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Indian Hotels: Is there steam left?
Jun 6, 2005

Performance Summary
Indian Hotels, the Taj chain of hotels, announced its full year results today. Buoyed by robust increase in tourist inflows into the country, the topline has risen by 27% YoY in FY05. While the standalone topline is exactly in line with our estimates for FY05, operating margins have risen at a faster clip on the back of very remunerative room rates. Excluding the extraordinary incomes in both the corresponding fiscals, net profit has actually risen by 117% in FY05, which is commendable.

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net sales 2,123 2,663 25.5% 6,683 8,476 26.8%
Expenditure 1,756 1,958 11.5% 5,659 6,659 17.7%
Operating profit (EBDITA) 367 705 92.3% 1,024 1,817 77.5%
Operating profit margin (%) 17.3% 26.5%   15.3% 21.4%  
Other income 91 35 -61.8% 254 256 0.7%
Interest (net) 89 56 -37.1% 269 318 18.3%
Depreciation 135 159 17.7% 486 568 16.9%
Profit before tax 234 525 124.3% 523 1,187 126.8%
Extraordinary income/(expense) 243 64 -73.5% 279 230 -17.5%
Tax 109 167 53.7% 196 358 83.2%
Profit after tax/(loss) 368 422 14.6% 607 1,059 74.5%
Net profit margin (%) 17.3% 15.8%   9.1% 12.5%  
No. of shares (m) 45.1 50.3   45.1 50.3  
Diluted earnings per share (Rs)       12.1 21.1  
Price to earnings ratio (x)         31.7  

What is the company's business?
Indian Hotels Company Limited (IHCL) is India's largest hotel chain with an estimated room inventory share of 25% in top seven cities in the luxury segment (room inventory share is the share of Indian Hotels of the total rooms available). On a standalone basis, while the company derived 49% of its net sales from room revenues in FY05, the food & beverages division contributed 39% to net sales. IHCL also manages hotel properties, which added to 5% to net sales in FY05.

What has driven performance in FY05?
Occupancy close to previous peaks: Backed by a 23% YoY growth in international tourist inflows into the country, the overall occupancy rate for IHCL (standalone) touched 72% in FY05 as against 69% in FY04, which is amongst the highest in the last decade. If one were to look at key cities, occupancy in Delhi increased from 72% in FY04 to 77% in FY04 with similar or higher rise in Bangalore and Kolkata. Mumbai, however, saw a marginal decline in occupancy in FY05 owing to higher supply of rooms. Since demand was robust during the fiscal year, average room revenues (ARRs) of IHCL increased by 26% YoY. The topline growth therefore, has to viewed in this context.

Operating leverage benefit…
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Raw materials 195 216 10.7% 680 791 16.4%
% sales 9.2% 8.1%   10.2% 9.3%  
Staff 450 620 37.7% 1,666 2,003 20.2%
% sales 21.2% 23.3%   24.9% 23.6%  
License fee 211 269 27.6% 603 879 45.9%
% sales 9.9% 10.1%   9.0% 10.4%  
Power & lighting 139 147 6.4% 617 647 4.8%
% sales 6.5% 5.5%   9.2% 7.6%  
Others 761 705 -7.3% 2,094 2,339 11.7%
% sales 35.8% 26.5%   31.3% 27.6%  

Staff cost to reduce going forward: All key expenses have declined as a percentage of sales in FY05. As we have mentioned before, hotels is a high fixed cost industry and whenever there is a sharp rise in room rates, the growth in operating profits will be faster (as key expenses increase at a marginal rate as compared to the topline). Staff cost as a percentage of sales however, has declined at a slower rate. The is due one-time training expenses, which the company incurred during the fiscal and are non recurring in nature. At the operating level, margins are higher than our estimates.

Standalone Vs consolidated:On a standalone basis, if one were to exclude extraordinary items from the both fiscals, net profit has risen by 117% YoY, despite lower other income. Despite the reduction in total debt to the tune of Rs 3 bn, interest cost is higher owing to the FCCB issue. Higher depreciation charges could be attributed to the commencement of the residential complex in Mumbai (Wellington Mews). On a consolidated basis, barring James Court (London), all other subsidiaries and associates posted improved performance in FY05. Oriental Hotels and Taj GVK, for instances, posted a 64% and 73% growth in net profit respectively in FY05. The consolidated performance was however, impacted by poor show by the London subsidiary.

Consolidated snapshot…
(Rs m) FY04 FY05 Change
Net sales 10,023 13,135 31.0%
Operating profit (EBDITA) 1,784 3,326 86.4%
Operating profit margin (%) 17.8% 25.3%  
Other income 320 241 -24.8%
Interest (net) 679 1,053 55.0%
Depreciation 878 1,102 25.4%
Net profit 720 1,302 80.9%
Net profit margin (%) 7.2% 9.9%  
No. of shares (m) 45.1 50.3  
Diluted earnings per share (Rs) 14.3 25.9  
Price to earnings ratio (x)   25.8  

What to expect?
The stock currently trades at Rs 668 implying a price to earnings multiple of 25.8 times FY05 consolidated earnings. The company has declared a dividend of 100% (Rs 10 per share) as against 80% in FY04. Post the FY05 results, we have to upgrade our earnings estimate for FY06 at the consolidated level. The company is looking to expand the IndiOne initiative (budget hotels) by 10 in FY06, thus adding 1,000 more rooms. It is also looking at adding 3 to 5 properties under management contracts apart from expansion in cities like Bangalore, Chandigarh and Chennai through subsidiaries and associates. While current valuations are not cheap by any standards, the fact is that the industry is going through a transition. We also believe that there is significant scope for unlocking efficiency and thus improving margins in the medium-term at the corporate level. We therefore, have a HOLD view on the stock. But taking into account the susceptibility of the sector to global events, we would rate the stock as a high-risk one.

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