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Indian Hotels: The party continues…

Jan 20, 2006

Performance Summary
Indian Hotels (IHCL) announced results for the third quarter and nine months ended December 2005. The operating revenues for the quarter and nine months ended December 31, 2005, grew by 27% and 25% respectively over the corresponding period of the preceding year, driven by a significant surge in business and tourist travel. Operating margins are also strong at 33% for 3QFY06. A substantial increase in other income in 3QFY05 contributed to the steep 76% YoY rise in bottomline (on the back of surplus cash from funds raised through FCCB issue and exchange gain).

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 2491 3174 27.4% 5813 7283 25.3%
Expenditure 1822 2131 16.9% 4702 5437 15.6%
Operating profit (EBDITA) 669 1044 56.0% 1111 1846 66.2%
Operating profit margin (%) 26.9% 32.9%   19.1% 25.3%  
Other income 35 111 215.7% 387 342 -11.6%
Interest (net) 93 58 -38.0% 262 169 -35.5%
Depreciation 155 168 8.6% 408 469 15.0%
Profit before tax 456 928 103.5% 828 1550 87.2%
Tax 106 313 195.3% 191 501 162.3%
Profit after tax/(loss) 350 615 75.7% 637 1049 64.7%
Net profit margin (%) 14.1% 19.4%   11.0% 14.4%  
No. of shares (m) 45.1 55.4   45.1 55.4  
Diluted earnings per share (Rs)* 7.8 11.1   14.1 26.6  
Price to earnings ratio (x)**         43.7  
(* Annualised)    (** P/E ratio calculated on a trailing 12-month basis)

What is company's business?
IHCL, a Tata group company set up in the early 20th century, is a leading player in the Indian hospitality industry. Its hotels are spread across the country with more than 8,820 rooms under its management across 71 hotels in nine countries. IHCL operates through 14 subsidiaries, six joint ventures and seven associates.

What has driven performance in 3QFY06?
Rising ARR and OR - A positive for IHCL: The occupancy levels and ARR across the company’s major hotels in India have been on an uptrend, due to high tourist inflow coupled with low supply in rooms. Though the average occupancy rate YoY for 3QFY06 has remained stagnant at 75%, the ARR’s reached new highs. The average ARR rose by 28% YoY, with Bangalore leading the pack. To put things in perspective, ARRs in Bangalore rose from Rs 7,905 in 3QFY05 to Rs 10,639 in this quarter and RevPar (revenue per available room) rose to Rs 8,084 from Rs 6,197 YoY. Room revenues grew by 31% from Rs 281 m in 3QFY05 to Rs 371 m in 3QFY06, while F&B segment grew by 19% during the same period.

Cost pressures under control: As is evident from the table below, the company has been successful in managing costs. Since the hotel industry operates on high fixed cost, whenever there is a sharp rise in the topline (led by higher ARRs), the bottomline increases at a faster rate.

Rs m 3QFY05 3QFY06 %Change 9mFY05 9mFY06 %Change
Raw materials 23 27 17.4% 58 66 13.8%
% sales 9.4% 8.4%   9.9% 9.1%  
Staff 57 61 7.0% 138 157 13.8%
% sales 22.9% 19.3%   23.8% 21.6%  
License fee 27 32 18.5% 59 74 -
% sales 10.8% 10.1%   10.2% 10.2%  
Power & lighting 16 17 6.3% 50 52 4.0%
% sales 6.5% 5.3%   8.6% 7.1%  
Others 59 76 28.8% 166 194 16.9%
% sales 23.7% 24.0%   28.6% 26.6%  

Due to the rise in topline, the margins of the company have been showing consistent improvement. The operating profits were up 56% in 3QFY06 as compared to last year, while the margins were at 32.9%.One of the key focus areas for the company has been to control the employee expenditure. After almost six quarters, it is starting to reflect in the standalone performance.

Other income increases profits: Net profits of the company witnessed more than 75% jump during the quarter ended December 2005. The growth is led by higher other income (up by 215% YoY) received on surplus cash received from the funds raised through FCCB issue. Also included in this is a forex gain to the tune of Rs 55 m. Similarly, a 38% fall in interest cost due to the repayment of debt and conversion of FCCB into equity (to the tune of around 10 m shares) has resulted in higher net margins.

What to expect?
At the current price of Rs 1,160, the stock is trading at a price to earnings multiple of 32 times our estimated FY08 earnings. The rising popularity of India as a business and leisure destination, coupled with an improvement in tourist arrivals, has resulted in an increase in both occupancy rates and ARRs. With supply of new rooms not expected in a significant manner in the next couple of years, ARRs are likely to get further boost. The new initiatives like light asset strategy, launch of ‘IndiOne’, acquisition of ‘La Pierre’ and the ‘W’ hotel in Sydney, Indian Hotel is well poised to capitalise on the growth opportunity. Even though valuations are higher side based on price to earnings basis, on a net asset value basis, upside exists. Therefore, we suggest investors to hold on to the stock.

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