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ITC Hotels: Peers racing ahead

Jul 15, 2002

It was another tough quarter for ITC Hotels Ltd., which owns and operates the Welcome Group of hotels. There seems to be a jinx on the hospitality sector, as the industry has been hit by a string of negative events over the past eighteen months. Quarter ended June '02 could be impacted by the travel advisories issued by U.S and few commonwealth states.

(Rs m) 1QFY02 1QFY03 Change
Sales 262 249 -5.3%
Other Income 11 1 -88.6%
Expenditure 235 239 1.7%
Operating Profit (EBDIT) 28 10 -64.7%
Operating Profit Margin (%) 10.5% 3.9%  
Interest 8 5 -35.9%
Depreciation 23 27 18.6%
Profit before Tax 8 -21  
Tax 1 2  
Profit after Tax/(Loss) 8 (23)  
Net profit margin (%) 3.0% -9.2%  
No. of Shares 30.2 30.2  
Diluted Earnings per share   -3.0  

Given the challenging operating environment, peer group companies seem to be adopting measures to prevent erosion in bottomline. However, the absence of reports suggesting similar initiatives by ITC Hotels could be a concern for investors. In the previous fiscal, the company registered the sharpest decline in operating margins compared to the big three domestic players. At 6.6%, the OPM was the lowest compared to double digits reported by the above-mentioned peer group. Staff costs, among the single largest expense head, continues to increase. The company had undertaken a voluntary separation package in FY01 amounting to Rs 10.5 m.

Cost break-up
(Rs m) 1QFY02 1QFY03 % change
F&B 26 24 -7.3%
Staff Costs 63 69 9.9%
Fuel, power & lighting 41 41 1.0%
Other Exp 105 105 -0.7%
Total expenditure 235 239 1.7%

There are market concerns as parent company, ITC Ltd., has also ventured into the hospitality sector. ITC Ltd., owns the Maurya Sheraton brand and has strengthened its position with new projects. The parent recently commissioned 'The ITC Grand Maratha' in Mumbai. Other projects in the pipeline include a business hotel in Mumbai, ITC Grand Central & Towers, and a luxury hotel, ITC Sonar Bangla Sheraton in Kolkata. These are capital intensive ventures and with performance of the subsidiary not able to meet the required project costs, it is likely that the parent took on the mandate. The management contracts of these hotels are likely to be with ITC Hotels Ltd., which could facilitate better performance. ITC Ltd. recently amalgamated its subsidiary ITC Bhadrachalam with itself, giving rise to speculation of a similar move regarding ITC Hotels.

Reports suggest that ITC Hotels subsidiary, Fortune Hotels, is planning to increase its brand awareness before venturing into a business expansion phase. The company, reportedly, operates 8 properties in the budget hotels category and is likely to build to 17-18 properties by end of FY04. The ITC Hotels stock is trading at Rs 54.

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