotels EIH Jaypee Hotels 0
FY06 FY07

10

20

30

40

50

60

Source: Networth Research

EBIDTA Margins to improve post Orchid expansion

With the expansion in the room capacity of Orchid Hotel by 100+ rooms from Q4FY09 onwards and another 30 rooms to be added in FY10, the EBIDTA Margins are expected to move up again in FY10E to 49.3%, as the existing food outlets and other facilities will be used for the extended wing of the Ecotel and minimum staff required for operations will be employed.
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August 16, 2007

Initiating Coverage

Kamat Hotels (India) Ltd.

Investment Concerns

General industry risks: The hotel industry is directly related to the economic and political situation of a country. Hence, any slow down in the economy, political upheaval or negative events like a natural calamity or terrorist attack might have an impact on the operations of the company. Single city risk Around 95.7% of the total revenues of the company are derived from its 2 hotels located in Mumbai and 85% of the room capacity is located in Mumbai, which exposes it to the business risk of operating in a single area. However the company is diversifying its operations in other high growth geographies as a result of which the dependence on Orchid and Lotus suites in terms of revenues will reduce to 56.8% and 14.6% respectively by FY10E. Also acquisition of stake in Concept Hospitality, which is managing hotels in multiple locations will reduce the companys reliance on these two properties to some extent. Project execution Any delay in its expansion plans pertaining to a particular project will result in a delay in revenue recognition from that project.

Replacement Cost
The replacement cost of KHIL works out to Rs 5781.5 mn after consideration of the benchmark construction cost for construction of a 5-Star/4-Star hotel in todays date and the owned land bank of the company in Andheri, Baddi, Nagpur, Kerala and Raipur. On reducing the debt component from replacement cost of KHIL and adding cash and investment for FY08E we get a replacement value per share of Rs 248 (post dilution of equity from FCCB conversion).

Computation of Replacement Value

Replacement Value The Orchid Hotel Lotus Suites Valuation of owned Land* Total Less : Debt (FY08E) Add : Cash (FY08E) Add : Investment & Long term deposits (FY08E) Net Repl Value Equity Capital (post dilution) Replacement value / share (Rs) Rooms 245 190 Avg. cost of construction / per room (Rs mn) 12.7 8 Total Value (Rs mn) 3111.5 1520 1150 5781.5 2401 72 839 4292 173 248

*The 2.5 acre land on which Orchid Hotel has been built has not been considered as it is on a 30 yr lease from Plaza Hotels Pvt. Ltd. Source: Networth estimates

August 16, 2007

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Initiating Coverage

Kamat Hotels (India) Ltd.

Valuation At a CMP of Rs.154 the stock is trading at 7.3x, 5.8x and 3.1x its FY08E, FY09 and FY10E earnings and an EV/EBIDTA multiple of 6.5x, 5.6x and 2.9x for FY08E, FY09E and FY10E respectively. Considering the experience of the management in managing environment friendly 5-Star and 4-Star hotels, favorable industry environment, margin expansion coming in post Orchid expansion and growth plans in strategic locations we recommend investors to buy the stock with a 12 month price target of Rs.250, which is at a 62% upside from current levels.

Peer Group Comparison

Room Capacity FY07 Kamat Hotels TajGVK Asian Hotels Hotel Leela Indian Hotels EIH Ltd Royal Orchid 509 684 1140 1083 9901 3801 649 FY08E 1095 904 1140 2156 11362 4501 965 Revenues 1592.3 2847.6 4016.0 5537.0 30188.0 12110.0 1687.0 EPS 21.1 12.6 41.1 3.3 CMP 154.0 153.0 742.3 45.9 PE 7.3 12.2 18.1 14.0 16.6 19.3 10.4 EV/EBIDTA 6.5 7.7 11.2 11.0 13.0 9.3 6.8 FY08E EV/Room 9.8 11.4 15.0 18.8 10.5 8.8 4.4 ROCE 15.3 42.1 25.6 12.3 14.4 13.4 30.3 ROE 14.6 33.1 19.4 11.4 20.7 18.2 21.6 EBIDTA % 48.9 47.2 38.2 49.5 30.5 33.5 40.0 PAT% 23.0 27.7 20.9 27.7 18.1 17.1 25.2

8 . 2 135.5 5 . 5 106.0 15.6 162.0

Source: Networth estimates / Concensus estimates

340 300 260 11x Share Price (Rs.) 220

9x

KHIL PE Band

13x

180 7x 140 100 60 20

Sep-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07

KHIL has always traded at a discount to its peers and in a band of 9x to 13x. With revenues flowing from its scheduled expansions the stock is slated to be re-rated.
August 16, 2007
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Initiating Coverage

Kamat Hotels (India) Ltd.

