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What lies ahead for Indian Hotels... - Views on News from Equitymaster

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What lies ahead for Indian Hotels...
Mar 11, 2010

Indian Hotels Company or IHCL is the largest hotel chain in Asia and operates 103 hotels across the globe. While predominately catering to the Indian markets, the company operates properties in USA, Australia, Maldives, Malaysia, UK, Sri Lanka, Africa and the Middle East. The company operates luxury, premium deluxe and mid budget range business hotels. We herein do a SWOT analysis of IHCL’s business and analyse what potentials and risks lie ahead of the company. Strengths
Brand Image:
IHCL is owned and operated by the Tata group, one of the most respected and trusted business conglomerates in India. IHCL has been in existence since the past 107 years and several of its properties are iconic in the cities in which they located. For eg. Taj Mahal Palace and Towers in Mumbai and Taj Lake Palace Hotel in Udaipur. Furthermore, the company operates several properties overseas which help enhance the image of the company for tourists visiting India.

High business standards: The company is known for its world class standards and services. It has been seen that IHCL constantly endeavours to improve the guest experience at its properties.

Human resources: Hotel industry is very dependent on its employees who become the face of the hotel for its guests. IHCL has well trained staff who support the company in providing customer delight and have know to go beyond the call of duty as was seen during the November 2008 terrorist attack in Mumbai.

Weakness
Dependence on the high-end segment:
While the international traffic to India is increasing, Indians are also travelling more frequently. However, the requirement of each traveller is different. The company operates hotels only in the luxury and premium space with a small portion of its revenue coming from the mid budget hotel chain "Ginger". As a result of this positioning the company is able to target a smaller customer base.

Heavy dependence on India: Most of the company’s properties are based in India. This makes the company heavily dependent of the economic and socio political climate in India.

High leverage: The net debt to equity of the company for FY09 stood at 1.3 times. This makes the company very venerable during a slowdown period as it can put pressure on the company to service its debt.

Opportunities
Fast growing tourist destination:
India with is fast growing economy and diverse culture is a fast growing destination for tourism. Also the Indian government has taken several initiatives like the launch of ‘Incredible India’ campaign to promote tourism.

Growing demand in the mid-market and budget segment: The budget and mid-market segment is the fastest growing tourist segment. IHCL has recently launched its mid budget hotel chain "Ginger" which is expected to help the company grow in this segment.

Demand supply mismatch in hotel rooms in India: Currently India has 110,000 rooms while the estimated shortfall is 150,000 rooms. This provides a huge opportunity for the hotel industry especially since in the Union Budget 2010 the government has announced incentives for adding hotel rooms.

Threats
Economic downturn:
The hotel sector is very venerable to economic conditions. Moreover, it is also affected by socio-political conditions, natural disasters, terrorist attacks and potential health issues.

Outbound traffic: Due to falling international airfares, people are travelling more to international destinations especially South East Asia.

Competition: In recent times several international chains have set up shop in India. These include Four Seasons, Radisson, Hilton, Le Meridian etc. These coupled with domestic luxury brands like ITC, Oberoi Hotel and Leelaventure are providing stiff competition to IHCL.

What lies ahead...
With the economic recovery underway we are seeing a pick up in the hotel occupancy rates. We have also observed increase in foreign traffic in the last quarter. We believe that the worst is over for the hotel sector and in our opinion the long term future is bright for IHCL. However, the valuation of the stock has run up recently and we advice the investors to practice "CAUTION" on the stock.

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