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Business travel enhances fortunes... - Views on News from Equitymaster
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  • Feb 24, 2001

    Business travel enhances fortunes...

    Hotel stocks have been outperforming the indices in the past six months. The improved macro environment coupled with stable political conditions have resulted in higher tourist arrivals and positive business sentiment. This in turn has increased activity in both leisure as well as corporate travel. The hotel sector has finally come out of the red. This sector had witnessed falling occupancy rates and average room rates since the past five years due to the economic slowdown.

    As a result occupancy rates in Mumbai, Delhi and other metro cities have shown considerable improvement in the past couple of months. Average room rates (ARRs), an important indicator of healthier prospects of the industry have also finally turned around. On an encouraging note hotel companies have been able not only to reduce discounts but also increase room tariffs by 5 -10 percent at their metro city properties. The depreciating rupee too has added to an improvement in ARRs, as 65 percent of industry earnings are in foreign exchange. The rupee has depreciated by 7 percent since the beginning of this financial year. The good times for hoteliers have set in again.

    Industry majors, Indian Hotels Company Ltd (IHCL) and EIH, which derive respectively 62 percent and 80 percent of their profits from their hotels in Mumbai and Delhi, have thus reported an improvement in their revenues for the first three quarters of the current financial year. IHCL's operating profits for 9 months of FY01 (Fiscal year 2001) grew by 20 percent, while for EIH the growth in operating profits was 60 percent YoY (year on year). This has got reflected in the share prices of these companies, bringing back the good times for their shareholders.

    The sentiment towards the sector has improved further as a result of likely disinvestments of government owned undertakings, India Tourism Development Corporation (ITDC) and Hotel Corporation of India (HCI). This has generated interest from both Indian and foreign hotel chains, as these public sector companies offer established and prime hotels in metro cities.

    A trend that has emerged in the industry in the past year is that existing hotel companies are scouting around for acquiring existing hotels as it saves a lot of time and effort. Typically it takes atleast 3 to 4 years from scratch before a hotel can actually start operations, due to time taken for construction and getting the necessary approvals. Hence these disinvestments are much welcomed by private hotel chains.

    This will eventually result in a phase of consolidation as the smaller hotels will eventually sell out to the larger ones as competition from foreign hotels is on the rise. IHCL's buy out of the Hotel Blue Diamond in Pune, is a typical case of this. Other companies too are looking around for the right opportunities.

    Though the going for the industry is good currently, there are some concerns hovering around the industry like increasing room supply in metro cities and lack of an improvement in infrastructure facilities. The industry is hoping to get some sops in the coming budget by way of reduction in the expenditure and luxury taxes as well as hoping to get infrastructure status.

    Room supply in the five star segment grew very slowly in the past few years, however over the next four to five years this is likely to expand rapidly due to increase in interest towards this sector. However, as many of the hotel projects in Mumbai and Delhi have got delayed, for the next two years, the existing hotels chains will continue to benefit.

    In the meantime the existing hotel companies will enjoy higher arrivals and increase in business travel and look forward to the improving prospects of the industry in FY2002 (fiscal year 2002).

    Besides concentrating on domestic business, hotel chains are also looking at global avenues. The large chains are eyeing properties in the Middle East and Asia so as to increase their presence and marketing reach. However, worldwide competition in the hotel market is very steep hence they will take a long time to make their mark on the global map.

      23rd Febr
    1 month 3 months 6 months Dividend
    yield(%) FY00
    Indian Hotels Co. Ltd (Rs) 290 233 210 229 2.9%
    Absolute (%)   24% 38% 27%  
    Relative to
    BSE Sensex (%)
      28% 31% 34%  
    EIH Ltd (Rs) 205 209 197 188 2.4%
    Absolute (%)   -2% 4% 9%  
    Relative to
    BSE Sensex (%)
      2% -3% 16%  
    BSE Sensex 4,128 4,297 3,852 4,445  
    Absolute (%)   -4% 7% -7%  



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