TEXT-Fitch cuts Indo-Continental Hotels to 'Fitch BBB-(ind)'

(The following statement was released by the rating agency)

Jan 18 - Fitch Ratings has downgraded India-based Indo-Continental Hotels & Resorts Ltd's (ICHRL) National Long-Term rating to 'Fitch BBB-(ind)' from 'Fitch BBB(ind)'. The Outlook is Stable. A list of additional rating actions is provided at the end of this commentary.

The downgrade reflects the delays in the execution of ICHRL's Jodhpur project, which has contributed to higher-than-expected financial leverage from FY11 (end-March 2011) onwards. The Jodhpur project, a five-star deluxe hotel, earlier anticipated to come up in FY11 was first delayed to FY12 and has now been delayed to FY13.

The ratings are also constrained by ICHRL's small-size of operations and the volatility of demand in the hospitality sector.

The ratings, however, continue to be supported by ICHRL's established track record in the hospitality business with strong brand (Mansingh Hotels) recognition and the moderately diversified location of its properties across north India. The ratings are also supported by the steady performance of the company's hotel business, with segmental revenue and margins largely unaffected during FY08-FY11.

Negative rating guidelines include continued delays in the Jodhpur project and/or a further decline in revenue and profitability and net financial leverage of above 6x. On the other hand, timely commissioning of the project and/or an improvement in revenues and margins and net financial leverage of below 3x could act as a positive rating guideline.

ICHRL's revenues declined by 3.1% yoy in FY11 to INR376m, with EBITDA margins falling to 21.3% from 29.9%. The decline in revenue and profitability was largely due to the levying of entertainment tax on multiplex revenues from FY11 onwards. As a result, net profit declined by 31.8% to INR30m, while net leverage (net debt/EBITDAR) increased to 4.2x from 1.9x. Fitch expects net leverage to remain high, until the Jodhpur project becomes fully operational. Fitch notes that ICHRL's operating services and technical agreement with ITC for its Jodhpur Hotel is likely to lower initial operational risk of the project.

ICHRL has four operational hotels and one shopping complex-cum-multiplex. Two of the hotels are located in Jaipur, while remaining two are located in Agra and Ajmer. The shopping complex-cum-multiplex is located in Ghaziabad. The four hotels have a combined room inventory of 310 rooms. The under construction Jodhpur hotel will have a room inventory of 106 rooms.

Rating actions on ICHRL:

- National Long-Term rating: downgraded to 'Fitch BBB-(ind)' from 'Fitch BBB(ind)'; Outlook Stable

- INR122.5 term loans (reduced from INR403.2m): downgraded to 'Fitch BBB-(ind)' from 'Fitch BBB(ind)'

- INR50m fund-based working capital limits (enhanced from INR40m): downgraded to 'Fitch BBB-(ind)'/'Fitch A3(ind)' from 'Fitch BBB(ind)'/'Fitch A3+(ind)'

- INR15m non-fund based bank facilities (enhanced from INR6.8m): downgraded to 'Fitch A3(ind)' from 'Fitch A3+(ind)'; assigned at 'Fitch BBB-(ind)'