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Indian Hotels vs Accor Hotels

Jun 3, 2003

The global tourism industry has been in doldrums for the last couple of years due to various geo-political concerns, which surfaced around the globe. Concerns regarding the prospects of the industry started with the 'September 11' WTC attacks in 2001 and was further dented by the war in Afghanistan, the second ‘Gulf War’, and the spread of the SARS virus. The slowdown in the global economy and cost-cutting measures adopted by companies globally have hurt the sector. We take a look at the performance of domestic hotels as compared to international hotels.

(Rs m) Accor Hotels** Indian Hotels EIH
Sales* 550,733 5,415*** 3,700***
Number of rooms 440,807 2,797 1,925
Average occupancies during the year 58.0% 58.0% 55.0%
OPM 17.1% 17.3% 11.6%
NPM 6.1% 13.9% 9.5%
P/E (x) 11.6 24.0 23.6
P/E (without amortised goodwill)(x) 9.2 - -
Market Capitalization to Sales (x) 0.7 1.4 2.8
Book Value per share (Rs) 364.1 197.1 197.8
* converted at Rs 76.30 per pound  **December 2002  *** Trailing 12 months

Accor Hotels is one of Europe’s leading hotel chain having its presence (3,654 hotels and 440,807 rooms in FY02) in almost all regions of Europe, US and other parts of the world. The hotel chain has its presence largely in the economy class hotels as well as in the business and leisure segment. During 2002, 38% of its total revenues came from the business and leisure segment, while 32% came from the economy class hotels. The economy class usually involves motels and budget hotels (mostly in Europe and North America). In 2002, over 69% Accor's total revenues were from room revenues. Normally in most international hotel chains, casino and betting revenues form a large part of total revenues. However for this hotel chain, revenues from casinos were only 5%. For Indian Hotels and EIH, food and beverages are the second largest source of revenues (after revenues from rooms).

During the last few years, particularly in 2002, the global tourist traffic declined by 0.6% as a result of which occupancies around the world slipped to around 55%-58%. Both Accor Hotels and Indian Hotels saw their average occupancies decline from over 60% to 58% in FY02. EIH (Oberoi Hotels) was more affected as its average occupancies declned at 55%. Although occupancies for the industry did bounce back in the latter part of 2002 from the 'September 11' lows of around 45%-50%, but occupancy rates are still lower than the average of over 60% achieved prior to '9/11'.

On an operating margin basis Indian Hotels fares favourably with Accor. However on the NPM level the Indian hotels are doing better than Accor. But, as the table above indicates, this is due to the fact that Accor, like other international hotel chains, have acquisitions which results in good will on their books. This goodwill is written off every year (amortized) and because it is treated as an expense there is an impact on the NPM. The Indian hotel chains are not known to make big-ticket acquisitions either in India and overseas.

Over the years, the operating margins have declined due to the deterioration in the overall business environment. The decline in the RevPAR (revenue per available room) is due to a combination of less visitors and higher discounts to attract those fewer visitors. This has forced many hotel chains, including Indian Hotels and Accor, to sell their non-performing hotels. Accor has sold some hotels in North America and Europe while Indian Hotels has sold some of its smaller hotels in India.

On the valuations front, the hotel majors are trading at a higher P/E than their respective country’s stock markets. However, valuations on a P/E basis are skewed as we are penalizing these companies by using their current profits that are, arguably, the low point in their cycle. Going forward we believe that the worst seems to be over for this sector indicated indicated by the improving occupancies and that investors in hotel stocks may witness better times sooner rather than later.


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