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Indian Hotels: Room for growth

Jan 2, 2003

After witnessing a lackluster FY02, India's No. 1 hotel chain, Indian Hotels Co. (IHCL), has reeled under economic and geo-political affects in FY03 so far. IHCL reported a 25% dip in topline and its profit shrunk to a measly Rs 37 m in 1HFY03. If FY02 saw the attack on the World trade centers and the Afghanistan war then FY03 has seen Gujarat carnage, Indo-Pak stand off, Palestinian-Israeli conflict and finally possibility of a US-Iraq war. For the domestic industry, the Indo-Pak military build up post the Parliament attack in December 2001 saw travel advisories being issued by western nations, which halted the influx of foreign tourists.

FY03 so far...
(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net Sales 1,473 1,159 -21.3%3,053 2,285 -25.2%
Other Income 81 105 30.0% 133 157 18.4%
Expenditure 1,209 1,012 -16.3%2,396 1,944 -18.9%
Operating Profit (EBDIT) 264 147 -44.4% 656 341 -48.1%
Operating Profit Margin (%) 17.9%12.7% 21.5%14.9%
Interest 124 93 -25.2% 248 200 -19.2%
Depreciation 123 118 -4.0% 246 235 -4.5%
Profit before Tax 9841-57.9%29663-78.7%
Extraordinary items 842 - - 818 - -
Tax 114 15 -87.1% 167 26 -84.2%
Profit after Tax/(Loss) 826 26 -96.8% 947 37 -96.1%
Net profit margin (%) 56.1%2.3% 31.0%1.6%
No. of Shares 45.1 45.1 45.1 45.1
Diluted Earnings per share* 73.22.3 42.01.6
* annualised

It is estimated that during 1HFY03 there was 14% decline YoY in the international tourist arrivals, which became a concern for the industry. In order to mobilise the domestic tourists, hotels started some initiatives like package tours so as to maintain the occupancy levels. Competition in the four major metros saw a major pricing war with hotels vying for a piece of the already saturated pie. Entry of serious players like Imperial Tobacco Company (ITC), JW Marriott and Hyatt in select metros expanded quality room supply, consequently average room revenues (ARRs) were under pressure.

For Indian Hotels, the entry of ITC and JW Marriott created pressure situations in Mumbai. The company's own refurbishing drive also took a toll on room occupancy. Operating profits in 2QFY03 took a hit with a 19% decline over the corresponding previous period due to the slide in revenues and margins. However, the company has been able to keep a check on the administrative and other expenses. Going forward however, the IHCL management expects the occupancies to improve, but ARRs are likely to remain under pressure.

The company has indicated that there would be an upturn of earnings in the second half of the financial year. This indeed is seen as a positive in a lackluster environment. The October-February period being the tourist season is likely to see an increase in the average occupancy and room rates. Apart from the metros, smaller cities are also seeing better occupancy levels, sometimes outperforming major metros like Delhi and Mumbai.

The hospitality industry is looking at 2003 with hope and is silently praying that nothing untoward happens this year. If the prayers are answered, 2003 may turn out to be a much better year as compared to the listlessness seen last year. With the tourist inflow stuck at 2.4 m in the last few years, domestic travelers have saved the industry from a complete disaster. Of course, competitive environment not only saw hotels become more affordable, the airline industry too encouraged tourists.

At the current price of Rs 190, the IHCL stock trades at 11.6x our FY04E projected earnings. Short term concerns notwithstanding, in the long term, the company is likely to be a key beneficiary of economic recovery given its status as a world class hotel chain.

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