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Indian Hotels: Terror attacks take toll

Jun 15, 2009

Performance summary
  • The standalone topline declines by 13% YoY, while on a consolidated basis, the sales fall by 11% YoY. The performance is adversely impacted by the terror attacks in Mumbai in November last year.
  • The company adds1,200 rooms during FY09 across segments. It is adding another 15 hotels during the current fiscal. IHCL acquires 85% stake controlling stake in the closely-held ELEL Hotels and Investments (Sea Rock Hotel) for Rs 6.8 bn.
  • The standalone profits decline by 43% YoY. The consolidated margins decline from 30.5% to 18.2%.
  • The consolidated net profits (excluding forex and exceptional items) tumble 84% YoY.
  • The Board declares a dividend of Rs 1.2 per share (dividend yield of 1.6 %).

  Standalone financials Consolidated financials
Rs m FY08 FY09 Change FY08 FY09 Change
Net sales 17,645 15,340 -13.1% 29,200 26,008 -10.9%
Other operating income - 855   - 855  
Expenditure 10,629 11,310 6.4% 20,280 21,280 4.9%
Operating profit (EBDITA) 7,016 4,031 -42.5% 8,920 4,728 -47.0%
Operating profit margin (%) 39.8% 26.3%   30.5% 18.2%  
Other income 415 870 109.4% 755 705 -6.6%
Interest (net) 943 904 -4.1% 2,023 2,305 13.9%
Depreciation 854 944 10.5% 1,676 1,883 12.4%
Profit before tax 5,634 3,907 -30.6% 5,976 2,101 -64.8%
Exchange gain/ (loss) 171 (222)   171 (466)  
Extraordinary item - (62)   (542) (50)  
Tax 2,030 1,283 -36.8% 2,470 1,558 -36.9%
Share of profit in associates - -   642 255 -60.3%
Less minority interest - -   (227) (158)  
Profit after tax/(loss) 3,775 2,340 -38.0% 3,550 125 -96.5%
Net profit margin (%) 21.4% 15.3%   12.2% 0.5%  
No. of shares (m) 602.9 723.4   602.9 723.4  
Diluted earnings per share (Rs)*   3.2     0.2  
Price to earnings ratio (x)*   23.2     435.4  
*trailing twelve month earnings

What has driven performance in FY09?
  • Indian Hotels reported a decline of 13% YoY in the standalone topline during the year. On a consolidated basis, the sales fell by 11% YoY. The performance was adversely impacted by the terror attacks in Mumbai in November last year even as the hospitality industry was severely hit by the economic slowdown in all key markets during the latter part of the year, which is traditionally the peak season period. The occupancy for the year stood at 66% as compared to 73% last year. The average room rates (ARR) were down 2% YoY, while RevPARs fell 12% YoY. While the room and F&B revenues saw a fall of 13% YoY, the other operating income grew by 33% YoY. However, on the positive side, while the luxury segment was the worst affected, as we move lower down the segment i.e. to mid scale and budget, the decline in occupancy and room rates was lower.

  • The international revenues contribute one third to the total revenues. Slowdown in the US markets affected its performance. The full closure of Pierre Hotel in New York for renovation also led to lower revenues. Its properties in Boston, New York, Australia and Dubai were also impacted by the slowdown. The properties in San Francisco, St James in London and Maldives witnessed a decent performance. While the current year would be tough, the management is bullish on its Pierre property which will open by September this year. While the management has indicated difficulty in hiking room rates, it would try to hold on to the current rates.

  • The company added 1,200 rooms during FY09 across segments. It is adding another 15 hotels during the current fiscal. The Mumbai property (palace wing) will be re-opened during the year. The capex on a standalone basis is estimated at Rs 3 bn for the year. IHCL also acquired 85% stake controlling stake in the closely-held ELEL Hotels and Investments for Rs 6.8 bn. ELEL is a subsidiary of Delhi-based Claridges Hotel Private that holds the lease for the land on which Sea Rock hotel is located in Mumbai. IHCL already has an existing arrangement with Claridges (starting January 2009) to provide technical and management expertise for the restoration and operations of Sea Rock Hotel, when the redevelopment of the property is completed. The complex will include a hotel, a large convention centre and a retail outlet at an investment of Rs 5 bn. Within a close proximity to Taj Land’s End, the combined operation will enable IHCL to have a leading position in North Mumbai.

  • Decline in sales and faster growth in expenses led to the 43% YoY fall in standalone profits. Staff costs increased by 25% YoY as earlier in the year, the company had undertaken pay hikes to retain talent. Fuel, power and other expenses (launch of Vivanta brand) too saw an increase as a percent of sales. The consolidated operating profits too declined by 47% YoY. The margins declined from 30.5% to 18% YoY. Since hotels have fixed costs, any decline in room rates directly affect profits. On account of the global slowdown and terror attacks, the end of 3QFY09 and the entire 4QFY09 (peak season) was very bad for Indian Hotels thereby affecting its full year performance.

  • On a standalone basis, the net profits (excluding the extraordinary item – annuity purchased for pension payments to the family of deceased employees on 26/11), declined by 36% YoY. The company also reported forex losses during the year. Excluding this, the standalone profits reported a fall of 27% YoY. The consolidated net profits (excluding forex and exceptional items) tumbled 84% YoY. The company’s associates, subsidiaries and JVs too reported a subdued performance.

    Group performance Revenues   PAT  
    Rs m FY08 FY09 % change FY08 FY09 % change
    IHCL 18,230 17,070 -6.4% 3,780 2,340 -38.1%
    Subsidiaries 11,040 9,970 -9.7% (1,020) (2,100) 105.9%
    JV 1,460 1,280 -12.3% 340 190 -44.1%
    Associates 620 250 -59.7% 620 250 -59.7%
    Total 31,350 28,570 -8.9% 3,720 680 -81.7%
    less: inter segment eliminations 580 750 29.3% 170 560 229.4%
    Total sales 30,770 27,820 -9.6% 3,550 120 -96.6%

What to expect?
At the current price of Rs 75, the stock is trading at a price to earnings multiple of 20.9 times our FY11 estimates. Like its peers IHCL too suffered on account of the economic slowdown, which impacted all the regions of its operations. The WTTC has indicated that the GDP for travel will de-grow by 3.5% this year. Also the RevPARS are expected to fall by 10% to 15% YoY.

While Indian Hotels is adding 15% of India’s new supply in the coming three to four years, it is looking at handing smaller properties to its group companies and looking at handling the bigger projects. The management has indicated that it would witness pressure on its cash flows on account of lower revenues. The company has debt of Rs 46 bn on its books and is looking at reducing it going forward. Hence, it may have to either delay or rationalize its expansion plans. While there has been some pickup in tourist inflow in the last month, things are still expected to be tough during the year.

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