The gloom at Indian Hotels Company Ltd. (IHCL) continues. The company has reported the third consecutive YoY decline in topline. Having said that, there has been no respite for the industry for the past 18 months. Every light at the end of the tunnel is an oncoming train. The industry has just come out of peak season, though it was not much to speak about, as the industry coped with the aftermath of September 11 and domestic setbacks.
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The air catering division of IHCL was hived off at the end of 1HFY02 to a joint venture company with Singapore Air Terminal Services (SATS). Consequently, the results have been adjusted to make the numbers comparable. The hospitality industry experienced a favourable year in FY01 and 1QFY02 was to that extent a normal quarter. However, one has to mention that the economy, global & domestic, was on a downswing during this period. Gujarat had come out of an earthquake and the stock market scam hit the domestic holiday season. Therefore, one did not anticipate such a slide in operating earnings.
The management in the last analyst meet had indicated an improving trend in revenues for the month of April and May '02. In our FY02 report, we had mentioned that travel advisories in June '02 were likely to subdue first quarter numbers. With two-thirds of the quarter completed and improving sales trend we did not anticipate such a decline in sales. The entire decline in 1QFY03 sales is attributed to June '02 due to the advisories, which affected room revenues. Reports suggest that inbound travel to the country is likely to have declined by an estimated 19% YoY for June '02.
Operating profits have taken a hit with a slide in revenues and lower operating margins. Margins, YoY, continue to remain under pressure as last fiscal the company is likely to have reduced average room rates (ARR) to maintain occupancy. Room rates cannot immediately be revised to previous levels, as occupancies have to be built. Going forward, while the company does see improving occupancies their sensitiveness to ARR has to be factored. Assuming, end to the string of negative events in the industry, we anticipate ARRs could start improving in 2HFY02. Responding to the environment, the company has kept vigil on operating costs, cutting other expenses by Rs 78 m during the quarter.
Interest expense in FY02 increased considerably due to foreign exchange loan of Rs 3 bn taken at start of the fiscal. Consequently, the YoY effect has been compensated. Interest for the quarter is lower due to better working capital management and refinancing of loans. With operating earnings just covering for fixed costs, changes in such earnings tend to magnify the impact on pre-tax profits. Adjusting for other income, the company would have reported a pre-tax loss for 1QFY03.
The scrip is trading at Rs 171. Valuations are skewed due to the sharp slide in earnings. The scrip has been rising on the bourses over the past few sessions, which could be in anticipation of the results. Therefore, Monday could see some correction on the counter. Having said that, markets are anticipating a likely improvement in the industry with economy on an upswing and tourism sector undertaking several initiatives. 2HFY03 is likely to be much better than the previous fiscal.
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