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ITC Hotels: Hope for recovery

May 16, 2003

ITC Hotels declared its FY03 results yesterday. For the full year, the company recorded a 9% growth in its topline, indicating the hotel industry could be seeing light at the end of the tunnel. ITC Hotels has also seen an improvement (by 390 basis points) in operating margins in FY03. Let us take a look at the performance of the company in FY03.

(Rs m) FY02 FY03 Change
Net Sales 1,121 1,217 8.6%
Other Income 13 9 -31.6%
Expenditure 1,047 1,089 4.0%
Operating Profit (EBDIT) 74 128 73.4%
Operating Profit Margin (%) 6.6% 10.5%  
Interest 26 19 -25.4%
Depreciation 99 103 4.1%
Profit before Tax (38) 14 -
Extraordinary items - - -
Tax 7 9 29.9%
Profit after Tax/(Loss) (45) 6 -
Net profit margin (%) -4.0% 0.5%  
No. of Shares (m) 30.2 30.2  
Diluted earnings per share* (Rs)   0.19  

If FY02 was a bad year for the company and the industry in general, the first half of FY03 was no different. The industry continued to be marred by adverse events, although there were some signs of recovery during the 3rd quarter (December). The March quarter however created a dent in the performance of the sector. The US-Iraq war and the SARS virus dampened the sentiments of the business and leisure travelers to the South East Asia region. India being a part of this region also got affected due to this. Although occupancies during the second half of FY03 have been much better than what they were in FY02, Average Room Rates continued to remain under pressure for the complete year.

There has been a slight recovery in the sales and operating margins of the company in FY03 compared to the previous period, as the heavy discounts which were given in FY02 have fallen. ARRs however continue to remain under pressure due to low occupancy rates. However we must point out that the operating margins of ITC Hotels is still much lower than the industry leader Indian Hotels (19% in 9mFY03). However considering the fact that the company is catering mainly to the business traveler, its performance in FY03 is reasonably good.

There has been a significant improvement in operating margins, mainly due to the fact that the company has been able to keep its fuel, power and other expenses in check. As a result of which, expenditure has gone up by 4% during the year, compared to a topline growth of 8%. ITC Hotels has been able finish the year in the positive, making a profit of Rs 6 m after posting a loss in FY02 mainly due to improvement in operating margins. Bottomline has further improved due to decrease in the interest cost, as the company has been retiring its high cost debt and due to the falling rate of interest scenario.

Due to the fact that the company is in a turnaround phase the earnings per share of the company is very low. Hence a P/E ratio is irrelevant at this juncture. Over the past year, the scrip has steadily declined from its highs and is currently quoting at Rs 47. The 52-week high/low is Rs 61 / Rs 36. Recent expansions in hospitality segment, namely ITC - Grand Maratha, Mumbai, have been undertaken by the parent company, ITC. Consequently, concerns have cropped up on expansion plans and positioning of the subsidiary. We feel that going forward the concerns regarding the future of the company are likely to overshadow its reasonably good financial performance in FY03.

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