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Indian Hotels: Haunted by terror, slowdown
Aug 1, 2009

Performance summary
  • Sales decline by 24% YoY during the quarter on account of slowdown induced weak room occupancies and decline in average room rates (ARR).
  • Operating profits fall by 70% YoY. Operating margins decline to 12%, from 31% in 1QFY09, again largely impacted by pressure on ARR.
  • Bottomline in the red (net loss) if one were to exclude the extraordinary items (forex gain and non recurring profit on sales of investments).


Standalone financials
Rs m 1QFY09 1QFY10 % Change
Net sales 3,769 2,849 -24.4%
Expenditure 2,602 2,504 -3.8%
Operating profit (EBDITA) 1,167 345 -70.4%
Operating profit margin (%) 31.0% 12.1%  
Other income 211 91 -56.8%
Interest (net) 235 376 60.3%
Depreciation 203 251 23.7%
Profit before tax 941 (191) -120.3%
Extraordinary item (60) 433  
Tax 268 78 -70.8%
Profit after tax/(loss) 613 164 -73.2%
Net profit margin (%) 16.3% 5.8%  
No. of shares (m) 723.4 723.4  
Diluted earnings per share (Rs)*   2.6  
Price to earnings ratio (x)*   26.0  
* On a trailing 12 months basis

What has driven performance in 1QFY10?
  • Indian Hotels witnessed a decline of 24% YoY at the topline level during 1QFY10. While the company has not made much disclosure, we believe this pressure was on account of weak room occupancies and decline in average room rates (ARR). Further, closure of 287 rooms of the Taj Mahal Palace & Tower (TMPT), Mumbai, which is undergoing renovation due to terror attacks in November 2008, also aggravated the fall. TMPT forms around 17% of the standalone rooms of IHCL and 5% of its total consolidated room inventory. Located at a prime location in India’s financial capital, it commanded higher occupancy and room rates. On account of the insurance cover, the company has recognised a claim of Rs 225 m for business interruption during 1QFY10.

    Cost break-up
    As a % of net sales 1QFY09 1QFY10
    Total Cost of goods 8.1% 7.7%
    Staff Cost 22.7% 30.5%
    License fees 5.8% 5.9%
    Fuel , power & light 6.8% 8.8%
    Other Expenditure 25.7% 35.0%

  • With 24% YoY decline in sales, Indian Hotels witnessed a 70% YoY fall in the operating profits. The margins declined to 12% in 1QFY10, from 31% in 1QFY09. While the performance is weaker than our estimates, with the onset of the peak season starting from September, the situation is expected to improve. Further, as per the management, the capital expenditure, other than that for on-going projects is frozen and operating costs are minutely scrutinised.

  • Excluding the extraordinary items (forex gain and non recurring profit on sales of investments amounting to Rs 388 m), IHCL’s recorded a net loss of Rs 269 m in 1QFY10 (as against a net profit of Rs 673 m in 1QFY09, also excluding the one off items). Decline in operating profits coupled with lower other income and higher interest costs hampered the company’s performance on the net profit front.

What to expect?
At the current price of Rs 68, the stock is trading at a multiple of 19.4 times our estimated FY12 earnings. While IHCL’s 1QFY10 performance was battered by a double whammy of economic slowdown and the November 2008 terrorist attacks in Mumbai, the tourism industry is finally showing signs of an upturn, with tourist arrivals registering positive growth for the first time in six months. The foreign tourist arrivals increased from 3.4 lakh in June 2008 to 3.41 lakh in June 2009. With peak season starting in September, the coming quarters seem more promising in terms of growth.

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