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Indian Hotels: Debt burden affects profitability - Views on News from Equitymaster

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Indian Hotels: Debt burden affects profitability

Jul 30, 2010

The Indian Hotels Company Limited has announced its 1QFY11 results. The company has reported a 15.4% YoY growth in sales and a 79.7% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Net sales for 1QFY11 increased by 15.4% YoY on the back of higher occupancy.
  • Operating (EBITBA) margins increased by 4.1% during the quarter. This has been due to lower staff costs and other expenditure (both as a percentage of sales). The growth in operating margins was capped as a result of higher costs of goods sold.
  • Net profit dropped by 79% YoY during the year. The fall in profits is due to lower extraordinary income recorded this quarter.


Standalone financials
Rs m 1QFY10 1QFY11 % Change
Net sales 2,849 3,287 15.4%
Expenditure 2,504 2,753 10.0%
Operating profit (EBDITA) 345 534 54.7%
Operating profit margin (%) 12.1% 16.2%  
Other income 91 61 -33.5%
Interest (net) 376 340 -9.5%
Depreciation 251 254 1.5%
Profit before tax (190) 0  
Extraordinary item      
Tax 78 9 -88.8%
Profit after tax/(loss) (269) (9) -96.8%
Net profit margin (%) -9.4% -0.3%  
No. of shares (m) 723 724  
Diluted earnings per share (Rs)*   2.5  
Price to earnings ratio (x)*   40.0  
* On a trailing 12 months basis

What has driven performance in 1QFY11?
  • The company has a good start this year. This is due to the improvement in economic environment with which the fortunes of the hospitality sector are tied. The company witnessed improvement in occupancy on the back of better demand this quarter. However, the company suffered because of the closure of part of its flagship property, Taj Mahal Palace & Tower due to renovation.

    Cost break-up
    As a % of net sales 1QFY10 1QFY11
    Total Cost of goods 7.7% 8.8%
    Staff Cost 30.5% 29.3%
    License fees 5.9% 6.1%
    Fuel, power light 8.8% 8.9%
    Other Expenditure 34.9% 30.8%

  • IHCL's operating (EBITDA) income grew by 57% YoY. This was due to fall in staff costs and other expenditure (as a percentage of sales). Staff costs fell by 1.3% while other expenditure fell by 4.1% to stand at 29.3% and 30.8% respectively (as a percentage of sales). However, cost of goods sold came in higher by 1.1% to stand at 8.8% as a percentage of sales.

  • IHCL's profits declined by 80% YoY during the year on the back of lower extraordinary income recorded during the quarter. When adjusted for the one time income, the company recorded a net loss of Rs 9 m compared to a net loss of Rs 269 m in 1QFY10.

What we expect?
At a price of Rs. 99, the stock is trading at 20.3 times our estimated FY13 earnings (RPro subscribers click here). While the results look bad, there is an improvement in business as a result of higher demand. However, the company has a large debt on its books. As a result the company is burdened with a large interest component. The company is working currently to reduce this burden. Going forward we expect to see better profitability by the company. However, the stock price has run up quite a bit. For this reason we are cautious on this company.

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