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Indian Hotels: Small signs of recovery - Views on News from Equitymaster
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Indian Hotels: Small signs of recovery
Mar 5, 2015

The Indian Hotels Company Ltd (IHCL) has announced its results for the quarter ended December 2014. The company has reported a 6.4% YoY increase in standalone sales and a 20.8% YoY decline in the standalone bottomline. Here is our analysis of the results.

Performance summary
  • Standalone net sales for 3QFY15 grew by 6.4% YoY on account of muted average room rates (ARRs) during the festive season owing to the oversupply of luxury rooms in the Indian market.
  • The standalone operating profits decreased by 6% YoY. The consolidated operating profits (on a last nine months basis) fell by 14.8% YoY due to higher employee costs and SG&A expenses.
  • The company posted a consolidated net loss of Rs 707 m for the nine months ended December 2014 largely due to the poor operating performance as well as exceptional items.

Standalone and Consolidated financials
  Standalone Consolidated
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 5,642 6,002 6.4% 29,722 30,813 3.7%
Expenditure 4,061 4,515 11.2% 25,821 27,490 6.5%
Operating profit (EBDITA) 1,581 1,487 -6.0% 3,901 3,323 -14.8%
Operating profit margin (%) 28.0% 24.8%   13.1% 10.8%  
Other income 71 214 199.2% 487 666 36.7%
Interest cost 249 201 -19.4% 1,282 1,345 4.9%
Depreciation 300 295 -1.5% 2,326 2,194 -5.7%
Exceptional Item (62) (228)   (3,913) (302)  
Profit before tax 1,042 976 -6.3% (3,132) 148  
Tax 387 458 18.4% 503 575  
Profit after tax/(loss) 655 519 -20.8% (3,635) (427)  
Minority interest - -   (204) (244)  
Share of profit of associates - -   (91) (36)  
PAT after minority and sh. of assoc. profit 655 519 -20.8% (3,930) (707)  
Net profit margin (%) 11.6% 8.6%   -13.2% -2.3%  
No. of shares (m)         807.5  
Diluted earnings per share (Rs)         (2.9)  
P/E ratio (x)*         N.A   
(* On a trailing 12 months basis)

What has driven performance in 3QFY15?
  • IHCL's standalone revenues for 3QFY15 increased by 6.4% YoY. This was a fairly decent performance. However, average room rates (ARR) remained flat. The standalone operating performance continued to remain under pressure. The fall in operating profit on a YoY basis was due to higher staff costs and SG&A expenses (as a % of sales).

    Cost break-up
      Standalone Results Consolidated Results
    As a % of sales 3QFY14 3QFY15 9MFY14 9MFY15
    Cost of goods 9.2% 8.8% 10.6% 10.7%
    Staff costs 21.3% 24.2% 34.3% 35.5%
    License fees 6.3% 6.3% 5.1% 4.9%
    Power, fuel & light 7.5% 7.2% 7.8% 7.9%
    Other Expenses 27.7% 28.7% 29.7% 30.2%
What to expect?
The company's standalone business remained under pressure at the operating level. The company has not been able to reign in operating costs yet despite the management moving in that direction. The expected economic recovery will help the standalone business get back on track. Despite this, the company's fortunes will be largely driven by the speed of the turnaround in the international business.

In line with the management's plan to streamline the international subsidiaries, the company has divested its holdings in four minor subsidiaries. This is not expected to have any material impact on the consolidated numbers. However, it will help the management to consolidate the international operations under one 100% owned offshore subsidiary company.

We have updated our financial estimates of the company from a FY17 perspective. At current levels, the stock fully factors in a potential earnings recovery. Thus, keeping in mind the valuations as well as the risks and the business faces, we maintain our sell view on the stock.

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