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Indian Hotels: Robust growth continues - Views on News from Equitymaster

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Indian Hotels: Robust growth continues
Aug 1, 2007

Performance summary
  • Topline grows by 20% YoY led by its large room inventories across key growth cities and leadership in domestic markets.

  • It acquires Campton Place Hotel in San Francisco in the US for US$ 58 m.

  • On a YoY basis, operating margins have witnessed strong expansion of 1.1% YoY.

  • Stronger operating margins aided by higher other income and lower depreciation charges has led the bottomline to grow by 39% YoY in the current quarter.

Rs m 1QFY07 1QFY08 %Change
Net sales 2,894 3,465 19.8%
Expenditure 2,010 2,369 17.8%
Operating profit (EBDITA) 883 1,096 24.1%
Operating profit margin (%) 30.5% 31.6%
Other income 104 179 72.3%
Interest (net) 178 227 27.6%
Depreciation 219 213 -2.9%
Profit before tax 590 836 41.6%
Tax 196 288 46.7%
Profit after tax/(loss) 394 548 39.1%
Net profit margin (%) 13.6% 15.8%
No. of shares (m) 600 603
Diluted earnings per share (Rs) 5.6
Price to earnings ratio (x) 24.4

What is company's business?
Indian Hotels Company Limited (IHCL) is India's largest hotel chain with an estimated room inventory share of 25% in top seven cities in the luxury segment (room inventory share is the share of Indian Hotels of the total rooms available). On a consolidated basis, including properties under the management control, the total inventory in FY06 stood at little over 9,100 rooms. On a standalone basis, while the company derived over 50% of its net sales from room revenues in FY07, the food & beverages division contributed 39% to net sales and the rest was accounted for by management contracts.

What has driven performance in 1QFY08?
No stopping: Favorable macro environment continued to increase the business and leisure travel traffic to India. Strong demand for hotel rooms, drive up in occupancies and further increase in average room rates (ARRs) has aided the growth. Leveraging on its large room inventories across key growth cities, its premium brand positioning with 'Taj' and its leadership in domestic markets led IHCL to yet again report a robust growth of 20% YoY in the topline.

Rs m 1QFY07 1QFY08 % change
Room revenues 1,511 1,828 21.0%
% of sales 52.2% 52.8%  
F&B sales 1,046 1,207 15.5%
% of sales 36.1% 34.8%  
Other operating income 337 430 27.7%
% of sales 11.6% 12.4%  
Total sales 2,893 3,465 19.8%

The room revenues were higher by 21% YoY led by higher ARRs. Though ARRs grew in the range of 20% to 35% across major cities, the US$ depreciation affected it in the quarter. While occupancy rates in Goa, Kolkata and North Mumbai remained healthy, Bangalore and Hyderabad witnessed a fall due to addition of new rooms. However, the rooms sold per day increased by 1% YoY. Further a 15% YoY growth in F&B revenues added to the topline. The results also include the financials of Asia Pacific, Indian Resorts, Gateway Hotels and Gateway Resorts, Taj Lands End and Kuteeram Resorts, which were amalgated with the company effective 1st April 2007.

During the quarter it acquired Campton Place Hotel in San Francisco in the US for US$ 58 m. Also, a new Ginger Hotel was opened in Nashik. The management contracts were also signed for hotels in Pune, Gurgoan, Kolkata and Trivandrum.

IHCL has lined up strong expansion plans for the next 3 years across different segments. Also, it is adding 400 odd rooms in its international properties. IHCL is constantly on the prowl to acquire assets abroad to diversify its revenues and reduce the risk of dependence on the Indian markets. The company has enough cash flows to fund its capex plans. It is also bullish on its wild life lodges, service apartments and the spa segment. IHCL is signing management contracts (around 584 rooms) in the next 2 years, which would improve its return ratios going forward.

Cost break-up
As a % of net sales 1QFY07 1QFY08
Total Cost of goods 8.8% 8.2%
Staff Cost 21.5% 20.6%
License fees 6.0% 5.3%
Fuel , power & light 7.2% 6.7%
Other Expenditure 26.1% 27.5%

Costs under control: IHCL has been successful over the last few quarters in reporting stronger margins. The benefits from operating leverage have been clearly visible over the quarters. On a YoY basis, operating margins have witnessed strong expansion of 1.1% YoY, which has been driven by a reduction in almost all the operating heads (as percentage of sales) except other expenditure.

It flows to the bottomline: Stronger operating margins aided by higher other income and lower depreciation charges has led the bottomline to grow by 39% YoY in the current quarter. The net margins have also witnessed an expansion of 220 basis points. In the hotel industry, ARRs over and above the levels sufficient to meet the fixed costs flow straight down to the bottomline, which is clearly visible in the performance of IHCL.

What to expect?
At Rs 137, the stock is trading at a price to earnings multiple of 13 times our FY10 estimated earnings. The company has continued with its robust performance. The company’s current properties are likely to witness stable or marginally higher occupancy rates combined with robust ARRs in the next two years. Its expansion plans will start factoring in from FY08. Also, some of its subsidiaries are expected to get profitable. From a long-term perspective, IHCL is our top play from the hotel sector.

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