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Indian Hotels: Global business continue to hurt - Views on News from Equitymaster
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Indian Hotels: Global business continue to hurt
Jun 18, 2013

The Indian Hotels Company Limited (IHCL) has announced its standalone and consolidated results for the quarter ended March 2013. On a standalone basis, the company has reported a 0.8% YoY decline in sales and a net loss of Rs 3389 in 4QFY13. Here is our analysis of the results.

Performance summary
  • Net sales for 4QFY13 decreased by 0.8% YoY on account of decline in revenue per available room (RevPAR).
  • Operating margins increased by 1% YoY. Operating profits increased by 3.4% YoY.
  • The company posted a net loss as compared to a net profit for the quarter ended march 2013.
  • On a consolidated basis, for the full year March 2013, the company reported 8.7% YoY increase in net sales and a net loss of Rs 4302 m as compared to a net profit in the same period last year.
  • The company has declared a dividend of Rs 0.8 per share for the year ended March 2013.

Standalone and Consolidated financials
  Standalone Results Consolidated Results
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 5,602 5,558 -0.8% 34,435 37,434 8.7%
Expenditure 3,989 3,890 -2.5% 28,983 32,057 10.6%
Operating profit (EBDITA) 1,613 1,668 3.4% 5,453 5,376 -1.4%
Operating profit margin (%) 29% 30%   16% 14%
Other income 110 96 -12.3% 714 602 -15.7%
Interest (net) 306 268 -12.5% 2,125 1,707 -19.6%
Depreciation 319 315 -1.4% 2,550 2,884 13.1%
Profit before tax 1098 1,182 7.7% 1,492 1,386 -7.1%
Exceptional Item -11 (4,247) NA (15) (4,304)  
Tax 414 324 -21.7% 1,218 990 -18.7%
Profit after tax/(loss) 673 (3,389) NA 259 (3,908)  
Minority interest 0 -   (384) (409)  
Share of profit of associates 0 -   156 14 -91.2%
PAT after minority and sh. of assoc. profit 673 (3,389) NA 31 (4,302) NA
Net profit margin (%) 12%     1%    
No. of shares (m)         808  
Diluted earnings per share (Rs)         (5.3)  
P/E ratio (x)*         NA  
(* On a trailing 12 months basis)

What has driven performance in FY13?
  • IHCL's standalone revenue for FY13 grew 4% YoY, mainly supported by 7% increase in Food and Beverage income (i.e. 40% of revenue). Revenue per room (RevPAR) across all major destinations remained lower vs. last year. Baring Goa, all other major cities reported flat average occupancy vs. last year while low room tariffs were due to oversupply of rooms coupled with subdued demand. Occupancy for hotels in India remained flat at 59% for FY13 and RevPar dipped 7% YoY. The 24% growth in rooms supply in India for FY13 outpaced the 21% demand, leading to 2% drop in occupancies.

    Cost break-up
      Standalone Results Consolidated Results
    As a % of net sales 4QFY12 4QFY13 FY12 FY13
    Total Cost of goods 8% 8% 11% 10%
    Staff cost 21% 22% 33% 34%
    License fees 8% 6% 5% 5%
    Power, fuel & light 6% 7% 7% 8%
    Other Expenditure 29% 27% 28% 28%

  • IHCL's operating (EBITDA) income increased by 3.4% YoY. Standalone operating margins, for the quarter, improved 100 bps YoY due to cost rationalisation. Margin expansion has been helped by lower other operating expenses and license fee. Margins of the international segment continued to remain subdued due to lower occupancy and high fixed overheads.

  • During the quarter, the company reported a net loss as compared to a net profit during the same period last year. The company took a hit of Rs 4 bn for devaluation of investments, Rs 3 bn for 7% stake in Orient Express Hotels (OEH) and Rs 1 bn for BJets.

  • The company's debt at Rs 37 bn will surge to Rs 42 bn in line with its capex in the next two years and will stabilize as further expansion will be done via management contracts.

  • Its standalone FY13 profit (excluding exceptional items) of Rs 1.6 bn was completely wiped off by subsidiaries' and associates' FY13 loss. Management believes all its international properties will be cash and EBITDA positive in 3-5 years.

  • Full year revenue growth of 8.7% YoY on a consolidated basis (standalone up 3.7% YoY, subsidiaries up 14.5% YoY) is mainly attributable to consolidation of Piem Hotels Ltd (a subsidiary company) and a stable standalone performance. However, a loss of Rs 1244 m (FY13) for subsidiary companies remains a concern.

What to expect?
IHCL's plan of expanding via asset-light model (management contracts) will help expand its footprint and add to the bottom line. IHCL is likely to add 12 hotels with 1,590 rooms in FY14 through management contract (57%) and own (16%) and rest others (Ginger Hotels). The company will incur capex of Rs 2 bn for the expansion of Guwahati and Dwarka properties.

Turnaround of subsidiaries remains a key challenge for the company, going ahead, especially in US. Despite turnover growth, US hotels continue to face challenges in terms of profitability. We believe a turnaround of US hotel properties remains a key challenge in order to improve the overall performance of the company, going ahead.

At the current price of Rs 48, the stock trades at around 0.8x our estimated FY15 book value per share. We maintain our Buy view on the stock. We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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