Profit & Loss

(Rs. mn) Income Statement Room Revenues Food & Beverages Other Revenues Revenues % Ch. YoY Total Expenditure % Ch. YoY EBIDTA % Ch. YoY EBIDTA Margin (%) Interest PBDT Depreciation PBT before Other Income Other Income PBT after Other Income Tax PAT % Ch. YoY Net Profit Margin (%) Extra-ordinary Items RPAT Cash Profit % Ch. YoY FY06 560.4 224.1 30.2 814.6 52.2 462.9 46.0 351.7 61.2 43.2 122.8 228.9 65.6 163.3 8.8 172.1 16.3 155.8 279.6 19.1 155.8 221.4 159.9 FY07 791.0 290.1 38.1 1,119.3 37.4 597.0 29.0 522.3 48.5 46.7 151.0 371.3 79.4 291.8 9.0 300.8 95.0 205.8 32.1 18.4 205.8 285.3 28.9 FY08E 1,086.3 406.9 99.0 1,592.3 42.3 814.2 36.4 778.1 49.0 48.9 132.0 646.0 108.8 537.2 9.4 546.6 180.4 366.2 77.9 23.0 6.0 372.2 481.0 68.6 FY09E 1,406.5 535.1 135.6 2,077.2 30.5 1,094.7 34.4 982.5 26.3 47.3 172.8 809.6 139.4 670.3 9.8 680.0 219.6 460.4 25.7 22.2 460.4 599.8 24.7 FY10E 2,161.0 825.2 208.2 3,194.3 53.8 1,619.4 47.9 1,574.9 60.3 49.3 139.6 1,435.4 171.5 1,263.8 10.2 1,274.0 408.4 865.6 88.0 27.1 865.6 1,037.1 72.9

Balance Sheet
(Rs. mn) FY06 SOURCES OF FUNDS Equity share capital Reserves & Surplus Equity share holders funds Secured Loans Un Secured Loans Total Loan funds Deferred Tax Liability Capital Employed APPLICATION OF FUNDS Gross Block Less: Depreciation Net Block Capital WIP Investments Long Term Deposits Curr Assets, Loans & Adv Curr Liab & Prov Net Current Assets Miscellaneous Exp Total Assets 250.6 191.5 59.1 0.6 2,964.1 2,971.9 367.9 2,604.0 260.6 39.8 2,620.4 443.7 2,176.7 302.1 39.9 799.1 1,275.0 253.0 1,022.1 4,339.9 4,185.7 586.0 3,599.7 421.1 39.9 799.1 552.7 334.5 218.2 5,077.9 5,162.1 696.9 4,465.2 555.4 39.9 799.1 535.6 427.5 108.1 5,967.7 5,717.4 800.4 4,917.0 39.9 799.1 656.2 649.6 6.6 5,762.7 137.9 1,087.6 1,225.4 1,326.8 345.8 1,672.6 66.1 2,964.1 137.9 1,254.8 1,392.7 1,648.0 1,125.9 2,773.9 173.3 4,339.9 173.2 2,330.6 2,503.8 1,995.5 405.3 2,400.8 173.3 5,077.9 173.2 2,740.3 2,913.5 2,550.5 330.3 2,880.8 173.3 5,967.7 173.2 3,555.3 3,728.5 1,530.5 330.3 1,860.8 173.3 5,762.7 FY07 FY08E FY09E FY10E

Cash Flow Statement

(Rs. mn) FY06
Net Profit before tax and extraordinary items Depreciation Others Change in working capital Direct taxes paid (Net of refunds) Net cash from operating activities Purchase of Fixed Assets Capital WIP Investments Others Net Cash used in investing activities Proceeds from issue of Share Capital (Net of expenses) Increase/Decrease in Debt Dividend paid (including Tax on Dividend) Net cash used in financing activities Net Increase / (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents (Opening Balance) Cash and Cash Equivalents acquired on Amalgamation Cash and Cash Equivalents (Closing Balance) 172.1 65.6 36.7 48.2 (14.9) 307.6 (155.0) (106.6) (261.6) -

