Indian Hotels: Running a marathon

Indian Hotels Company Ltd. declared significantly reduced numbers for third quarter FY02. Considering that second half is the peak season in the hospitality industry, slowdown in global and domestic economy and the aftermath of September 11 events, the YoY effect on results has been considerable.

That said, we had mentioned greater downside risk on sales and profits at time of 2QFY02 results (Indian Hotels: Abyss likely to deepen). It seems the company was impacted more than expected with top and bottomline declining by 33% and 83% respectively. This effect has been magnified by the sale of the air catering business to a joint venture with Singapore Air Terminal Services Ltd. (SATS). For nine months ended December'01, the hit on topline has been softened, as IHCL reported an 8% growth for 1HFY02. The bottomline has been salvaged from sale of air catering business.

Among the largest revenues spinners, category-wise, are rooms and food & beverages (F&B). On strategic business unit (SBU) basis, luxury hotels constitute the largest share in revenues. This seems to indicate that the company is closely linked to shifts in the travel industry, as recessionary trends are likely to result in reduced occupancy and considerably impact luxury hotels. For 3QFY02, luxury hotel sales were impacted more than business hotels and were largely responsible for pulling down company revenues YoY. Also, luxury & leisure hotels reported the largest slide in tariff (ARR) and occupancy rates. On the other hand, F&B and business hotel revenues have shown maximum resilience to the downturn. It seems, increasing the share of business hotels in revenues could help the company reduce the risk on topline.

Although the state of the global economy and international travel is uncertain, the domestic economy is showing signs of revival with many believing agriculture would provide the critical push. IHCL has reported more stability in domestic travels, which has smoothened the slide in international travel. Also, the month of December '01 was better than the months immediately following September 11, which could indicate a bottoming in the industry and a subsequent turnaround.

To beat the blues of a slowdown the company has undertaken cost control measures to protect profits. In 3QFY02, this initiatives resulted in savings of Rs 155 m. Similar savings are expected in the current quarter. To exploit resilience in domestic travel, IHCL has stepped up its marketing drive towards this segment by launching several offers. As mentioned above, in an effort to de-risk revenues, the company is focusing on augmenting F&B revenues. This is likely to be through the launch of new restaurants, night clubs and loyalty programmes. However, F&B already contributes 39% to revenues and driving it higher could prove challenging.

Over the past 24 months the company has undertaken renovations at top hotel sites. It is going to continue with this effort, focusing on priority hotels, as the company believes that this strategy has helped it gain marketshare. The exercise is likely to be funded through internal accruals. Being a service industry, its working capital requirements are high, which IHCL plans to squeeze with implementation of I.T systems. The company also plans to rationalise the portfolio, which could involve sale and acquisitions of properties. Wellington Mews, the luxury appartments, are likely to be operational from next year. The group structure is also being streamlined with number of associated companies to be reduced from 7 to 2. This is likely to yield greater transparency in business operations and be accretionary to IHCL's balance sheet.

The IHCL stock price has declined sharply over the past two years, as revenues & earnings have remained flat for the past five years. In the current fiscal, the company will report lower topline with earnings salvaged by sale of business. We will downgrade our revenue estimates for FY02. Stock price performance is likely to depend on revival in tourism business. Number of international tourists have stagnated at 2 m levels. This will have to increase. Further, growth through new & renovated sites will have to reflect on the bottomline, which is being eaten by depreciation and interest.

Click here for 3QFY02 results.