Indian Hotels continues thrust on business hotels - Views on News from Equitymaster

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Indian Hotels continues thrust on business hotels

Apr 19, 2000

As per a newspaper report Indian Hotels Company Ltd (IHCL) has signed a 20 year management contract with Royale Manor Hotels for their property the "Sofitel Ummed" in Ahmedabad. This would now be called the "Taj Residency" Ahmedabad. IHCL is continuing their thrust of expanding their "Taj Residency" brand which is primarily a first class business hotel brand into smaller cities across India.IHCL, India's largest hotel chain reported a turnover of Rs 5,915 m in FY99. It currently operates 48 hotels in India under the "Taj" brand. The company's operations have been regrouped under five strategic business units: Luxury Hotels Division, Business Hotels Division, Leisure Hotels Division, Air Catering Services and the International Operations Division.

IHCL has recently acquired the Blue Diamond hotel in Pune from Pune Industrial Hotels for a consideration of Rs 400 m and has converted this into a Taj Residency hotel. In the long term this strategy of opening business hotels and expanding their base outside metro cities will pay off. As other cities like Pune, Ahmedabad, Hyderabad are growing very fast, IHCL is positioning itself to take advantage of the growth in business travel here.

Besides this its thrust of opening hotels in leisure destinations in the past which also continues will benefit the company in future. IHCL will be able to take advantage of a pick up in leisure travel when India's potential as a tourist destination is realised.

IHCL plans to spend around Rs8 bn for its expansion plans over the next four to five years which would be financed through a mix of debt and internal accruals. The thrust of these expansions would be on the business and leisure hotel segments. IHCL's debt to equity stood at only 0.2:1 as of March 1999, hence taking on debt for expansions would be easy for them. Also with the earlier sale of their US properties and after paying off their international liabilities, IHCL has around US$ 76 m left, which could be used for its international as well as domestic expansions.

As the economy has started to pick up and the political situation is more stable now than it has been since the last few years, business travel is expected to pick up over the next year. Hence IHCL which gets 34% of its profits from its Mumbai hotels and 67% of profits from the top five hotels, will benefit as a result of this pick up in corporate travel. As new room supply in the metro cities is coming up very slowly due to delays, cost overruns this would benefit the existing hotel chains like IHCL in the medium term as excess capacity will not pose a problem.

Market View:
Hotel stocks have been out of favour for the past two years as a result of a fall in occupancy rates. IHCL however continues to be a long term favourite of analysts due to its large hotel network, aggressive expansion plans, professional management and its sound financials.

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