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Indian Hotels: Domestic business improves - Views on News from Equitymaster

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Indian Hotels: Domestic business improves
Feb 21, 2014

The Indian Hotels Company Limited (IHCL) has announced its standalone and consolidated results for the quarter ended December 2013. On a standalone basis, the company has reported 3.6% YoY increase in net sales and 1.4% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Net sales for 3QFY14 increased by 3.6% YoY on account of subdued revenue per available room (RevPAR).
  • Operating margins remained flat YoY. Operating profits increased by 4.4% YoY.
  • The company reported an increase of 1.4% YoY in net profit for the quarter ended December 2013.
  • On a consolidated basis, for the nine month ended December 2013, the company reported 9% YoY increase in net sales and a net loss of Rs 3930 m as compared to Rs 411 m net loss in the same period last year.

Standalone and Consolidated financials
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Net sales 5,446 5,642 3.6% 27,268 29,722 9.0%
Expenditure 3,931 4,061 3.3% 23,770 25,821 8.6%
Operating profit (EBDITA) 1,514 1,581 4.4% 3,499 3,901 11.5%
Operating profit margin (%) 28% 28%   13% 13%  
Other income 61 71 17.0% 481 487 1.3%
Interest (net) 252 249 -1.1% 1,246 1,282 2.9%
Depreciation 305 300 -1.7% 2,174 2,326 7.0%
Profit before tax 1,018 1,104 8.4% 560 781 39.5%
Exceptional Item (15) (62) NA (5) (3,913) NA
Tax 357 387 8.3% 567 503 -11.3%
Profit after tax/(loss) 646 655 1.4% (12) (3,635) NA
Minority interest       (324) (204) NA
Share of profit of associates       (74) (91) 22.6%
PAT after minority and sh. of assoc. profit 646 655 1.4% (411) (3,930) NA
Net profit margin (%) 12% 12%   -19% -169%  
No. of shares (m)   808        
Diluted earnings per share (Rs)   (7.0)        
P/E ratio (x)*   -8.6        
(* On a trailing 12 months basis)

What has driven performance in 3QFY14?
  • IHCL's standalone revenue for 3QFY14 increased by 3.6% YoY. Room revenue was subdued, owing to continued new supply in a recessionary market. Oversupply has put pressure on the occupancy rate (OR) and average room rates (ARR) during April-December 2013 compared to last year across all key metros, with the exception of Bangalore and Mumbai, which have seen occupancy growth, and Goa, which has seen ARR growth.

    Cost break-up
      Standalone Results Consolidated Results
    As a % of net sales 3QFY13 3QFY14 9MFY13 9MFY14
    Total Cost of goods 6.6% 9.2% 10.3% 10.6%
    Staff cost 20.6% 21.3% 34.8% 34.3%
    License fees 7.5% 6.3% 5.4% 5.1%
    Power, fuel & light 7.2% 7.5% 7.9% 7.8%
    Other Expenditure 28.2% 27.7% 28.8% 29.0%

  • IHCL's operating (EBITDA) income increased by 4.4% YoY despite lower sales. Standalone EBITDA margins, for the quarter remained flat.

  • Most of the company's International portfolio has reported improved occupancies (over 75% levels) and ARR. Pierre's occupancy at 76% was particularly encouraging and allows it to start closing a US $250 ARR gap to peer group. Boston and Sand Francisco all reported improved RevPAR trends suggesting a possibility of breakeven in US portfolio by FY15.

  • Peak capex of the company is now behind with two hotels in Delhi/Guwahati (400 rooms) expected to commission in FY15. Incrementally growth is mostly via management contracts and suggests that peak capex may now be behind.
What to expect?
IHCL's 3QFY14 results suggest that the domestic business has finally arrested a decline and is now stabilizing. US hotels occupancies have ticked up to above 75% levels and are on course to likely post breakeven FY15 onwards. With peak supply in the domestic market behind us, capex largely over and improved outlook for US assets, IHCL's overall business is achieving some stability. However, an increase in ARRs is likely still some time away as the market will probably take 1-2 years to clear excess inventory. With peak supply being over in the domestic market, Rupee depreciation and visa-on-arrival possibility by 2HFY15, we believe the fundamentals are coming together for the company but it will likely take1.5-2 years for it to start reflecting in earnings.

At the current price of Rs 60, the stock trades at around 0.6x our estimated FY16 book value per share. We maintain our Hold view on the stock. We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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