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Indian Hotels - metro occupancy rates up

Aug 4, 2000

The management of Indian Hotels Company Ltd (IHCL), India's largest hotel chain has reasons to feel happy about. So do its shareholders as the company's stock price has started to move up in the right direction. After four years of declining occupancy rates the company has reported an occupancy rate of 57% in the 1QFY01 for its luxury metro city hotels, as compared to 49% in the 1QFY00, an increase of 8%. These luxury metro hotels contribute to around 85% of the company's profits and hence any increase in occupancy rates and average room rates (ARRs) in these hotels are of material significance for IHCL. This is good news for IHCL as the performance in the 1QFY01 has shown significant improvement, the 2H of the year which is normally much better for hotel companies, augurs well for the year ahead.

The average room rate for the 1QFY01 at Rs 5,612 has however declined by 10% YoY from Rs 6,199 in the 1QFY00. The main reason behind this is the company's ongoing renovations in its metro hotels in Mumbai, Delhi, Bangalore and Calcutta. These renovations are expected to be completed by end of September. Hence the company will be in a position to increase tariffs in these hotels only after renovations.

Occupancy rates (%) ARR (Rs)
1QFY01 1QFY00 1QFY01 1QFY00
Taj Luxury Hotels 57.0% 49.0% 5,612 6,199
Taj Leisure Hotels 37.0% 48.0% 2,030 1,841
Taj Business Hotels 52.0% 59.0% 2,840 2,500

The leisure and business hotels have seen a decline in occupancy rates in the 1QFY01, however their ARRs have gone up by 10% YoY and 14% YoY respectively. Of the total operating income for the 1QFY01, room revenue accounted for 42%, food and beverage 45% and other operating income accounted for 13%. The contribution of room revenue in the company's total operating income is expected to go up during the year, as occupancy rates pick up further.

The improvement in the economic scenario and stable political situation has been favourable for the hotel industry. FY2001 earnings across the industry are expected to be much better after four miserable years of falling profits.

The negative news affecting the hotel industry has been factored into IHCL's low valuations. Indian Hotels is an attractive play on the Indian hotel industry, given its capital cost advantage, prime hotel properties, widespread network and exciting expansion plans it will always be ahead of the newer hotel chains. It is the only hotel company which has surplus land currently available both in North and South Mumbai, and these were purchased/leased at very low costs.

Indian Hotels share price has picked up in the last couple trading sessions. On the current price of Rs 228, IHCL Ltd is trading at 9.1x (on FY00 earnings). This is low as compared to multiples of 25x-30x it had traded at few years ago.

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