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Hotels: Beyond FY03 - Views on News from Equitymaster
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  • Apr 4, 2003

    Hotels: Beyond FY03

    The Indian tourism market or rather the global tourism market has been marred by geo-political concerns for the last couple of years. During the first half of FY03, communal tensions (Gujarat riots) gripped the country. As a result, the western world issued travel advisories in June ’02, which stagnated the inbound travel of foreigners. The impact of the Kashmir issue and the parliament attack prior to that also had an adverse impact on India as a tourist destination. Consequently, there was fall in tourist arrivals from 2.6 m in FY01 to 2.3 m in FY02. The dip continued during the current fiscal as well (marginally below 2.3 m).

    Consolidated picture
    (Rs m) 9mFY02 9mFY03 % Change
    Net Sales 6494.2 6685.4 2.9%
    Other Income 470.7 466.7 -0.8%
    Expenditure 5567.9 5935.9 6.6%
    Operating Profit (EBDIT) 926.3 749.5 -19.1%
    Operating Profit Margin (%) 14.3% 11.2%  
    Interest 478.6 527.6 10.2%
    Depreciation 527.2 464.8 -11.8%
    Profit before Tax 391.2 223.8 -42.8%
    Extraordinary items 804 -33.2 -104.1%
    Tax 181.5 65.5 -63.9%
    Profit after Tax/(Loss) 1013.7 125.1 -87.7%
    Net profit margin (%) 15.6% 1.9%  
    Market Capitalisation   1,6340  
    P/E (x)   1.4%  
    * annualised      
    (*annualised nine months earnings)
    (**Combined IHCL & EIH results)

    The domestic hotel chains namely Indian Hotels and EIH have also had their fair share of ups and downs during the year. The Indian Hotels (Taj Group) stock finished a marginal 4% up in FY03. This is however, much better than the erosion of over 27% of EIH stock price on the bourses during the current fiscal. The reason why IHCL performed well as compared to EIH on the bourses was that it has shown more aggression in marketing its hotels. It also invested considerable sums in upping its F&B range with new restaurants. All this resulted in IHCL reporting a 12% growth in 9mFY03 topline. It has also been able to control its expenses, which has enabled its bottomline to go up 85% YoY. Due to this the stock price jumped up by nearly 25% during the December-January period and ended the year in the positive. However, the Oberoi group’s EIH did not have such a good run on the bourses owing largely to a disappointing 2% topline growth in 9mFY03 and a 23 m loss during the said period. The hotel chain acquired flight-catering service from its associate company EIH Associated Hotels Ltd. and added UdaiVilas resort, as a result of which there was a spike in the interest and depreciation expenses.

    On a consolidated (IHCL and EIH) basis for the 9mFY03 period the performance has been buoyant. The topline has grown by 3% while the bottomline has been eroded by 88% YoY. At the operational level also the performance has been a letdown. The operating profit has gone down by 19%, which indicates that overall expenses as a percentage of sales are still high. In order to come out of these depressing events, hotels started to spend more on advertising. Staff costs have also increased for the industry, which has affected the performance as the ARRs have remained under pressure due to lower occupancies.

    Occupancy and ARRs till Jan '03
    Cities Occupancies ARRs
    Delhi 14 (7.9)
    Bangalore 11.3 (0.7)
    Mumbai (North) 40.9 (8.1)
    Mumbai (South) 1.5 (2.9)
    Hyderabad (2.9) 8.7
    Chennai 1.9 (11.7)

    During the year, though occupancies returned back to the prior September ’01 levels, ARRs continue to remain under pressure due to the competition (both new and old) prevalent in the market. New entrants that have entered in the last couple of years include J W Marriott, Hyatt International, Le Meridian, Radisson and Claridges. Supply in cities like Mumbai (North) is growing around 30%, while South Mumbai is growing at around 5%. This oversupply will create a demand-supply mismatch among hotels thus affecting their performance in the near term.

    Tourism never received serious focus of the Government, as it was considered recreation of the elite. However, Budget '04 laid emphasis on tourism although in an indirect way. The government took some key initiatives like building of new roads, railways, airports and seaports. All these initiatives are key measures to woo the international and domestic tourist.

    During the current Union Budget, the Finance Minister did increase the FDI limits for certain industries. This may give a boost to business travel in the region. Business travel is a key driver for the hospitality sector in the country. With economic liberalization being flagged off in 1992, new policy measures have attracted foreign companies to establish operations in the country or at least to study the feasibility of operations. During this period, although GDP growth has slowed down compared to the mid nineties, FDI inflows have increased from US$ 2.3 bn in FY01 to US$ 4.4 bn in FY03.

    Though the inflow of tourists has stagnated for the last few years at around 2.5 m, this number is expected to be around 6 m by the year 2010 and around 9 m by 2020, as per WTO. This means that tourist arrivals are expected to grow at a CAGR of 6% plus in the next two decades. However, in light of India’s share miniscule share in the global tourist pie (0.2%), even this encouraging growth pales in comparison to booming economies like China.

    The ongoing war (US-Iraq) will have an impact on the Indian tourism industry, although not immediately. The war has started at a time when the tourist season (September-February) is almost over. However, if the war gets elongated then there is a concern for the industry. As of now, the global tourist movement has seen a drop due to the war. Secondly, the South East Asia region is up against a mysterious pneumonia virus, which has again been a cause for concern for the industry in the region. However, in the long run, keeping the demand potential in mind, we believe domestic hotel chains, particularly, IHCL and EIH stand to gain.



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