We had mentioned at time of 1HFY02 results for Indian Hotels Company Ltd. (IHCL) that achieving any growth in FY02 was likely to be a challenging task. Post September 11 events, hospitality and airline industry were amongst the worst affected. Consequently, fiscal '02 was likely to be a washout. With the extraordinary events, a YoY performance may not entirely be a fair comparison.
Operating Profit (EBDIT)
Operating Profit Margin (%)
Profit before Tax
Profit after Tax/(Loss)
Net profit margin (%)
No. of Shares
Earnings per share
The company also hived of their air catering strategic business unit (SBU) at the end of 1HFY02. The business contributed an estimated 20% to revenues. The air catering business was transferred to a joint venture company with Singapore Airlines holding 49% stake. The sale of business accrued pre-tax profits of Rs 886.4 m. As a result, FY02 YoY performance is not comparable. Having said that, while the international travel market was in a slump, the domestic industry has not offered any hedging opportunity. India experienced the October '02 attack on Jammu & Kashmir assembly, December 13, '02 attack on parliament, Gujarat riots through March '02 - May '02 followed by build-up in border tensions culminating in several foreign embassies issuing a travel warning to the region. Seeing the glass half-full, the industry could be relieved that most events occurred in the previous fiscal.
The management indicated that revenues have picked-up in the first two months of the current fiscal, which could signal a positive trend. We reckon, the improved revenues is likely due to the holiday season in the domestic market coupled with introduction of packages to better suit family travel. However, issue of travel warning could dent revenues in June '02, which could subdue 1QFY03 performance. While evacuation and warnings tend to be high profile, withdrawal is likely to be a low key affair leading to a gradual reversion to ex-ante scenario.
Operating profits have been hit by lower sales and reduced margins. OPM is lower by 750 basis points for the full year ended March '02. We reckon the damage to margins is due to discount packages to maintain occupancy rates. Also, expenses have been sticky with the ongoing IT initiative and inclusion of Lake Palace, Udaipur property on license basis during the year. With revenues, operating expenses are also not comparable. Staff costs, among the prominent expense heads in a hospitality company, has declined marginally, which could be due to voluntary retirement (VRS) in FY01. Also, the company continues to extract savings from ongoing cost control measures.
As part of the strategy to improve service offerings the company has undertaken inorganic growth and renovations at its key sites. This has led to substantial amount of capital expenditure over the last two fiscals. Consequently, interest and depreciation expenses have increased in fiscal '02.
The decline in pre-tax profits indicates the extent of damage. At Rs 161 the scrip is quoting on a multiple of 9x FY02 earnings. These are bottom of the cycle valuations. Mid-cycle valuations are estimated to be 15x-17x. Easing of tensions at the border, withdrawal of travel warnings and economic revival will augur well for the industry. FY03 is likely to be a better year for the company.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407