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Check In: Hilton Vs Four Seasons Vs Indian Hotel - Views on News from Equitymaster
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Check In: Hilton Vs Four Seasons Vs Indian Hotel
Feb 21, 2006

India is fast emerging as one of the popular tourist destinations in the world. The gaining popularity of India as a business and tourist destination partly aided by the government’s ‘Incredible India’ campaign, which helped develop interest among foreign tourists. The number of tourist visiting the country rose from 2.4 m in FY2002 to 3.9 m in FY2005, growing at a CAGR of 15.8%.The World Travel and Tourism Council expects the tourist inflow into India (for both business and leisure) to grow at 8.8% CAGR in the next decade.

In this article, we compare India’s largest hotel chain Indian Hotels Company Ltd (IHCL), with world majors Hilton Hotels and Four Seasons to give a perspective of the available potential for Indian player.

About Hilton
Hilton is a flagship brand of Hilton Hotels Corporation and the most recognized name in the global lodging industry. Started in 1919 in Texas, the company as of December 31, 2004, owned, leased, managed or franchised 2,259 hotels or timeshare properties with 358,408 rooms or units. Of such properties, the company had an interest in and operated 115 hotels, leased seven hotels, managed 206 hotels owned by others and franchised 1,900 hotels owned and operated by third parties. Hilton Hotels Corporation is recognized internationally as a preeminent hospitality company. Its portfolio includes many of the world's best known and most highly regarded hotel brands, including Hilton, Conrad , Doubletree , Embassy Suites Hotels and Hampton Inn among others.

About Four Seasons
Four Seasons Hotels (FS) is one of the world's leading managers of luxury hotels and resorts. As of December 31, 2004, the company was managing 64 luxury hotel and resort properties and three residence clubs, containing about 16,400 guestrooms and units. Properties are operated mainly under the Four Seasons and Regent brand names in 28 countries, in North America, Europe, Asia, the Middle East, Australia, the Caribbean, and South America. FS earns revenue from management and from ownership operations. In contrast with more volatile hotel ownership operations, hotel management operations tend to generate relatively stable earnings and cash flow for FS. Under its management agreements, FS supervises all aspects of a project's operations on behalf of its owner, including sales and marketing, reservations, accounting, purchasing, budgeting, and the hiring, training and supervision of staff. In exchange, FS receives a base fee calculated as a percentage of gross revenues of the property (generally 3%). In addition, it may receive incentive fees based on properties' operating performance (generally 5%). The company's management agreements are generally long term, with an average remaining term of about 52 years.

About Indian Hotels
Indian Hotels is the largest hotel chain in India, both in terms of revenues and number of rooms. It operates 77 properties with more than 8,200 rooms in India and overseas through its network of subsidiaries, associates and management contracts. It has grouped its hotels into three broad categories: Taj Luxury, Taj Business and Taj Leisure. The company generates 70% of its stand-alone revenues from the luxury segment, which accounts for as many as 2,008 rooms of the total offering of 3,091 rooms.

Indian hotels (stanalone) contribute nearly 70% of the revenues of the whole group. Of this 70% room revenues account for 47%, while management fees are merely 4.6%. In respect of the categories of hotels, the luxury hotels contributed 82% of the total revenues.

Indian hotels is very small compared to the global peers in terms of properties and the number of rooms. Hilton hotels has more than 2,300 hotels with nearly 0.3 m rooms under management. Four season though smaller than Hilton, but is still larger than Indian hotels with around 16,000 rooms. The Indian major lags behind on the net profitability level. Also, US hotel majors have an upper hand when it comes to efficient utilisation of assets is concerned as the ‘return on networth’ and ‘return on assets’ are higher. Hilton and Four Seasons also have better occupancy rates. Indian Hotels is way below its US peers in terms of management revenues. It is merely 3%, while that of the peers is more than 30%.

Financials
FY04 Hilton Four Seasons Indian hotels
Rooms 358,408 16,378 8,243
Revenues (US$ m) 3,937 227 188
EBIDTA margin 22.9% 47.4% 17.2%
Net profit margin 5.1% 7.7% 3.8%
Return on net worth 8.7% 4.2% 2.8%
Return on total assets 2.4% 2.8% 1.0%
Debt to equity 1.8 0.31 1.3
EV/EBITDA 11.7 15.5 14.1
ARR($) 134 298 91
Occupancy rate 70.8% 68.4% 62.1%
Management Income as % of total revenue 36.4% 35.5% 3.0%
Price to earnings (FY04, x) 35.2 84.6 37.3
Price to sales (FY04, x) 0.5% 28.7% 4.5%
Price to Book Value 3.5 3.7 1.6

Going Ahead

New initiatives to boost revenue and margins
IHCL is aggressively pursuing new ventures to broaden the base of its revenues and improve its margins.

Expansion of business by undertaking hotel by undertaking management contracts: This would help the company to control its financial and operating leverage and to gain presence in the prime destinations without incurring any additional capital cost. Currently management fees contribute less than 5% to the topline of Indian hotels, while in case of Hilton and Four Seasons it contributes nearly 35%.

Launch of budget hotels under the brand Indione : This initiative would help the company to reduce its dependence on its luxury business The Indione hotel launched in Bangalore has an average OR of 85% since its launch. IHCL plans to add 400 Indione rooms by FY2007, taking the total number of the budget rooms to 500.

Government Initiatives: Government initiatives have been helpful to the hotel industry. An open-sky policy within the ASEAN region and with the USA, that allows foreign airlines landing rights within India. Also the low cost airlines are expected to significantly improve tourist traffic and boost arrivals. Another effort is the decision to substantially upgrade the 28 regional airports in smaller towns, slated to be completed by 2006. The upgrading of the national highways has opened up new avenues of investment for the development of budget hotels alongside.

Changing lifestyle: Rising education levels, the information revolution, rising income of the middle class people have raised the aspiration levels. There is a change from satisfying basic needs to leisure needs. This will result in growth in domestic tourism with nearly 300 m tourism in 2005.

What to expect?
The stock is currentl trading at Rs 1,130 with price to earnings mltiple of 22 times based on FY08 earnings. The rising popularity of India as a business and leisure destination, coupled with an improvement in tourist arrivals, will result in an increase in both Occupancy Rates and ARRs. With supply of new rooms not coming in the next couple of years, will further help the ARR and occupancy rate to increase. With new initiatives like light asset strategy, launch of Indione, recent acquisition of ‘La Pierre’ Indian Hotels is strongly positioned to take advantage of the upturn.

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