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Indian Hotels: Operational blip

Jul 29, 2003

Indian Hotels (IHCL) has announced its 1QFY04 results, posting a topline growth of 15% and the bottomline has spurted up by 86%, which is largely due to the lower base during the previous period. Operating margins have taken a significant hit during the quarter (down 7%). Had operating margins been better, the net profit growth would have been much more stronger. Let us take a deeper look at the numbers during the quarter.

(Rs m)1QFY031QFY04Change
Net Sales 1,126 1,296 15.1%
Other Income 52 80 55.3%
Expenditure 922 1,147 24.3%
Operating Profit (EBDIT) 204 150 -26.5%
Operating Profit Margin (%)18.1%11.5% 
Interest 107 66 -38.7%
Depreciation 117 114 -2.4%
Profit before Tax325158.6%
Extraordinary items - -  
Tax 12 13 11.1%
Profit after Tax/(Loss) 20 38 86.1%
Net profit margin (%)1.8%2.9% 
No. of Shares 45 45  
Diluted Earnings per share*1.83.3 
P/E Ratio 74.4 
* annualised   

Revenues for the quarter have grown by 15% YoY. This is commendable given the fact that the first half of the financial year for hotels is considered to be an off-season period. This is largely due to the hotel major continuing to be aggressive in marketing its hotels. The aggressiveness is apparent from the increase in occupancies (up from 52% in 1QFY03 to 60% in 1QFY04).

IHCL continues its focus on the Luxury division as during the quarter around 80% of its total revenues was contributed by it (up from 75% in the previous quarter). Revenues from the Business division have gone down from 13% to 7% during the quarter as IHCL sold two of its business hotels (Taj Residency, Lucknow and Blue Diamond, Pune) to Piem Hotels (an associate company) during the last quarter of FY03.

Segmental Breakup
 Luxury Leisure Business 
 1QFY031QFY04% Change1QFY031QFY04% Change1QFY031QFY04% Change
Room Revenues (Rs m) 406.6506.224.5%36.244.522.9%64.638.6-40.2%
ARRs (Rs) 4,343 4,735 9.0% 1,945 2,187 12.4% 2,430 2,293 -5.6%
Occupanies (%) 53.963.618.0%38.642.29.3%59.262.96.3%

The company continues to face pressure on the Average Room Rate (ARRs) front. ARRs have still to attain the FY01 peak levels. Only in the Leisure segment ARRs have shown some signs of recovery (up 12% YoY). On the other income front, there has been a 55% increase, which is largely due to the sale of its property at Chiplun. IHCL received a sum of Rs 35 m for the sale of this property.

Expenses as a % of net sales
  1QFY03 1QFY04
Raw material 11.7%11.2%
Staff Costs 25.6%25.3%
Mfg Exp 12.4%12.4%
Other Exp 32.3%39.6%

At the operating levels, the company witnessed pressure primarily due to sluggish recovery in ARRs. So even though occupancies have grown during the quarter, realizations continued to remain under pressure. Another reason for operating margins being under pressure was the overall increase in expenses (24% YoY). We feel that this is a short-term blip rather than a serious concern for the company going forward.

Both interest as well as depreciation expenses have come down during the quarter. During the last quarter of FY03, IHCL restructured its high cost debt owing to the fall in interest rates. The benefit continues during 1QFY04 and is likely to continue going forward. The company has not added any new property during the quarter. On the contrary, it has sold some of its non-core portfolio properties as a result of which depreciation has gone down. This has resulted in the 86% increase in net profits during the quarter.

The scrip currently trades at Rs 249. Valuations seem to be skewed due to low base of earnings. The company’s growth strategy seems to be in place as IHCL has made a concerted effort to sell off its non-core properties in the recent past and would be doing so in the future also. Speculations about the hotel major entering into the budget/economy segment hotels has however been denied by the hotel management. The management though has indicated that it would be constructing 3 prototypes of ‘Functional people’s hotels’ during the next couple of years, which would have all the functions of a luxury hotel but without the luxury tag to it.

Having said that, there has been a continued anticipation of a likely improvement in the industry fundamentals, as the economy is on an upswing and the tourism sector itself has been undertaking several initiatives. In this light, 2HFY04 is likely to be much better than the corresponding period in the previous fiscal.

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