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Indian Hotels: A star performance

Feb 7, 2001

The shareholders of Indian Hotels Company Ltd (IHCL) are sure to have a smile on their face. The last couple of trading sessions has seen IHCL's share price jump by 20%. The better operating results for 3QFY01 as well as the fact that the government's keenness to push disinvestments is likely to see the ITDC disinvestment going through. This will benefit IHCL who has a 10% stake in ITDC. The going seems good for the company on all fronts. For 3QFY01, the company's occupancy rates at its metro hotels was 70% as compared to 66% in 3QFY00. These hotels contribute to over 80% of IHCL's profits.

Another very positive indicator of an improvement in the hotel sector is average room rates (ARRs). IHCL has finally reported an improvement in its ARRs for its luxury hotels in 3QFY01, by 3.5% YoY. This is a sure sign of an improvement as the company is likely to have reduced its discounts and incentives for this quarter. Besides IHCL's ability to hike tariffs at its properties in Mumbai, Delhi and Calcutta by 5% in October 2000 too has paid off. Infact the company's ARRs in all its three segments: luxury, leisure and business have reported an improvement.

ARR (Rs) 1QFY01 1QFY00 % change 2QFY01 2QFY00 % change 3QFY01 3QFY00 % change
Taj Luxury Hotels 5,612 6,199 -9.0% 5,443 5,301 3.0% 6,337 6,118 3.6%
Taj Leisure Hotels 2,030 1,841 10.0% 1,703 1,750 -3.0% 3,424 3,000 14.1%
Taj Business Hotels 2,840 2,500 14.0% 2,808 2,494 13.0% 3,030 2,233 35.7%

The company's food and beverage revenues too did well. They grew by 14% in 3QFY01, this includes a 25% growth in its air catering revenues. The company continues to enjoy the highest market share in air catering in the country through its units in Mumbai, Delhi and Calcutta.

The company's net profit growth for 3QFY01 would have been higher had it not been for higher interest and depreciation costs. The company is renovating its existing hotels to gear up to meet the upcoming competition in metro cities as well as focusing on its expansion plans. Though the company's performance at this stage may not look spectacular, in the long term this will pay off.

Occupancy rates (%) 1QFY01 1QFY00 2QFY01 2QFY00 3QFY01 3QFY00
Taj Luxury Hotels 57.0% 49.0% 57.0% 54.0% 70.0% 66.0%
Taj Leisure Hotels 37.0% 48.0% 38.0% 38.0% 56.0% 54.0%
Taj Business Hotels 52.0% 59.0% 53.0% 63.0% 57.0% 66.0%

On the ITDC front, IHCL being a 10% equity stakeholder in ITDC, is hoping to get a few of ITDC's hotels. The government plans to disinvest the hotels by either outright sale or on a long-term lease basis. IHCL is keen to swap its 10% stake for 3 properties of ITDC. Most of the privately run hotel chains are keen on only 10 of ITDC's hotel properties, due to their prime locations. The ten hotels are ITDC's properties in Delhi, Calcutta, Mysore, Udaipur and Thiruvananthapuram.

Of these, the 5 prime ones are located in the city of Delhi itself. These properties are huge in terms of size and are also very well located. If IHCL gets any of these hotels, they would stand to benefit in the long term. Even if IHCL gets few properties on a long-term lease basis it would be beneficial for the company. For example if IHCL was to buy out a new hotel in Delhi, as a ballpark figure for a five star 300 room hotel the cost of construction works out to Rs 1.5 bn (Rs 5 m per room). This does not include the cost of land.

IHCL had paid Rs 97 per share of ITDC and its total investment amounted to Rs 657 m for its 10% stake in ITDC. As its investment did not cost as much as compared to what the current market value of ITDC's assets will fetch, the company is in a win-win situation.

On IHCL's international hotel operations, the company is restructuring its operations to improve accountability to shareholders. The company plans to present consolidated accounts to shareholders next year which is likely to be higher than current earnings.

On the current price of Rs 293 it is trading at 11.2x FY01 EPS of Rs 26.1.

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