Share price correction led by negative news flow: IHCL has corrected ~20% overthe past three months (vs a flat broader market) led by higher GST rates and therecent board approval for fundraising of up to INR1.5bn through a rights issue. Thecompany is raising money to meet long-term financing needs such as capex, growthplans and debt repayment (Business Standard, August 20) which led to anotherc10% fall in the price in the past two weeks.    In July, the government imposed 28% GST on hotel rooms with a tariff of INR7,500and above – a negative for IHCL with its average room rate (ADR) of more thanINR10,000 for its major hotels across India. Premium hotels used to pay c10% luxurytax and 9% service tax. GST will lead to a 9% increase in total tax paid assuming noinput tax credit. Even if we assume 2-3% input credit, the increase is still high.    Right issues to fund capex and debt repayment: In February 2017 the companyannounced that it will phase out its Vivanta and Gateway Hotels brands and rebrandunder a new name – Taj Hotels Palaces Resorts Safaris. Although this will helpimprove occupancy and pricing further, the company needs capital to improveproperties to rebrand. We think another option to fund the refurbishment expenditurewould have been through selling some more foreign properties, which are margindilutive. In addition, the company may need capital to bid for Taj Mansingh, which willcome up for e-auction in the next six months.    Operating drivers continue to improve: We believe the recent correction does notdetract from our positive thesis and represents a good opportunity to add to positionsin IHCL as operating drivers continue to improve. In 1Q, the improvement inoperating drivers helped the company sharply improve EBITDA margins for thedomestic business – by 330bps y-o-y. We expect IHCL’s occupancy levels toimprove 400bps to 70% by FY19e and ADR to rise at a CAGR of 5% over FY17-19e.    Valuation and risks: We adjust our 2018-19 earnings estimates down to account forhigher GST rates. We value the consolidated business using a 12-month forwardEV/EBITDA multiple of 19x (unchanged), rolled over to September 2018, which is atc15% premium to EIH, the second-largest domestic hotel player, and a 30-50%premium to international peers. We cut our TP to INR145 (from INR155), whichimplies 26.4% upside and we rate the stock Buy.

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