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Indian Hotels: Analyst meet insight

Aug 2, 2001

Indian Hotels Co. Ltd (IHCL) reported its 1QFY02 results recently. The company’s sales grew by 12.5% YoY during this period to Rs 1.6 bn, and operating profits grew by 15.6% YoY. However, overall profits fell due to higher interest, depreciation costs as well as extraordinary items for deferred taxes as well as amortisation of its voluntary retirement scheme (VRS) costs. Consequently, the company had an analyst meet for its results, the highlights of which are as under. The company focused on its plan to hive off its flight catering division, which accounts for approximately 1/6th of the company’s profits currently.

  • The company has outperformed the industry in this quarter, in terms of occupancy rates in metro cities. Its quarterly turnover has reported a steady rise since the past three years over the corresponding quarters.

  • The company’s revenue break-up by category and by strategic business units (SBUs) for 1QFY02 is as follows. In terms of revenues, rooms contributed 39% to revenues, food and beverage accounted for 30% of revenues, airline catering 16%, other services income 11% and management fees 4%. In terms of strategic business units (SBUs), luxury hotels contributed to 63% of the company’s turnover, business hotels to 11%, leisure hotels to 6% and air catering business to 20% of turnover.

  • In terms of total room revenues, 82% comes from luxury hotels. Its business hotel segment contributes 12% and 7% comes in from IHCL’s leisure properties. These figures are for 1QFY02. Hence, the company continues to depend to a large extent on its luxury hotels, which include its hotels in Mumbai, Delhi, and Calcutta.

  • During 1QFY02, IHCL’s luxury hotels actually reported an improvement in occupancy rates from 57% in 1QFY01 to 58% in 1QFY02. This is a big achievement for the company considering most South Mumbai hotels have reported a decline in occupancy rates during this period due to new competition coming in as well as slowdown in business travel. The major gains however for IHCL were reported at its Delhi hotels, which have eaten into the market share of other players in this city thus outperforming the market. The company’s renovation at its flagship properties seems to be already paying off. Average room rates (ARRs) on the other hand, have declined by 2.6% YoY to Rs 5,467 due to competitive pressures.

  • The company’s business hotels reported a huge jump in occupancy rates to 58% in 1QFY02 from 52% in 1QFY01. ARRs however declined by 7% from Rs 2,840 in 1QFY01 to Rs 2,640 in 1QFY02. This division saw a huge jump in management fees by 49% due to higher fees earned from its Bangalore hotels, which are doing very well.

  • In its leisure properties too, the company’s occupancy rates went up from 37% in 1QFY01 to 39% in 1QFY02. In this segment, overall ARRs were up by 6.9% YoY from Rs 2,030 to Rs 2,170. This is commendable as this is the lean season for most leisure hotels in the country. The management fees rose by 418% YoY mainly due to better performance of the Taj Exotica, Goa in the current year. This hotel had started operations in the previous year.

  • In terms of expenditure the company has focused on controlling costs with respect to staff expenses, and power and fuel costs. In the airline catering business, IHCL has achieved a reduction in food cost and payroll costs as a percentage of sales.

  • The company’s flight catering continues to do well and revenues from this division grew by 17% YoY. This division contributes 20% to the company’s turnover.

  • As far as the renovations go, the company has taken a decision to postpone its remaining room renovations in Mumbai that will cost Rs 160 m to FY02. The company was slated to finish these renovations in FY01. In the Taj Mahal, Delhi restaurant renovations are to be completed by 2QFY02. In the Taj Bengal, Calcutta planned rooms have been completed and the lobby refurbishment is in progress. IHCL’s new project of a service apartment hotel at Wellington Mews in South Mumbai has started and 10% of the total project is complete. Till date, Rs 200 m has been spent on this project.

  • The company has made significant headway in its technology initiatives. This is in the areas of its central reservation systems (CRS) and online reservations. Total online room nights booked in 1QFY02 was 1,574 as compared to 113 in 1QFY01, a significant growth. Centralised city reservations have started for its Hyderabad hotels allowing cross-selling and providing more convenience to its guests.

  • On the international front, the company has tied up with a 5 star 249 room hotel in Dubai and has a management contract for this property for 7 years. This hotel had a soft opening in June 2001 with 140 rooms and 36 apartments commencing operations. The company is in the process of negotiating for a management contract for another property in the financial district of Dubai. This too will be on a management contract basis for a period of 7 years and this hotel is slated to start operations towards end 2003.

  • IHCL is in the process of negotiating its airline catering business joint venture with Singapore Airlines 87% subsidiary in airline catering, SATS. The airline catering business in India is currently growing at 10%-12% per annum. The company has decided to hive off its airline catering business into a separate company mainly because of increasing competition in this segment, low barriers to entry, slowly shrinking margins, consolidation and stronger presence of airline companies in this business.

The company sees its advantage of tie up with SATS to benefit it as it is a market leader in flight catering and ground handling in Asia, produces 23 million meals a year, has a strong client base and significant presence across Asia Pacific. Besides it currently has 11 joint ventures in flight catering across 8 countries in Asia.

Currently, however IHCL has a 55% market share in this business and we do not see this tie-up benefiting IHCL to a large extent, which at most can take its market share up by 10%-15%. This business of IHCL has been a high growth one, growing at 15% - 20% per annum. In FY01 revenues from this division grew by 26% YoY. Its contributes to around 20% of IHCL’s turnover and accounts for around 1/6th of the company’s total profits. Hence with the hive off the company will see an exodus of this profitable division from its books. By itself IHCL has been doing very well and has tie ups with leading domestic and international airlines. Hence, we feel that this joint venture will not enhance revenues of its division to a large extent. The company will gain some amount as extraordinary income in the current year, which will be used for further expansions in the hotel sector.

The company has stated reasons for forming this joint venture like acquiring better technology from SATS, larger customer base, and improved management focus on business through a separate company. However, we do not feel that the management focus by IHCL will be higher for a 51% subsidiary of it, rather than a 100% division of its own company. These reasons do not seem convincing to hive off 1/6th profits of IHCL.

On the whole, we feel that the company’s results for 1QFY02 were encouraging on the operating level and the company will continue to do well in the current year due to renovations of its food and beverage outlets and rooms in hotels. However, sentiment towards the stock is likely to suffer with this airline-catering hive off. We expect the stock to languish in the short term to adjust for the loss in profits by formation of this joint venture. But triggers for the stock may come in the form of faster ITDC disinvestment (remember IHCL is a 10% stake holder in ITDC). Also there is no clarity currently on the consideration, which Singapore Airlines is likely to shell out for the air catering joint venture. If the consideration is sizeable, investors may not mind IHCL divesting 49% of its airline catering business.

Prospects in the longer term look bright for IHCL despite higher competition in North Mumbai, due to its capital cost advantage, low debt levels and strong brand presence. On the current price of Rs 189 it is trading at 7.3x FY01 EPS of Rs 25.9.

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