As mentioned at time of 2QFY02 results, Indian Hotels Company Ltd. (IHCL) faced downside risk on topline considering the slowdown in global and domestic economy coupled with aftermath of the September 11 events. With tourist cancelling / delaying their travel plans, travel related industries, namely airlines & hospitality, were considerably affected. That said, the YoY results are not entirely comparable due to sale of the air catering business in September '01.
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The difficult business environment could be gauged from the slide in QoQ topline growth in 3QFY02. For the quarter ended December '01, sales have fallen YoY. Second half of the fiscal is considered to be the peak tourist season in India, as the climate becomes condusive for travel. The hospitality industry, more often than not, executes annual tariff hikes during this period. However, with the slump in the industry, hospitality majors seem to have held back hike in room rates. Excluding air catering business 3QFY02 sales have declined by 21.3%.
Operating profits have taken a beating, as a decline in sales has been accompanied with a sharp slide in margins. Although operating expenses have fallen sales have declined at a faster clip, which has eaten into margins. Having said that, the lower costs for 3QFY02 is also due to exclusion of air catering costs. The lower staff costs seem to reflect the benefits of voluntary retirement scheme (VRS) undertaken in FY01. Post September 11, hospitality majors announced sharp cuts in packages to increase occupancy rates. This strategy is accretionary to topline but is likely to have eroded margins.
As part of the strategy to improve service offerings the company has undertaken inorganic growth and renovations at its key sites. This has led to substantial amount of capital expenditure over the last two fiscals. Consequently, interest and depreciation expenses have increased in the current financial year.
In the previous quarter, Indian Hotels hived off the air catering business to a joint venture with Singapore Air Terminal Services (SATS). The transacation has bailed out the company's bottomline. The extent of damage can be gauged from the 55% drop in 9mFY02 pre-tax earnings. Extraordinary items also pertain to VRS expenses, which are to be written off over a period of five years. Cumulative deferred tax liability upto March '01 has increased by 220 m, which has been adjusted against reserves.
At Rs 155 the stock trades on a multiple of 29.1x 3QFY02 annualised earnings. On adjusted basis -- excluding extraordinary income -- the scrip trades on a multiple of 25.2x 9mFY02 annualised earnings, as compared to an adjusted multiple of 15.6x in 2QFY02..
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