Indian Hotels Company Ltd (IHCL), India's largest hotel chain continues to reap the benefits of seeds it sowed many years ago. The company's foresight of increasing its presence in metro cities as well as leisure destinations is paying off now.
The company is the first among the larger hotel chains to enter leisure as well as business hotel segment in secondary cities due to its anticipation of demand picking up in these cities. Besides IHCL invested in land in North and South Mumbai around 20 years ago, due to its foresight and will enjoy the benefits of this in the next few years.
Though IHCL was earlier keen on opening a hotel in North Mumbai, the company has dropped plans of this currently due to the oversupply anticipated in this region in the next four to five years. Instead the company has decided to sell of its land banks in North Mumbai so as to invest in other lucrative options. The gains from the sale of these properties is likely to boost the company's cash flows and help the company pump in funds for future expansions domestically and internationally.
In 3QFY01, IHCL's other income went up primarily due to sale of its idle assets. This asset is a piece of land at Andheri, Mumbai. The company realised Rs 46.7 m from sale of this asset.
The company is still sitting on a 17 acre plot in Sahar, Mumbai near the international airport. The company had purchased this property around 20 years back for a paltry sum of Rs 10 m. The company is expecting to clock in gains in the range of Rs 400 - Rs 700 m from part sale of its land in North Mumbai in the next few quarters.
It is in a position to hold a part of this property if it wishes to build a hotel here at a later stage. However, the company is in a win - win situation as compared to other hotel chains which have had to purchase land at current market prices resulting in higher capital costs per room. Hence, these companies would take much longer to break even on their properties in comparison to IHCL, if it decided to build a hotel here.
As many hotel chains are in the process of setting up shop in northern Mumbai IHCL does not feel the need to have its presence in this part of the city immediately. It will continue to concentrate on its forte, the South Mumbai hotel market. To this effect the company has recently completed renovation of restaurants and public areas at its hotel, Taj Mahal, Mumbai.
IHCL's strategy of foreseeing into the future has always paid off. Though earlier the company purchased this land on the premise that it would build a hotel in North Mumbai, it was very correct in forecasting future demand in this part of the city and hence bought the land 20 years ago. The company will gain from capital appreciation, while its competitors will reel under the pressure of high interest and depreciation costs, the key costs for determining profitability for a newly set up hotel.
IHCL has run up 36% in the past six months due to higher occupancy rates and an improvement in its ARRs in 3QFY01. On the current price of Rs 317, IHCL is trading at a 41% discount to its net asset value per share of Rs 541. It is trading at a price to earnings multiple of 12.0x FY01E EPS of Rs 26.4.
Due to high interest and depreciation costs and major renovations at its metro city hotels, the company’s profit growth has been low in the current financial year. However the market has started to realize that in future its strategy of expansion and renovations will boost its profitability further. In light of the above IHCL will continue to be a gainer among old economy stocks.