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Indian Hotels: The party is still on! - Views on News from Equitymaster

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Indian Hotels: The party is still on!

Jan 23, 2007

Introduction to results
Indian hospitality major, Indian Hotels (IHCL), yet again reported superlative results for the third quarter and nine months ending December 2006. The robust topline growth during the quarter has been attributed to strong economic growth, higher tourist inflow, favourable demand supply gap and higher room rates. Operating margins have considerably expanded on the back of reduction in almost all costs (as a percentage of sales). All these factors have contributed to the 43% YoY growth in bottomline despite the fall in other income.

Standalone performance
Rs m 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 3,175 4,098 29.1% 7,283 9,338 28.2%
Expenditure 2,131 2,565 20.4% 5,430 6,573 21.0%
Operating profit (EBDITA) 1,044 1,533 46.8% 1,854 2,765 49.2%
Operating profit margin (%) 32.9% 37.4%   25.5% 29.6%  
Other income 111 26 -76.7% 334 418 25.2%
Interest (net) 58 48 -16.6% 168 125 -26.0%
Depreciation 168 187 11.3% 468 527 12.6%
Profit before tax 929 1,323 42.5% 1,551 2,531 63.2%
Tax 313 443 41.5% 502 804 60.3%
Profit after tax/(loss) 615 880 43.0% 1,049 1,727 64.6%
Net profit margin (%) 19.4% 21.5%   14.4% 18.5%  
No. of shares (m) 546 587   546 587  
Diluted earnings per share (Rs)*         4.3  
Price to earnings ratio (x)*         36.2  
*trailing twelve month earnings

What is company's business?
Indian Hotels Company Limited (IHCL) is India's largest hotel chain with an estimated room inventory share of 25% in top seven cities in the luxury segment (room inventory share is the share of Indian Hotels of the total rooms available). On a consolidated basis, including properties under the management control, the total inventory in FY06 stood at a little over 9,256 rooms. On a standalone basis, while the company derived over 50% of its net sales from room revenues in FY06, the food & beverages division contributed 39% to net sales and the rest was accounted for by management contracts.

What has driven performance in 3QFY07?
The party continues: The strong GDP growth and the rising tourist inflows have benefited the Indian hotel industry immensely and IHCL is no exception. The tourism flow in the country for 2006 has touched 4.4 m and has led to strong ARRs (average room rates) for hotel companies and IHCL, being the market leader, has benefited from the same. The average occupancy rate for the quarter rose from 74% in 3QFY06 to 76% in 3QFY07. Except Delhi, Chennai, Bangalore and Hyderabad, all other cities where IHCL has its presence witnessed an increase in the occupancy rate with Pune being the highest at 85% for 3QFY07. The cities where the occupancy rates fell, were due to the new supply of rooms which came in the quarter. However, according to the management this is a temporary phase and with demand growing at 9%, supply is nowhere close in meeting the demand till the next two years. The average ARR rose by 32% YoY, touching a high of Rs 10,772 for the quarter. Bangalore, again, was the leader with ARR’s of Rs 11,708.

Revenue breakup 3QFY06 3QFY07 Change
Room revenue 1,690 2,290 35.5%
% of total revenue 53.2% 55.9%  
F&B 1,170 1,400 19.7%
% of total revenue 36.9% 34.2%  
Other operating income 160 210 31.3%
% of total revenue 5.0% 5.1%  
Management contract 150 200 33.3%
% of total revenue 4.7% 4.9%  

Of the operating income, room revenues grew by more than 35% YoY during the quarter while F&B income (food and beverages) increased by 20% YoY. The company has been aggressively pursuing its 'asset-light' strategy (management contracts), which is paying off rich dividends. Management fee grew by 33% YoY in this quarter.

Cost break-up
As a % of net sales 3QFY06 3QFY07 9mFY06 9mFY07
Total Cost of goods 8.4% 7.8% 9.1% 8.4%
Staff Cost 19.3% 17.6% 21.6% 20.5%
License fees 10.1% 11.2% 10.2% 10.8%
Fuel , power & light 5.3% 4.3% 7.2% 5.9%
Other Expenditure 24.0% 21.7% 26.6% 24.8%

Efficiency perks margins: IHCL has yet again managed to perk up its operating margins by efficient management of costs. During the quarter, all the major cost heads (raw materials, staff and others) have declined (as percentage of sales). The operating profits were up 46.8% YoY in 3QFY07, while the margins stood at 37.4% (32.9% in 3QFY06).

It boils down to the bottomline: Strong topline growth and expansion in operating margins, along with lower interest costs have aided IHCL’s net profits, which have grown by a robust 43% YoY during 3QFY07. The other income in this quarter was lower due to forex gains earned in 3QFY06.

New developments: IHCL now has 9,256 rooms with 76 properties. In this quarter, the company opened one more Ginger Hotel and now has 6 hotels in all. It has started the Taj Wilderness and would open one more by Feb 2007. It acquired Ritz Boston for US$ 170 m. It has also made an investment of Rs 180 m to buy 74% equity stake in Amalgam Foods and has made strategic plans for this over the next five years. It plans to get Amalgam’s ready to eat food brand ‘ Someru’ on the retail format. With ready to eat foods having a very strong demand and given IHCL’s experience in the food beverage segment, this may be a good move. Also, it can supply these foods to its hotel chains and gain benefits. It has signed new contracts for Gateway Hotels and service apartments.

What to expect?
At Rs 155, the stock is trading at a price to earnings multiple of 36.2 times its 12 months trailing earnings. The company has planned an investment of Rs 10 bn over the next 2 years. Also it has signed 5 management contracts for international hotels. With a debt to equity ratio of 0.4, the company has enough opportunity to expand its presence. Also it has made plans to increase its presence in the Ginger Hotels and Gateway Hotels. Overall, we are positive on the prospects and the business model of IHCL.

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