May 8, 2000|
Hotels no benefits from rupee depreciation
The rupee has depreciated by 26% from an average of Rs 33.4 in FY96 to Rs 42.1 in FY99. However hotel companies which are major beneficiaries of the depreciation in the rupee due to their dollar earning capacity, did not gain from this.
For the Indian hotel industry 60-70% of their revenues come from foreign exchange. As a ball park figure a 1% depreciation in the rupee contributes to 1% of the bottomline of most list hotel companies. In some cases it may be even more than this depending on the foreign exchange earnings of the particular hotel company.
Due to lower occupancy rates from FY97 onwards and pressure on average room rates and despite the benefit of the rupee depreciation in the past couple of years hotel companies performance was dismal.
For the larger hotel companies, Indian Hotels Co. Ltd (IHCL) saw a decline of 18.3% in its net profit from FY96 to FY99 and EIH Ltd reported a decline of 19.9% in its net profit for the same period. Hence if we were to take out the benefits of the rupee depreciation the decline in net profit of these companies would have been higher.
Earlier hotel companies benefited from the fact that they were allowed to charge dual rates for dollar paying guests and rupee paying guests. As a result most five star hotels charged higher rates to dollar paying guests and gained from this as well as the depreciation of the rupee. However since December 1997 hotels were allowed to quote a single rate. This however does not stop their rupee depreciation gains.
In future the foreign exchange portion of the profits of hotel companies are to be taxed, starting FY2001, this would have an impact on the future earnings for the short term. However in the long term this would be good as the fear of any such incentive will not hold.
The prospects for the hotel industry are expected to improve in the next one year as the economic scenario has improved and the political situation is more stable. Hence they should benefit from higher occupancy rates, average room rates and rupee depreciation in future.
On valuations, Indian Hotels Company Ltd is trading at price to earnings multiple of 8.4x and EIH Ltd is trading at 6.9x (both on FY99 earnings). This is low as compared to multiples of 20x-25x they traded at few years ago and the negative news which affected the hotel industry seems to be in the price.
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