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  • Jun 11, 2012 - Indian Hotels: Profits improve on lower interest cost

Indian Hotels: Profits improve on lower interest cost
Jun 11, 2012

The Indian Hotels Company Limited (IHCL) has announced its consolidated results for the full year ended March 2012. The company has reported a 19.9% YoY growth in sales. The company has also reported a net profit as compared to a net loss in the previous year. Here is our analysis of the results.

Performance summary
  • Net sales for FY12 increased by 19.9% YoY on the back of strong revenue growth in subsidiaries.
  • Operating margins improved by 0.2% YoY during the year. This has been due to increase in overall costs which saw a rise of 19.7% YoY. However, operating profits increased by 21% YoY on back of strong revenue growth.
  • The company reported a net profit for FY12 as compared to a net loss in FY11. This was due to reduction in interest cost.
  • On a standalone basis, the company reported a 8% YoY increase in net sales and 2.9% YoY increase in net profit for FY12.
  • The company has recommended a dividend of Rs 1 per share for FY12.

Standalone and Consolidated financials
  Standalone results Consolidated results
(Rs m) FY11 FY12 Change FY11 FY12 Change
Sales 16735 18087 8.08% 28625 34327 19.9%
Expenditure 12550 14028 11.78% 24117 28870 19.7%
Operating profit (EBDITA) 4184 4059 -2.99% 4,508 5,457 21.0%
Operating profit margin (%) 25% 22%   15.7% 15.9%  
Other income 401 497 24.08% 395 508 28.4%
Interest (net) 1229 1057 -13.96% 2512 1934 -23.0%
Depreciation 1084 1139 5.07% 2279 2551 11.9%
Profit before tax 2272 2360 3.87% 113 1,480 1210.0%
Exceptional Item -58 -61 5.53% 119 -5 NA
Tax 802 846 5.45% 921 1218 32.2%
Profit after tax/(loss) 1413 1454 2.90% (689) 258 NA
Minority interest       (117) (384) NA
Share of profit of associates       (67) 156 NA
PAT after minority and sh. of assoc. profit       (873) 31 NA
Net profit margin (%) 8% 8%   -2.4% 0.8%  
No. of shares (m)         759  
Diluted earnings per share (Rs)*         0.04  
P/E ratio (x)*         NA  
(* On a trailing 12 months basis)

What has driven performance in FY12?
  • The company's consolidated revenue growth of 19.9% YoY was led by robust revenue growth of subsidiary companies. Subsidiaries revenues grew 44% YoY mainly due to additions in rooms and marginal recovery in Revenue per room available (RevPar) of select international hotel room portfolio. Despite the economic slowdown, the US and UK witnessed a recovery in RevPar led by growth in occupancy and ARR. RevPar growth in Australia remained subdued.
    Cost break-up
      Standalone results Consolidated results
    As a % of net sales FY11 FY12 FY11 FY12
    Total Cost of goods 8.1% 8.5% 10.4% 10.6%
    Staff cost 24.6% 26.1% 33.6% 33.5%
    License fees 6.3% 6.6% 3.8% 3.6%
    Power, fuel & light 6.8% 7.3% 6.8% 7.1%
    Other Expenditure 29.2% 29.1% 29.6% 29.4%

  • IHCL's operating (EBITDA) income increased by 21% YoY. Operating margins saw a decline of 0.2% YoY. During FY12, room supply growth in India was 6% whereas demand grew by 3.9%. This increased competitive intensity prevented the company from hiking average room rent (ARR), thereby hurting margins.

  • The unfavourable demand-supply dynamics and grim economic scenario have negatively impacted industry occupancy rate (OR) and average room rent (ARR). The ARR in 12 major cities has declined by 3.3% YoY in FY12. However, occupancy rate has shown flat to negative growth in FY12 with a drop of 3.8% YoY in FY12.

  • For FY12 the company reported a net profit as compared to a net loss in FY11.This was due to lower interest costs. The US business continues to be a drag on IHCL's performance in FY12. The tepid recovery in occupancy and ARR took its toll on the consolidated bottomline. The company has indicated that it is unable to command a premium in the US despite the quality offering. This is unlikely to change so long as it battles with high competition and low demand. The company is likely to adapt the strategy by re-aligning cost with the changing of product mix, which has higher demand.

What to expect?
The company has added nearly 1,000 rooms in FY12 to its total room portfolio, which is currently at 13,629. The company is planning to add nearly 2040 rooms in 2012-13. The growth is primarily coming from management contracts and Ginger portfolio expansion, thereby limiting the capex needs for IHCL. While construction on the Sea Rock hotel is awaiting approvals, this would not entail funding commitment from IHCL in the near term as per management.

Muted domestic performance and slower recovery of US due to sluggish macroeconomic scenario have impacted the stock price significantly. However, we are overall bullish on the growth of the sector and Indian Hotel is well placed to capture the boom in the tourism industry.

At a price of Rs 55, the stock is trading at 17 times our estimated FY14 earnings. Hence we maintain a positive view on the stock.

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