ICRA Credit Perspective

INTERGLOBE HOTELS PRIVATE LIMITED

Analytical Contact
Kapil Banga
kapil.banga@icraindia.com +91-124-4545391

Ratings
ICRA has reaffirmed the long term rating of [ICRA]BBB- (pronounced ICRA triple B minus) for Rs. 407.00 crore bank facilities of Interglobe Hotels Private Limited (IHPL) . The rating carries a stable outlook.
(Refer Annexure for Instrument Details)

Shubham Jain
Shubhamj@icraindia.com +91-124-4545306

Rohit Inamdar
rohit.inamdar@icraindia.com +91-124-4545847

Particulars (Rs. crore) Operating Income (OI) Operating profit before depreciation, interest, tax and amortization(OPBDITA) Profit after tax (PAT) Equity Capital Tangible Net Worth(TNW) Total Debt OPBDITA/OI PAT/OI PAT/TNW PBIT/(Total Debt + TNW +DTL CWIP) OPBDITA/Interest and Finance Charges Gross Cash Flows+interest/Interest Net Cash Accruals/Total Debt Total Debt/(TNW+Minority Interest) Total Debt/OPBDITA Net Working Capital/OI
Source: Company

31.03.09 16.60 3.16

31.03.10 30.37 8.70

31.03.11 43.46 14.66

Relationship Contact
Vivek Mathur
vivek@icraindia.com +91-124-4545310

-1.17 280.84 275.40 183.10 % % % % Times Times % Times 19.01% -7.02% -0.42% 0.57% 1.14 (4.06) 1% 0.66

0.66 363.19 381.01 234.82 28.66% 2.17% 0.17% 1.41% 1.66 (2.07) 2% 0.62

-2.26 421.73 413.44 343.81 33.73% -5.21% -0.55% 1.28% 1.67 (0.00) 1% 0.83

December 2011

Times %

58.01 221%

26.98 190%

23.45 169%

Website: www.icra.in

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100 lakh = 1 crore = 10 million For complete rating definition please refer to ICRA website www.icra.in or any of the ICRA Rating Publications Page 1

ICRA Credit Perspective

Interglobe Hotels Private Limited (IHPL)

Credit Strengths
Association with Accor (40% stakeholder in the company), an established hospitality services provider, with around 4000 hotels in 90 countries. The association besides management support provides brand recognition and access to Accors global reservation systems Fiscal conservatism adopted by the promoter group and deferment of debt drawdown are expected to keep the leverage at moderate levels Significant proportion of equity contribution has already been brought into the company by the promoters and financial closure for most of the projects has been achieved mitigating the funding risk. Launching of Ibis brand in India in the 3 star category that currently has limited participation from branded players on a pan-India basis, is expected to accrue benefits from the burgeoning demand for select service affordable branded options in the segment Geographically diversified asset portfolio insulates the company from cyclicality specific to a particular region. Further, favorable Location of all the existing and planned properties closer to commercial & retail districts lends revenue visibility Prudent cost rationalization inherent in the Ibis business model supports project viability

Credit Concerns
High operating leverage and cyclicality inherent in the hospitality business may impact revenue generation and profitability; however presence in economy segment enhances the readiness of the properties to withstand cyclicality Nascent stages of brand positioning with only three properties operational as of now, against total fifteen projects planned Stiff competition from the numerous unbranded hotels; however, prime location of Ibis properties coupled with standardization of quality offerings partly helps to mitigate this competition Dearth of economically viable opportunities for geographic expansion due to steep real estate cost Modest scale of operations owing to stabilization phase for some of the existing properties and capex phase of the planned properties Ongoing delays in certain projects, such as Jaipur and Delhi, may postpone the inflows for the company and exert pressure on net cash flows, on account of cost overruns. Significant execution risks in the backdrop of the scale of planned expansion

