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Indian Hotels: Lean mean growth

Jul 20, 2004

Introduction to results
The largest hotel chain in the country, Indian Hotels Company Limited, has reported strong financial results for the June quarter, despite it being a lean season for the company. While the company has reported a strong 23% YoY rise in topline, the bottomline growth has been even sharper at over 70% YoY.

(Rs m) 1QFY04 1QFY05 Change
Net Sales 1,296 1,594 23.0%
Other Income 80 95 17.8%
Expenditure 1,147 1,391 21.3%
Operating Profit (EBDIT) 150 203 35.9%
Operating Profit Margin (%) 11.5% 12.8%  
Interest 66 91 37.7%
Depreciation 114 123 7.9%
Profit before Tax 51 85 67.6%
Extraordinary items - -  
Tax 13 21 60.0%
Profit after Tax/(Loss) 38 64 70.2%
Net profit margin (%) 2.9% 4.0%  
No. of Shares 45.1 45.1  
Diluted Earnings per share* 3.3 5.7  
P/E Ratio   64.5  
(* annualised)      

What is the company's business?
Indian Hotels Company Limited (IHCL) is India's largest hotel chain. It owns and manages 62 hotels across the country and the globe through its "Taj" brand. It has a presence in all hotel segments through luxury hotels, business hotels, palace hotels, beach resorts, garden retreats, wildlife lodges and service apartments. While the company derives nearly 79% of its revenues from the luxury division, the leisure and business divisions each contributed 7% to the revenues. IHCL also manages hotel properties, which contribute a small portion to overall revenues.

What has driven the performance in 1QFY05?
Sales: Strong improvement (16% YoY) in Average Room Revenues (ARRs) and marginal improvement (7%) in occupancies have led to the robust growth in the company's topline even in the lean period. IHCL had as a policy maintained its room rental rates despite the slowdown in the sector. As a result, due to the improvement in the scenario for the travel and tourism sector, the company has benefited immensely from its strategy of maintaining its room rates and in some properties the company has even raised room rates. Thus we observe that while the occupancy rates have not risen strongly, ARRs have risen at a very fast clip in the June quarter. On a broader basis, the company has reported a 27% rise in room revenues, while Food and Beverages (F&B) revenues have risen by 16%.

IHCL has witnessed strong ARR improvement in all its segments, viz, luxury, leisure and business. All these segments put together have led to the strong topline performance of the company in the June quarter.

Operating margins:
The operating expenses of the company have also risen commensurate to the topline of the company. Consequently, there is only a marginal improvement in the operating margins. The company continues to witness a rise in its employee expenses and this continues to keep margins in check. The company had initiated this pay revision exercise during the slump in the sector and hence the impact seems more profound. As the environment improves, the company is likely to see an improvement in its margins as revenue growth will more than compensate for the rise in costs. Other expenses have also risen in the June quarter mainly due to an exchange loss expense as well as higher variable expenses.

Net profits:
The improvement in the bottomline of the company has been mainly due to the strong rise in topline as well as higher other income. The improvement is despite the fact that interest, depreciation and tax expenses have been higher in the June quarter. This emphasizes the quality of growth in the company's earnings.

What to expect?
The stock currently trades at Rs 366 implying a P/E multiple of 64.5x 1QFY05 annualised earnings. Due to the seasonality of the business, most of the revenues are derived by the company mainly in the last two quarters. Hence, to that extent, the P/E ratio would seem a bit distorted. The company has exhibited resilience even in the lean period of business, highlighting its inherently sound business model. Going forward, further improvement in financial performance is likely as the busy season approaches. At this point, investors need to wait and watch as to how successfully the company manages its new initiatives like the value hotel concept called 'Indi One' and its new offering of service apartments. With India expected to gain significance as a global destination in the next few years and the potential demand supply mismatch, things look encouraging for this hotel major.

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