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Striving to be a world class hotel chain - Views on News from Equitymaster
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  • Feb 24, 2001

    Striving to be a world class hotel chain

    When Mr. R.K. Krishna Kumar took over as the Managing Director of Indian Hotels Company Ltd (IHCL) four years ago, little was going well for this number one Indian hotel chain. The company was looking for direction as its occupancy and average room rates (ARRs) plunged and its foreign properties failed to deliver. At that point Mr. Krishna Kumar had confidently stated that IHCL will become a world class hotel chain.

    Cut to 2001 and IHCL seems to have covered some ground in that direction. Renovations and projects are the new buzzwords these days at the corporate headquarters of IHCL. The company's newly renovated Taj Mahal hotel in Mumbai is a standing example of this. The company is concentrating on sprucing up its luxury hotels in metro cities so as to gear up to meet future competition in the hotel sector.

    After selling off its loss making US properties, IHCL moved on to expand by acquiring up and running hotels, especially in the business hotel segment. On the other hand, the company is being more innovative in the leisure hotel segment whereby the product itself and its location are very crucial.

    In the business hotels segment the company has acquired the Blue Diamond hotel in Pune, and has entered into a joint venture with GVK Hotels for three properties in Hyderabad. This saves IHCL considerable time and effort as all it needs to do is spruce up these properties.

    Another strategy of the company is to sell of surplus land for funding future capital expenditure requirements. IHCL owns a 17-acre land bank in North Mumbai, which it purchased around 20 years back. While its competitors are scrambling to get a share in the competitive North Mumbai hotel market, IHCL has decided to sell off some parts of this surplus land that it bought at very low rates and use the funds for improving its cash flows. However if demand picks up here, it can always open a hotel, at practically less than half of the cost of its peers who have purchased land at current market prices.

    This strategy of IHCL will pay off in the long run, though in the current year its profits have not reported an impressive growth. In 3QFY01 (third quarter fiscal year 2001), IHCL's revenues grew by a robust 14 percent on the back of an occupancy rate of 65 percent and a 12 percent YoY (year on year) growth in ARRs. Its operating margins though improved by only 100 basis points to 30.7 percent in 3QFY01 due to higher cost of renovations and staff expenses.

    (Rs m) 3QFY00 3QFY01 Change 9mths FY00 9mths FY01 Change
    Sales 1,712 1,946 13.7% 4,167 4,779 14.7%
    Other Income 7 55 701.5% 188 159 -15.4%
    Expenditure 1,187 1,369 15.3% 3,150 3,560 13.0%
    Operating Profit (EBDIT) 525 577 9.9% 1,017 1,219 19.9%
    Operating Profit Margin (%) 30.7% 29.7%   24.4% 25.5%  
    Interest 54 67 23.2% 102 225 119.5%
    Depreciation 86 113 32.2% 270 331 22.3%
    Profit before Tax 392 452 15.2% 832 823 -1.1%
    Other Adjustments 0 10   0 14  
    Tax 59 40 -32.9% 100 47 -52.9%
    Profit after Tax/(Loss) 333 402 20.7% 732 762 4.1%
    Net profit margin (%) 19.4% 20.6%   17.6% 15.9%  
    No. of Shares (eoy) (m) 45.1 45.1        
    Diluted number of shares 45.1 45.1        
    Diluted Earnings per share* 29.5 35.6        

    On the whole though IHCL's 3QFY01 results were lower than market expectations, the improvement in its top line is significant. The company's improved performance at its luxury metro hotels is a result of a 4 percent growth in ARRs in these hotels and a 400 basis points increase in occupancy rates to 70 percent. This is of utmost significance to shareholders of IHCL, as these hotels contribute to over 80 percent of IHCL's net profit.

    In FY2002 (fiscal year 2002) the company's margins are expected to be better as some of its costs like staff expenses and renovations will stand reduced. Its voluntary retirement scheme in the current financial year, which resulted in 1,300 employees parting ways, has resulted in lower number of employees on the staff rolls of IHCL. Most of IHCL's ongoing renovations are likely to be completed in the current year itself.

    The company has realised the need to unfold the mystery behind their international hotel operations. Currently its property, the St. James Court in London, has a very complicated parental structure, resulting in confusion to IHCL's shareholders. The management is working on restructuring its international operations so as to improve accountability to shareholders.

    Occupancy rates (%) 1QFY01 1QFY00 2QFY01 2QFY00 3QFY01 3QFY00
    Taj Luxury Hotels 57% 49% 57% 54% 70% 66%
    Taj Leisure Hotels 37% 48% 38% 38% 56% 54%
    Taj Business Hotels 52% 59% 53% 63% 57% 66%

    The company's technology efforts too are worth mentioning. Right from reservation networks to internet connections per room, the company has been aggressively spending on upgrading its technology efforts to keep abreast with the latest technology that may be brought by international chains into India. IHCL will spend US$10.8 million for its technology efforts over the next three years.

    IHCL will benefit in future from its 10 percent stake in India Tourism Development Corporation (ITDC). The government has plans of disinvesting 74 percent of its stake in ITDC. IHCL was initially criticised for investing funds in this loss making government owned hotel company. However, IHCL's management foresighted that one day the government would have to sell out due to its precarious financial position. IHCL will benefit in terms of either getting some properties on a long-term lease basis or tie up for management contracts.

    ARR (Rs) 1QFY01 1QFY00 % change 2QFY01 2QFY00 % change 3QFY01 3QFY00 % change
    Taj Luxury Hotels 5,612 6,199 -9% 5,443 5,301 3% 6,337 6,118 4%
    Taj Leisure Hotels 2,030 1,841 10% 1,703 1,750 -3% 3,424 3,000 14%
    Taj Business Hotels 2,840 2,500 14% 2,808 2,494 13% 3,030 2,233 36%

    The prospects for IHCL continue to look bright over the next year due to its strong business acumen, renovated luxury hotels and improving profitability margins. All these are the results of the right moves at the right point in time.



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