Ratios
FY06 Valuation EPS (Rs.) CEPS (Rs.) BVPS (Rs) PER (x) PEG (x) P/CEPS (x) P/BV (x) EV/EBITDA (x) EV/Net Sales (x) EV/room(x) Dividend Payout % Dividend Yield % Profitability ROCE (%) ROE (%) EBIDTA Margin (%) Net Profit Margin (%) Turnover Ratios: Avg. Collection Period (Days) Avg. Payment Period (Days) Net Fixed Assets (x) Total Assets (x) Other Financial Ratios Interest Coverage (x) Debt to Equity Ratio (x) 11.3 16.1 88.9 13.6 0.1 9.6 1.7 10.8 4.7 10.4 14.5 1.0 11.9 12.7 43.2 19.1 23.8 85.8 0.3 0.3 2.9 1.4 FY07 14.9 20.7 101.0 10.3 0.3 7.4 1.5 9.4 4.4 10.3 18.8 1.7 12.0 14.8 46.7 18.4 21.7 82.5 0.5 0.3 3.5 2.0 FY08E 21.1 27.4 144.5 7.3 0.2 5.6 1.1 6.5 3.2 9.8 13.8 1.7 15.3 14.6 48.9 23.0 21.9 76.7 0.4 0.3 5.9 1.0 FY09E 26.6 34.6 168.2 5.8 0.2 4.4 0.9 5.6 2.7 6.7 11.0 1.7 16.5 15.8 47.3 22.2 22.6 75.1 0.5 0.3 5.7 1.0 FY10E 50.0 59.9 215.2 3.1 0.0 2.6 0.7 2.9 1.4 4.1 5.9 1.7 27.3 23.2 49.3 27.1 23.7 74.2 0.6 0.6 11.3 0.5

FY07
300.8 79.4 0.4 (28.9) (30.3) 321.4 (400.1) (100.1) (96.8) (597.0) -

FY08E
546.6 108.8 (3.0) 4.4 (180.4) 476.4 (1,565.3) (119.0) 3.0

FY09E
680.0 139.4 (3.2) 106.2 (219.6) 702.7 (976.4) (134.3) 3.2

FY10E
1,274.0 171.5 (3.5) 100.7 (408.4) 1,134.3 (555.4) 555.4 3.5 3.5 -

(1,681.3) (1,107.5) 795.6 (339.6) (50.7) 405.4 (799.5) 871.6 72.1 -

(51.0) (2,891.4) (10.5) (61.5) (15.5) 60.7 15.6 60.8 (22.3) 1,086.3 810.8 60.8 871.6

451.5 (1,088.0) (50.7) (50.7)

400.8 (1,138.6) (3.9) 72.1 (0.8) 68.2 -

68.2

67.4

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Annexure I
Premium segment hotels in North Mumbai
Hotels Star Category Rooms FY06 The Orchid Hotel JW Marriott Grand Hyatt The Leela Kempinski ITC Grand Maratha Taj Lands End Renaissance Mumbai Hotel, Marriott Le Royal Meridian Intercontinental The Grand Hotel Sea Princess Sun-N-Sand Hotel Holiday Inn Ramada Hotel Palm Grove Hyatt Regency The Retreat Royal Palms Park Plaza (added 111 rooms in FY07) The Resort Planned hotels / Recently launched hotels Hotel Sahara Star (Formerly CentaurAirport, launched 223 rooms in July 07) Trident Hilton, BKC (expected to be opened up in phases from current yr) Hotel Searock (Being upgraded to premium hotel) Taj Residency, Airport hotel, Santacruz (Q4 FY09) Royal Palms (plans to have a 5-Star villa hotel with 60 rooms) Sofitel, Accor (FY10) Royal Orchid, Powai (in 2-3 yrs time) Total Source: CRISINFAC, Networth Research 5-Star 5-D 5-Star 5-Star 5-Star 5-D 5-Star 4,387 400 437 410 175 60 300 100 6,857 100 6 6 6 3 1 4 1 100 5-Star 5-D 5-D 5-D 5-D 5-D 5-D 5-D 5-D 5-Star 5-Star 5-D 5-Star 5-D 5-D 5-D 5-D 245 358 547 423 386 368 271 171 369 110 120 192 114 397 144 112 94 FY10E 380 358 547 423 386 476 471 171 369 110 120 192 114 397 144 223 94 Capacity Share (%) FY06 6 8 12 10 9 8 6 4 8 2 3 4 3 9 3 3 2 FY10E 6 5 8 6 6 7 7 2 5 2 2 3 2 6 2 3 1 Market Share (%) FY06 7 14 14 12 11 9 7 5 8 3 3 4 2 N.A N.A N.A N.A