Rating Rationale
The rating reaffirmation takes into account IHPLs exclusive agreement with Accor Group to develop 3- Star hotels under the brand name Ibis in India, its geographically diversified portfolio of projects (under-development as well as operational), the fact that the financial closure for most of the projects has been achieved and its comfortable capital structure led by upfront capital infusion by the promoters. IHPLs association with Accor Group, besides fetching investment, provides strong brand recognition and offers IHPL access to Accors global reservation systems. ICRA notes that the occupancy for IHPLs properties will be further supported by favourable location of IBIS properties which is usually located close to city center, as is reflected by the healthy performance of two of its operational properties, at Golf Course Road in Gurgaon (Haryana) and Domestic Airport in Mumbai (Maharashtra). The ratings also positively factor in the emphasis on prudent cost rationalisation embedded in the IBIS business model which is expected to bolster the profitability indicators for the company. The equity funding support from the promoters and fiscal conservatism adopted by them in relation to the overall leverage along with deliberate deferment of debt drawdown are expected to keep the capitalisation indicators moderate; though the leverage of the company is expected to increase in future given that the incremental capex will be largely funded through debt going forward. The ratings are however constrained by inherently high operating leverage of the hospitality industry which increases the reliance on remunerative Revpars to sustain profitability, and cyclical nature of revenue generation owing to economic or seasonal cycles. The ratings also takes into account the fact that the operations of the company are still in initial stages and are yet to turn profitable at the net level. With a number of its projects currently being in the construction phase, the company remains exposed to the risk relating to timeliness of project execution and commencement of hotel operations; though some comfort can be drawn from the engagement of reputed and experienced agencies that mitigates execution risks to an extent. The Indian budget hotel segment remains largely unorganized,
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ICRA Credit Perspective

Interglobe Hotels Private Limited (IHPL)

characterized by relatively low entry barriers; IHPL faces significant competition from brands such as Ginger, RedFox, Keys etc. in addition to the standalone players in the individual markets.

Company Profile
Interglobe Hotels Private Limited (IHPL), a 60:40 JV between Interglobe Group and Accor Group of France (Accor), is developing 15 budget hotels under the brand name Ibis in India. IHPL is expected to have a cumulative inventory of approximately 2800 rooms in the next four to five years across India. Accor, a Euro 7 billion group, is a leading player in the hospitality industry with more than 4,000 hotels in 90 countries. Interglobe Enterprises Limited, on its part, is an established player in aviation management, travel distribution services, and ground handling services.

Business and Competitive Positioning

Positioning in the Economy Segment... The Ibis brand is targeted towards economy segment. An Ibis property is typically located near central business district and offers a room inventory of 100+ rooms. The manning ratio of the Ibis property is generally low, at 0.5-0.6 per room, which reduces the operating costs. Hence, the emphasis of Ibis business model to prudently rationalise cost will support the companys ability to offer competitive rates. However, the company faces significant competition from the unorganised players, which currently dominate this segment. Nascent stage of brand positioning in India with only three properties operational as of now The companys first hotel started operations in the city of Gurgaon (Haryana) in August 2008 and till date the company has only three operational properties- one each in Gurgaon (Haryana), Mumbai (Maharashtra) and Pune (Maharashtra). Since, the operations are confined to three hotels only as of now, with the skew more towards under-construction properties, the operations are currently at a nascent stage. In FY2011, the Operations of the Gurgaon property were satisfactory, with Revpar of Rs. 3400 but the performance of the Pune property was subdued, with revpar of Rs. 1400 only. The Pune market has been in oversupply situation, which has resulted in the modest performance of the property. The Mumbai hotel started operations on a healthy note in March 2011, with Revpar of Rs. 3200 in H1FY12. Hence, the performance of the properties has been mixed, driven largely by the location and the dynamics of the micro market. The companys ability to successfully market its brand and offer competitive prices without diluting its brand remains to be seen. However, association with Accor reduces the risks to some extent. Sizeable Expansion Plans.. IHPL, in collaboration with Accor, is planning to develop a total of fifteen properties and envisages a total operating room inventory of ~2800 rooms by FY2016. The total capex for these fifteen properties is estimated at ~Rs. 1300 crore funded in an overall debt to equity ratio of 60:40. The company has so far incurred ~50% of the projected capex and has commenced operations at only three of the properties. Moreover, the company has plans to acquire more properties to expand beyond fifteen hotels and is actively exploring new opportunities. The size of the expansion is significant thus the execution and management capability of this magnitude is yet to be demonstrated. Tie-up with Accor Group of France (Accor) imparts strong brand recognition, superior management expertise and access to its global reservation systems.. IHPL has entered into a management agreement with Accor SA for its economy brand- Ibis. The agreement besides imparting strong brand recognition to the property also provides IHPL access to Accors global reservation systems. Accor, a Euro 7 billion group, is a leading player in the hospitality industry globally, and has around 4,000 hotels in 90 countries

