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Indian Hotels: Weak demand dent profits

Jan 28, 2012

The Indian Hotels Company Limited (IHCL) has announced its third quarter results for financial year 2011-2012 (3QFY12). The company has reported a 7.4% YoY and 0.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales for 3QFY12 increased by 7.4% YoY on the back of marginal improvement in occupancy rates and new hotel launches.
  • Operating margins declined by 2.7% YoY during the quarter. This has been due to increase in overall costs which saw a rise of 11.6% YoY. Cost pressures in the absence of strong revenue momentum led to a 2.4% contraction in operating profit in the quarter from a year ago.
  • The company reported a marginal increase of 0.5% in net profit which stood at Rs 505 m as compared in Rs 503 m in the corresponding quarter last year. This was due to weaker domestic demand and high interest costs that affected the hospitality sector in India.
  • The company also reported a 9.3% YoY increase in net sales and 69.5% YoY increase in net profit for the nine months ended December 2011.

Standalone financials
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Sales 4853 5215 7.4% 11426 12486 9.3%
Expenditure 3411 3807 11.6% 9083 10011 -9.3%
Operating profit (EBDITA) 1,443 1,408 -2.4% 2,343 2,475 5.6%
Operating profit margin (%) 29.7% 27.0%   20.5% 19.8%  
Other income 32 86 166.8% 245 398 62.4%
Interest (net) 327 304 -7.3% 963 762 -20.9%
Depreciation 298 265 -11.0% 804 820 2.0%
Profit before tax 850 925 8.8% 820 1,291 57.4%
Exceptional Item -27 -148 448.5% -37 -50 34.0%
Tax 320 271 -15.2% 310 440 41.7%
Profit after tax/(loss) 503 505 0.5% 473 801 69.5%
Net profit margin (%) 10.4% 9.7%   4.1% 6.4%  
No. of shares (m)         759  
Diluted earnings per share (Rs)*         2.28  
P/E ratio (x)*         27.67  
* On a trailing 12-months basis

What has driven performance in 3QFY12?
  • In spite of the quarter being the best of four for the sector, company's top line grew by just 7.4% YoY. This was due to marginal increase in occupancy rates and new hotel launches. However Average Room Rate (ARR) was lower in the quarter.
    Cost break-up
    As a % of net sales 3QFY11 3QFY12 9mFY11 9mFY12
    Total Cost of goods 7.9% 8.5% 8.5% 8.7%
    Staff cost 23.4% 23.9% 26.7% 28.1%
    License fees 5.5% 6.1% 5.9% 6.1%
    Power, fuel & light 5.8% 6.4% 7.5% 7.9%
    Other Expenditure 27.8% 28.1% 30.8% 29.3%

  • IHCL's operating (EBITDA) income declined by 11.6% YoY. Operating margins also saw a decline of 2.7% YoY. This was due to faster growth in operating expenditure as compared to growth in sales. Cost of raw material increased by 16% YoY while staff cost increased by 9% YoY and power, fuel and light cost increased by 20% YoY. During the quarter the company reported flat net profit. This was due to the downturn in key overseas source markets which affected the hotel and tourism industry badly. Even the 5.2% YoY growth in foreign tourist arrivals did not help the sector; after all it was half the growth rate registered in the previous year.

  • The company has received Rs 2,000 m from insurer against the damage of property of Taj Mahal, Mumbai and the balance of Rs 363 m is expected to be received shortly.

What to expect?
The company plans to open 12 new hotels under its mid-range Gateway brand in the next couple of years. It will also open new hotels under Vivanta brand at Bekal, Coorg and Gurgaon after having set up a new one at Coimbatore. Through the year, the premium and luxury segment has not been able to post a steady and sustainable rise in occupancy rates and ARRs, which is worrisome. At the end of the quarter, the firms consolidated debt stood at Rs 36 bn and standalone debt at Rs 20 bn. However despite a weak quarter we are overall bullish on the growth of the sector and Indian Hotel is well placed to capture the boom in the tourism industry.

At a price of Rs 63, the stock is trading at 11 times our estimated FY14 earnings. Hence we maintain a positive view on the stock.

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