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  • Aug 9, 2012 - Indian Hotels: Forex losses, higher costs hit profits

Indian Hotels: Forex losses, higher costs hit profits

Aug 9, 2012

The Indian Hotels Company Limited (IHCL) has announced its consolidated results for the quarter ended June 2012. The company has reported a 19.8% YoY growth in sales. The company has also reported a wider net loss as compared to the same period last year. Here is our analysis of the results.

Performance summary
  • Net sales for 1QFY13 increased by 19.8% YoY. This is despite the first two quarters usually being the leanest period for the industry.
  • Operating margins saw no improvement and remained flat as compared to the same quarter previous year. This has been due to increase in overall costs which saw a rise of 20.2% YoY. However, operating profits increased by 16.9% YoY on back of strong revenue growth.
  • The company's net loss for the quarter widened to Rs 334 m as compared to Rs 223 m in the same quarter last year. This was due to increase in forex losses, lower treasury income, and an investment in a new property.
  • On a standalone basis, the company reported a 7.3% YoY increase in net sales and a decline of 81.1% YoY in net profit for the quarter ended June 2012.

Standalone and Consolidated financials
  Standalone Consolidated
(Rs m) 1QFY12 1QFY13 Change 1QFY12 1QFY13 Change
Net sales 3,695 3,965 7.3% 7116 8526 19.8%
Expenditure 3,017 3,304 9.5% 6249 7511 20.2%
Operating profit (EBDITA) 678 660 -2.7% 868 1015 16.9%
Operating profit margin (%) 18.4% 16.7%   12% 12%
Other income 150 75 -50.4% 129 137 6.6%
Interest (net) 226 299 32.5% 490 438 -10.7%
Depreciation 276 310 12.2% 602 714 18.7%
Profit before tax 327 127 -61.3% -96 0 NA
Exceptional Item - (64)   -3 -91 NA
Tax 114 22 -80.7% 129 97 -24.6%
Profit after tax/(loss) 213 40 -81.1% -227 -188 NA
Minority interest       -52 -81 NA
Share of profit of associates       57 -65 -215.2%
PAT after minority and sh. of assoc. profit       -223 -334 NA
Net profit margin (%) 5.8% 1.0%   -3% -4%  
No. of shares (m) -       808  
Diluted earnings per share (Rs)         -0.04  
P/E ratio (x)*         NA  
(* On a trailing 12 months basis)

What has driven performance in 1QFY13?
  • Net sales of the company rose 19.8% YoY on a consolidated basis and 7.3% YoY on a standalone basis. IHCL reported its first consolidated quarter numbers with incorporation of Piem Hotel as also another hotel in the domestic portfolio. Consolidated revenue growth due to addition of new inventory and consolidation benefits of new subsidiaries including Piem Hotels. Sluggish performance of IHCL's standalone business continues in 1QFY13. Despite the stagnated occupancy rate (OR) and average room rate (ARR) YoY in 1QFY13, the company managed to post 7.3% growth with the launch of new hotels in Bangalore and Hyderabad.

  • During 1QFY13, only North Mumbai and Kolkata reported marginal improvement in average occupancy levels YoY. While other major cities reported downward trend. During 1QFY12, ARR across business destination declined marginally except North Mumbai and Chennai that saw marginal recovery in 1QFY13. Among leisure destinations ARR improved marginally in Goa and Agra due to low base effect of last year.

    Segmental contribution to consolidated sales
      Standalone results Consolidated results
    As a % of net sales 1QFY12 1QFY13 1QFY12 1QFY13
    Total Cost of goods 8.5% 9.2% 10.8% 10.5%
    Staff cost 29.8% 29.3% 36.7% 36.5%
    License fees 5.9% 6.4% 4.8% 5.0%
    Power, fuel & light 8.7% 9.7% 7.9% 8.1%
    Other Expenditure 28.8% 28.8% 27.7% 27.9%

  • At the operating level, consolidated EBITDA was up 16.9% YoY. However EBITDA margin was marginally down by 29 bps to 11.9%. Higher depreciation and loss from related businesses have bloated losses. Quarter margins indicate that there is not a significant improvement in US business (14.5% to consolidated sales) which continues to be a drag on IHCL's performance. On a standalone basis, addition of new inventory (327 room Taj Yeshwantpur) resulted in YoY increase in employee expenses. Operating expenses also escalated due to 19% increase in fuel and electricity expenses during the quarter. Higher expenses due to inflationary pressure has impacted EBITDA margin by 170 bps YoY to 16.7%. Higher food and beverage and power and fuel cost contributed significantly to decline in EBITDA margin

  • On consolidated basis net loss widened YoY to Rs 334 m on increased depreciation, minority/associate losses and Rs 91 m in forex loss. Lower margin and other income on YoY basis combined with higher interest cost resulted in an 81.1% YoY fall in standalone net profit.

What to expect?
Despite subdued quarter in terms of profitability and scale-up mode of IHCL, we remain positive as we see improvement in return on capital due to greater cost efficiencies as 1) new inventories mature, 2) debt burden to ease and 3) improvement in the performance of the overseas hotel portfolio. The company is planning to add nearly 2,040 rooms in 2012/13. Of the total room additions, nearly 48% of rooms would be added under management contracts.

At the current price of Rs 58, the stock trades at around 1.1x our estimated FY15 book value per share. We maintain a positive view on the stock.

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