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ICRA Credit Perspective

Interglobe Hotels Private Limited (IHPL)

Geographically diversified projects likely to minimize the impact of adverse environment in any particular micro market.. IHPL currently has under-development/operational hotels in Delhi, Bombay, Bangalore, Chennai, Hyderabad, Gurgaon, Pune, Nashik, Jaipur, Kochi, Coimbatore and Goa and is currently exploring more cities to establish its hotels. The geographical diversification and pan-India presence is likely to enable the company in mitigating the vulnerability to possible downturns in any particular industry/region.

Financial Profile
IHPLs operating income in FY2011 stood at Rs. 43.46 crore and was largely from two hotelsGurgaon and Pune; the Gurgaon hotel started operations in August 2008, the Pune property in September 2010 and the hotel at Mumbai Domestic Airport started operations in March 2011. The operating margins of the company increased from 29% in FY2010 to 34% in FY2011, owing to the improvement in performance of the hotels in Gurgaon and Pune. The gearing of the company remains moderate at 0.83 times as on 31st march 2011 despite significant capex owing to the equity contribution brought in upfront. The promoters have also infused Rs. 134 crore through preference shares in FY07 with face value of Rs. 1000 at a premium of Rs. 9000. These preference shares are redeemable in 20 years for the same consideration (i.e. Rs. 9000 premium on face value of Rs. 1000). All the projects being developed by IHPL are being funded in a debt-equity ratio of 60:40. Moreover, the promoters have infused majority of their contribution in the early stages of project development, in order to reduce the interest during construction. The gearing of the company is expected to increase going forward as the incremental capex will be largely funded through debt. Nevertheless, the fiscal conservatism adopted by the promoters is expected to enable the company in keeping the debt position and the debt protection indicators at comfortable levels.

Prospects
Going forward, companys ability to improve operational metrics by strengthening brand presence, maintain its profitability in wake of stiff competitive intensity and ensure timely completion of capex will remain the key rating sensitivities.

Recent Results

In FY2011, Interglobe Hotels Private Limited (IHPL) reported operating income of Rs. 43.46 crore (previous year Rs. 30.37 crore) and net profit of Rs. -2.26 crore (previous year Rs. 0.66 crore).
December 2011

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ICRA Credit Perspective

Interglobe Hotels Private Limited (IHPL)

Annexure 1: Rating
Instrument Amount (Rs. Crore) Rating Action

Term Loans Non-fund-based Limits

Rs. 379.00 Rs. 28.00

[ICRA]BBB- (stable) reaffirmed [ICRA]BBB- (stable) reaffirmed

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ICRA Credit Perspective

Interglobe Hotels Private Limited (IHPL)

ICRA Limited
An Associate of Moody's Investors Service
CORPORATE OFFICE Building No. 8, 2nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002 Tel: +91 124 4545300; Fax: +91 124 4545350 Email: info@icraindia.com, Website: www.icra.in REGISTERED OFFICE 1105, Kailash Building, 11th Floor; 26 Kasturba Gandhi Marg; New Delhi 110001 Tel: +91 11 23357940-50; Fax: +91 11 23357014

Branches: Mumbai: Tel.: + (91 22) 24331046/53/62/74/86/87, Fax: + (91 22) 2433 1390 Chennai: Tel + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294, Fax + (91 44) 2434 3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065 Ahmedabad: Tel + (91 79) 2658 4924/5049/2008, Fax + (91 79) 2658 4924 Hyderabad: Tel +(91 40) 2373 5061/7251, Fax + (91 40) 2373 5152 Pune: Tel + (91 20) 2552 0194/95/96, Fax + (91 20) 553 9231
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