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Indian Hotels: On an expansion drive - Views on News from Equitymaster

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Indian Hotels: On an expansion drive
Jun 24, 2008

Performance summary
  • The standalone sales are up 14.5% YoY, while the consolidated topline grows by 16.5% YoY.
  • For the full year, the operating margins are higher by 3.3%. Effective management of the costs lead to higher margins.

  • On the bottomline front, the profits grow by 17% YoY. On the consolidated front, the profits are higher by 10.5%.

  • The company has more than 10, 000 rooms at present and plans to add another 8,000 (including management contract) rooms in the next 3 to 4 years across all its segments.

Financials
Rs m 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 5,027 5,576 10.9% 15,407 17,645 14.5%
Expenditure 2,929 3,092 5.6% 9,793 10,629 8.5%
Operating profit (EBDITA) 2,098 2,484 18.4% 5,615 7,016 24.9%
Operating profit margin (%) 41.7% 44.5% 36.4% 39.8%
Other income 360 90 -74.9% 765 586 -23.3%
Interest (net) 229 220 -3.8% 719 943 31.1%
Depreciation 246 224 -9.1% 914 854 -6.5%
Profit before tax 1,983 2,131 7.4% 4,746 5,805 22.3%
Tax 638 782 22.6% 1,523 2,030 33.3%
Profit after tax/(loss) 1,345 1,349 0.3% 3,224 3,775 17.1%
Net profit margin (%) 26.8% 24.2% 20.9% 21.4%
No. of shares (m) 587 603 587 603
Diluted earnings per share (Rs)* 6.3
Price to earnings ratio (x)* 14.9
*trailing twelve month earnings
The company has not declared the fourth quarter numbers. However we have calculated the same by taking the difference between the full year results and nine-month performance of the company.

What has driven performance in FY08?
  • Indian Hotelsí standalone sales grew by 14.5% YoY, while the consolidated topline registered a 16.5% YoY growth. The group companies witnessed a faster growth of 19.7% YoY. The performance is lower than our estimates by 4.8%. The occupancy on the domestic front remained stable at 73%, while the room revenues jumped 15% YoY. While the demand was flat in terms of rooms per day, the supply increased by 2% YoY. The company posted a 16% YoY growth in room revenues and a 12% YoY increase in food & beverage (F&B) revenues. Its international properties continue to do well in line with its peers in the international market.

    Rs m FY07 FY08 % change
    Room revenues 8,452 9,787 15.8%
    % of total revenues 54.9% 55.5%
    F& B 5,237 5,853 11.8%
    % of total revenues 34.0% 33.2%
    Other operating revenue 1,719 2,005 16.7%
    % of total revenues 11.2% 11.4%
    Total 15,407 17,645 14.5%

  • For the full year, the operating margins were higher by 3.3%. Effective management of costs led to higher margins. On a consolidated basis, the margins improved to 30.5% from 28.7% in FY07. The performance is higher than our estimates.

  • On the bottomline front, the profits grew by 17% YoY. Higher margins and lower deprecation aided the jump. Having said that, the growth in net profits was relatively slower than the operating profit growth due to lower other income and higher interest costs. Other income was lower on account of non-recurring profit made on sale of investments last year. The interest costs were on the higher side on account of debt taken for its acquisitions. On the consolidated front, excluding the extraordinary item (employee severance cost), the profits were higher by 10.5% YoY.

  • IHCL raised Rs 14.5 bn through a rights issue of equity shares and non-convertible debentures in April 2008. The warrants issued along with the debentures are convertible into equity in September 2009. This should raise an additional Rs 9 bn.

What to expect?
At Rs 93, the stock is trading at a price to earnings multiple of 10.1 times our FY10 estimates. IHCL plans to add nearly 8,500 rooms over the next four years. While 40% will come through budget hotels, 30% will be part of management contracts. For FY09, it has lined up an expansion plan of 2,100 rooms across 16 properties, with majority of them being in the domestic market. The cost of the expansion has been estimated at Rs 14 bn. The company had raised funds recently and also has strong internal accruals. IHCL is also looking at the Middle Eastern markets to increase its presence. It expects Pierre and Taj Boston, along with Campton Place and Blue, to generate positive cash flows in the next two to three years. Given its strong expansion plans, presence across the segments, international presence and prime locations, we think the company will continue to do well going forward.

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