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Indian Hotels: Slowdown effect - Views on News from Equitymaster
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Indian Hotels: Slowdown effect
Jul 28, 2008

Introduction to results
  • Topline grows by 9% YoY in 1QFY09 on account of higher room sales.

  • Operating margins decline by 0.7% on account of higher staff and license costs.

  • Excluding the extraordinary item during both the periods, the bottomline is up 64% YoY on account of lower depreciation and tax expenses and higher other income.



Rs m 1QFY08 1QFY09 %Change
Net sales 3,457 3,769 9.0%
Expenditure 2,361 2,602 10.2%
Operating profit (EBDITA) 1,095 1,167 6.5%
Operating profit margin (%) 31.7% 31.0%  
Other income 42 211 403.6%
Interest (net) 227 235 3.3%
Depreciation 213 203 -4.9%
Profit before tax 697 941 34.9%
Extraordinary item 137 (60)  
Tax 288 268 -7.0%
Profit after tax/(loss) 547 613 12.1%
Net profit margin (%) 15.8% 16.3%  
No. of shares (m) 603 723.4  
Diluted earnings per share (Rs)   5.3  
Price to earnings ratio (x)   16.3  

What has driven performance in 1QFY09?
  • Indian Hotels reported a topline growth of 9% YoY. The company has not divulged details regarding the revenue breakup and growth in the room rates and occupancy levels during this quarter. However, as compared to the last quarters, growth has slowed down. This can be attributed to the overall global weakness, higher airfares and rationalisation of the room rates. Given the weak macro economic environment, the growth of the business-tourist air-traffic slowed down to 11% -12% in 1QCY08 as compared to 15% in 1QCY07 and with supply risks on the rise, we believe that the pressure would continue for the coming quarters. However, we believe that IHCL is relatively insulated on account of its locational advantages as compared to its peers.

    Cost break-up
    As a % of net sales 1QFY08 1QFY09
    Total Cost of goods 8.2% 8.1%
    Staff Cost 20.8% 22.7%
    License fees 5.3% 5.8%
    Fuel , power & light 6.8% 6.8%
    Other Expenditure 27.2% 25.7%

  • The operating margins declined by 0.7% on account of higher staff and license costs. The staff costs were higher by 20 YoY. However, lower other expenses (as percentage of sales) brought some relief to the company.

  • Excluding the extraordinary items during both the periods the profits grew by 64% YoY for 1QFY09. Extraordinary income in 1QFY08 was due to exchange gain arising on conversion of deposits placed with a wholly owned subsidiary into investment. This strong growth in the bottomline was aided by lower depreciation and tax expenses. The tax rates were lower this quarter (28% in 1QFY09 as compared to 35% in 1QFY08). Other income was higher by 404% YoY.

  • The company completed its rights issue of equity shares at a price of Rs 70 each and 6% non convertible debentures with detachable warrants aggregating to Rs 14.5 bn on April 24, 2008. Consequently, the share capital of the company has increased from Rs 602.9 m to Rs 723.4 m.

What to expect?
At Rs 86, the stock is trading at a price to earnings multiple of 12.1 times our FY11 estimates. The performance this quarter was subdued as compared to the last few quarters. Though the growth in the room rates has been lower, if you compare this growth with that of its peers, then the growth is still on the higher side. We believe this is largely driven by its diversified room inventory and pan-India presence across key growth markets. It has 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. Thus, we believe, this volume growth will help the company offset some of the weakness in ARRs, which will occur as a result of increased supply in the next 2 to 3 years.

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