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Indian Hotels – Research meet extracts
Feb 10, 2006

The management of Indian Hotels Company Ltd (IHCL) had organised an analyst meet to discuss the 3QFY06 results, outlook on the industry and their growth strategy. The key takeaways from the meet were as follows.

About the company
IHCL, a Tata group company set up in the early 20th century, is a leading player in the Indian hospitality industry. Its hotels are spread across the country with more than 8,820 rooms under its management across 71 hotels in nine countries. IHCL operates through 14 subsidiaries, six joint ventures and seven associates. On a standalone basis, while the company derived 50% of its net sales from room revenues in 9mFY06, the food & beverages division contributed 39% to net sales. IHCL also manages hotel properties, which added to 5% to net sales in 9mFY06.

Robust demand: After growing by more than 13% in FY05, we understand that the international tourist inflow continues to exhibit robustness, in light of heightened business activities in the country. Also, as per the management, domestic business travel segment is showing strong growth. What this means for Indian Hotels is high occupancy rate and remunerative room rates in the next two to three years. As far as supply of rooms is concerned, the management do not visualise any substantial inventory flow in the next two years and to that extent, the firmness in room rates are likely to be sustained.

Strong ARR’s: High occupancy rates sustained in most cities during the quarter and in the first nine months of the fiscal year with Bangalore leading the pack at 78%. However, the average occupancy levels were marginally down to 74% in 3QFY06 as compared to 75% in 3QFY05 in the case of Bangalore. ARRs increased by 34.7% YoY to Rs 8,150 from Rs 6,050 per room per night and RevPar surged by 32.9% YoY in the hi-tech city.

Cost Control: The company has been successful in managing costs. Since the hotel industry operates on high fixed cost, whenever there is a sharp rise in the topline (led by higher ARRs), the bottomline increases at a faster rate. Due to the rise in topline, margins of the company have been showing consistent improvement. Operating profits were up by 56% YoY in 3QFY06 while margins stood at a healthy level of 32.9%. One of the key focus areas for the company has been to control the employee expenditure. After almost six quarters, it is starting to reflect in the standalone performance.

Expansion: The company is in a expansion mode, with about 660 rooms (standalone basis) under different stages of construction. It has earmarked an investment of Rs 5.6 bn, of which Rs 5.0 bn would be utilised for expansion while the balance would be meant for upgradation of the existing properties.

City Rooms Expected by
Hyderabad 60 Q4 FY07
Bangalore 200 FY08
Mumbai 200 FY08
Coimbatore 200 FY08

IHCL has roped in new product offerings like wildlife lodges, spas and F&B outlets. The company’s newly introduced luxury service-apartments and the IndiOne brand of smart basics budget-hotels have gained momentum. Six more IndiOnes are under construction in cities of Haridwar, Pune, Durgapur, Panjim, Bhuvaneshwar and Mysore. These would be operational between February and July 2006. The Bangalore IndiOne is performing well with 90% occupancy and the company has plans to open 50 such hotels over the next five years at an investment of around Rs 100 m per property..

Overseas: Indian Hotels continues to expand its presence overseas. This time, the company has bought out a 100-room hotel in Sydney for a consideration of Rs 1.3 bn. Early this year, Indian Hotels had entered into a 30-year management contract to operate and manage ‘Pierre’, a luxurious hotel in New York. Most of the international operations will be through the management-route and to that extent, the capital expenditure is likely to be capped.

What to expect?
At the current price of Rs 1,291, the stock is trading at a price to earnings multiple of 36 times our estimated FY08 earnings. The rising popularity of India as a business and leisure destination, coupled with an improvement in tourist arrivals, has resulted in an increase in both occupancy rates and ARRs. With supply of new rooms not expected to match demand in a significant manner in the next couple of years, ARRs are likely to firm. Overall, we maintain a HOLD rating on the stock.

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