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Annexure II
Market Overview of cities in which the company plans to set up its hotels
Mumbai Pune Discussed in detail on page 3 IT/ITES, biotechnology, auto industries key drivers for room demand in the city. Room demand is expected grow at a CAGR of 18% over the next 5 yrs. But the ORs are expected be on a declining trend post FY08, from 81-82% at present, due to estimated supply of 25002800 rooms to be added during next 4 yrs, in addition to existing 508 rooms in the premium segment. However in FY09 the OR and ARRs are expected to move up for a brief period on account of the Commonwealth Youth Games being held in the city in Oct 08. An emerging city of eastern Maharashtra, where there is currently no 5-star hotel in the branded segment and the average OR is around 70% in the citys hotels. A Multimodal International Hub Airport (MIHAN) project for developing an international air cargo hub being planned in the city. The project includes an SEZ, a captive power plant, a health city, road and rail terminals, an international school and a residential area on 3,600 hectares of land. KHILs both projects in Nagpur will be strategically located at a brief distance from the MIHAN project. Other players which are planning an entry in the city include Indian Hotels and Hyatt. Capital of Chattisgarh state, is fast developing as an industrial centre. The city lying on the Mumbai-Nagpur-Haora mainline, is well connected by air and rail and is a good base to visit the tourist centers of the region. KHIL plans to establish a 5-Star environment friendly hotel near city airport, mainly catering to mid-segment travelers in the various mining and power industries. North Indias industrial town housing an ambitious SEZ project and a captive market with more than 400 major healthcare companies present. KHILs Lotus Suites being the first branded hotel in the city will enjoy a first mover advantage and a tax holiday for 10 yrs. A tourist spot located on banks of a river that separates Maharashtra and Goa. Company setting up a 200 room hotel in Katra, a place from where the pilgrims normally start their journey on foot for the Vaishnavdevi shrine. Lies in north western Karnataka state, near the neighbouring states of Goa & Maharashtra A tourist place in Sindhudurg district, Maharashtra Commonly used as a base for visiting world heritage sites of Ajanta & Ellora, the city is a busy industrial centre of today. KHIL has entered into a management agreement with Vedant hotels Ltd, a company listed on BSE owning a 100 room hotel currently under refurbishment.

Nagpur

Raipur

Baddi

Aronda Vaishnavdevi Belgaum Amboli Aurangabad

Source: CRISINFAC, HVS International, Networth Research

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Networth Research: E-mail- research@nsbl.co.in Research Huzaifa Suratwala Rishi Maheshwari Rajan Kumar Rati Pandit Brijesh Rajvanshi Vishal Sanghavi Surya N. Nayak Ashwani Sharma Deepak Kumar KS Rabindra Basu Shruti Bhargava Shashin Shah Amar More Sector Auto / Banks / Shipping / Logistics Information Technology Cement / Pharmaceuticals Hotels / Aviation Telecom / Media Textiles Mid Caps Associate Associate Associate Associate Mid Caps Production E-mail id huzaifa.s@nsbl.co.in rishi@nsbl.co.in rajan@nsbl.co.in rati@nsbl.co.in brijesh@nsbl.co.in vishalsanghavi@nsbl.co.in suryanarayan@nsbl.co.in ashwanisharma@nsbl.co.in ksdeepakkumar@nsbl.co.in rabindrabasu@nsbl.co.in shrutibhargava@nsbl.co.in sdshah@networthstock.com amar@nsbl.co.in Telephone nos. 022-30286389 022-30286389 022-30286389 022-30286389 022-30286389 022-30286389 022-30286389 022-30286389 022-30286389 022-30286389 022-30286389 022-30286389

Networth Institutional Sales: E-mail- dealing@nsbl.co.in Raj Bhandari / Rameshwar Singh 022-22633020/1/2

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