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Indian Hotels: Management perception - Views on News from Equitymaster
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  • Jun 8, 2001

    Indian Hotels: Management perception

    At the recently held analyst meet of Indian Hotels Company Ltd (IHCL), the management seems quite optimistic on its renovation program and future growth plans. However, in the current financial year they have cautioned that 1HFY02, is likely to be only marginally better as compared to the previous year due to an overall slowdown in demand and higher competition especially in North Mumbai.

    The main points of the company's analyst meet are as follows:

    • The company's performance in 4QFY01 was commendable as it reported a robust 12% growth in turnover and 20% growth in net profit. The company's occupancy rates in all three segments: luxury, business and leisure reported a strong growth during this period. In the previous three quarters, the company had reported a decline in occupancy rates in its business and leisure hotel segment. In terms of average room rate (ARR) growth too, the company has done well. The reasons for this upbeat performance in 4QFY01 is the completion of renovations at its hotels in Mumbai and Delhi, which resulted in higher occupancies, hike in room tariffs and increase in food and beverage income.

    • For FY01, the company's total room income grew by 9% on the back of an occupancy rate of 66% in FY01 at its luxury hotels as compared to 61% in FY00. Though the company's occupancy rates in FY01 for business and leisure segments reported a decline, the company's ARRs in the business segment grew by a robust 30% and leisure segment by 9%.

    Occupancy rates (%) FY01 FY00
    Taj Luxury Hotels 66% 61%
    Taj Leisure Hotels 48% 51%
    Taj Business Hotels 57% 59%

    • On the costs side, the company has focused on cost cutting on the operating level and managed to reduce raw material costs as a percentage of food and beverage revenue by 2% during the year. Power and fuel costs however went up sharply due to steep rise in tariffs in FY01. The company managed to contain its staff costs as a result of its VRS (voluntary retirement scheme). As a result the company's operating profits grew by 20% YoY in FY01.

    • The air catering and food beverage income contributed well to its FY01 results. The air catering revenues reported a growth of 26% YoY (16.6% of IHCL's turnover) and food and beverage income grew by 12% to Rs 2,064 m.

    ARR (Rs) FY01 FY00 % change
    Taj Luxury Hotels 6,069 5,987 1%
    Taj Leisure Hotels 2,727 2,494 9%
    Taj Business Hotels 2,944 2,264 30%

    • The company's net profit growth at 6% for FY01 (after reducing the extraordinary expense related to VRS) was low as a result of higher depreciation and interest costs due to renovations during the year as well as its expansion plans.

    • In its international operations, the company has formed a new company called Taj Asia and transferred its properties Taj Lanka and Taj Maldives into this company. As a result the company has managed to eliminate debt to the tune of US$ 3.5 m. The company is on the look out for a joint venture partner for this subsidiary. All capital expenditure to be undertaken in this venture will be shared with its joint venture partner. In future all its expansion plans in the South East Asian region will be done through this subsidiary.

    • The company has managed to change its operating agreement for the Lake Palace Hotel in Udaipur to a licensing agreement which will result in higher profit generation for the company as well as allow IHCL to have full control of running the hotel. IHCL is planning to complete its renovations planned in this hotel, and these will now be done in IHCL's books as it has become a licensed property.

    • The company has spent Rs 580 m for its voluntary retirement scheme, which will result in a pre-tax savings of Rs 180 m on its staff costs per annum.

    • IHCL has estimated a renovation spend of Rs 1.55 bn for FY02 of which Rs 600 m will be spend for its upcoming Wellington Mews service apartment hotel and Rs 450 m for its renovations in Goa, Udaipur, Mumbai, Delhi and Calcutta. The company has estimated to spend Rs 6 bn on expansions over the next five years.

    • In terms of future expansion plans the company has indicated that it is keen to take a low strategic stake of 15-25% in future hotel properties and manage these as and when the opportunity arises. The company does not want to increase its capex too a large extent but wants to encash on its brand image and hotel operational skills. This will benefit the company as it may not need to increase its capex spends to large levels and earn management fees.

    • The company is being aggressive on reducing its costs for FY02 and has come up with specific targets of reducing travel cost by 20% (travel costs Rs 67.2 m in FY00), communication costs by 22%. The company has obviously decided on how to reduce these expenses and has hence been so candid about these figures. Besides the company's ongoing energy saving initiatives are likely to reduce power consumption by 5% in FY02. On its working capital front too the company plans to reduce working capital needs by 11% through prudent measures.

    • The company has admitted that competition in North Mumbai is likely to have an impact on its hotel in South Mumbai. Also tourist traffic is growing by 15%-20% in North Mumbai as against only 3% in South Mumbai. This has had an impact on group bookings for its Mumbai property. However on the cabin crew front Singapore Airlines has renewed its contract with them.

    • In 1HYFY02, the company expects ARRs and occupancy rates to remain flattish due to slowdown in traffic as well as higher competition. They expect this to increase marginally in the 2HFY01.

    • The company expects to receive 10% for every sale undertaken by ITDC (India Tourism Development Corporation) as per their stake in the company. ITDC plans to break up its hotel properties into many companies and sell each separately. The company is keen to bid for the flagship Ashoka Hotel in New Delhi alongwith a strategic partner. For HCI (Hotel Corporation of India), the company is very interested in its air catering unit in Mumbai.

    • For budget hotels, the company is looking to come out with a model hotel in North Mumbai and plans to eventually franchise this model to hotel owners in smaller towns. The company will come out with clear cut plans of operating these hotels.

    On the whole the prospects for IHCL seem to be bright as it is undertaking many changes internally in its operations and expansion plans the impact of which will show up in the longer term. However in the short term the earnings are likely to be affected by higher competition.

    On the current price of Rs 221.5, the stock trades at a price to earnings multiple of 8.6xFY01 EPS of Rs 25.9.



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