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Indian Hotels- Party time!

Jun 8, 2006

Performance Summary
Indian Hotels (IHCL), the owners of the Taj chain of hotels, announced strong results for the fourth quarter and full year ended March 2006. The topline (standalone) for the quarter and fiscal grew by 33.6% YoY and 27.9% YoY respectively, driven by higher occupancy and average room rates (ARRs). An improvement in operating efficiency has also aided margins. The board has recommended a dividend of Rs 13 per share (dividend yield of 1.5%).

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 2663 3,559 33.6% 8,476 10,843 27.9%
Expenditure 1958 2292 17.1% 6,659 7,693 15.5%
Operating profit (EBDITA) 705 1267 79.7% 1,817 3,150 73.4%
Operating profit margin (%) 26.5% 35.6% 21.4% 29.1%
Other income 35 128 265.7% 256 433 69.1%
Interest 56 35 -37.5% 318 204 -35.8%
Depreciation 159 191 20.1% 568 659 16.0%
Profit before tax 525 1169 122.7% 1187 2,720 129.1%
Extraordinary income 64 - 230
Tax 167 381 128.1% 358 882 146.4%
Profit after tax/(loss) 422 788 86.7% 1059 1,838 73.6%
Net profit margin (%) 15.8% 22.1% 12.5% 17.0%
No. of shares (m) 50.2 58.4 50.2 58.4
Diluted earnings per share (Rs) 31.5
Price to earnings ratio (x) 29.7

What is company's business?
IHCL, a Tata group company set up in the early 20th century, is a leading player in the Indian hospitality industry. Its hotels are spread across the country with more than 9,182 rooms under its management across 76 hotels in nine countries. IHCL operates through 16 subsidiaries, 6 joint ventures and 16 associates

What has driven performance in FY06?
Robust tourist inflow: International tourist inflow into the country has increased by almost 13% YoY to 3.9 m for the period between January to December 2005. This led to strong ARRs (average room rates) for hotel companies and IHCL, being the market leader, has benefited from the same. The occupancy levels and ARR across the company's major hotels in India have been on an uptrend, due to the high tourist inflow coupled with low supply in rooms. Though the average occupancy rate for FY06 fell from 72% in FY05 to 70% in FY06, the ARRs reached new highs. The average ARR rose by 31% YoY, with Bangalore leading the pack. To put things in perspective, the ARRs of the IHCL rose from Rs 5,471 per day in FY05 to Rs 7,187 per day in FY06. On a standalone basis, while the company derived 50% of its net sales from room revenues in FY06, the food & beverages division contributed 36% to net sales. IHCL also manages hotel properties, which added to 5% to net sales in FY06.

Cost Control: Hospitality being a fixed asset intensive business, operating leverage has played its part in perking up margins for IHCL during both 4QFY06 and FY06. During the fiscal, all the major cost heads (raw materials, staff and others) have witnessed declines as percent of sales. The operating profits were up 73% YoY in FY06 as compared to last year, while the margins were at 29.1% (21% in FY05).

(% of sales) 4QFY05 4QFY06 % Change FY05 FY06 % Change
Raw material and cost of goods 216 270 25.0% 791 932 17.8%
% of sales 8.1% 7.6% 9.3% 8.6%
Staff cost 620 637 2.7% 2,001 2,207 10.3%
% of sales 23.3% 17.9% 23.6% 20.4%
Power and Fuel cost 147 163 10.9% 647 683 5.6%
% of sales 5.5% 4.6% 7.6% 6.3%
Other expense 705 845 19.9% 2,339 2,754 17.7%
% of sales 26.5% 23.7% 27.6% 25.4%
License fees 269 377 40.1% 879 1,117 27.1%
% of sales 10.1% 10.6% 10.4% 10.3%

It flows to the bottomline: Strong growth in the topline, combined with expansion in operating margins has helped IHCL post a superlative growth in bottomline during the fiscal. The net profit growth has also been aided by lower interest costs (debt to equity 0.3 in FY06 against 0.9 in FY05). The actual bottomline performance is 53% above our FY06 estimates (excluding the impact of extraordinary income) and, to that, extent, we shall have to upgrade our numbers.

What to expect?
At the current price of Rs 936, the stock is trading at a price to earnings multiple of 26 times our estimated FY08 earnings. IHCL's FY06 performance has outperformed our estimates, especially on the profitability front. The company has benefited immensely from operating leverage, and considering that buoyancy in the Indian hospitality market is likely to continue in the future, we shall have to upgrade our numbers for the company.

The company is in process of expansions. The hotel major is planning to add 8 more 'Ginger' hotels, which will come into operation by FY07. Also, it is banking on the growth of Spas and new brands like the 'Gateway' and 'Wilderness' lodges. IHCL's overseas properties are also performing well and the company is on lookout for more management contracts. The company has reduced its debt and with the conversion of the FCCB proceeds and is well poised to capitalise on the growth opportunity.

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