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Reaping the benefits of foresight - Views on News from Equitymaster
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  • Aug 19, 2000

    Reaping the benefits of foresight

    'She is the Taj', this slogan not only reminds us of one of India's best five star hotel brands but also of its company, the Indian Hotels Company Ltd (IHCL). IHCL is not only India’s largest hotel chain but is also the market leader in both business as well as the leisure hotels sector. It also enjoys the distinction of being the first to make its presence felt in many Indian cities and of having one of the lowest capital costs per room in metro cities, due to low historical land costs.

    IHCL has always been a forward looking company and is currently undertaking a major renovation and refurbishment drive in its main hotels in Mumbai, New Delhi and Calcutta. Its proactive approach is gearing it up to meet future foreign competition. As room capacity in the metro hotels is expected to rise over the next four to five years, upgradation of hotels should result in protecting its future profitability.

    Also, in the period of economic downturn over the last few years, the company tried to cushion itself from falling occupancy rates and average room rates (ARRs). It concentrated on increasing its revenues from food and beverages. Food and beverage revenues as a percent of sales has gone up from 37 percent in financial year 97 to 42 percent in financial year 2000. In the process the company has refurbished restaurants giving them a trendy new look and concentrated on in-flight catering business to increase food and beverage revenues. Another area where the company is expanding its presence in the food business is by getting into institutional catering in a big way. Though this business commands lower margins than its traditional income from rooms, it will help the company to encash on its surplus flight catering capacity.

      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

    In other areas too, IHCL has been way ahead of its peers. While other hotel companies concentrated on opening hotels in metro cities, IHCL's thought process jumped by leaps and bounds. They were the first to introduce the concept of " business hotels", a rung lower than the upmarket luxury hotels in metro cities.

    For a developing country like India secondary cities too are expanding in terms of business opportunities. To encash on this, IHCL has introduced its "Taj Residency" business hotel brand in some of these cities. This strategy will pay off as travelers are on the look out for "value for money" alternatives. The hotels set up in these destinations years ago may not have been profitable for the company in the past. However as demand in this segment picks up these hotels could turn into profitable money spinners in future.

    Operating profits up 25% YoY in 1QFY01
    (Rs m) 1QFY00* 1QFY01* Change
    Sales 1,224 1,404 14.7%
    Other Income 82 41 -49.8%
    Expenditure 951 1,065 11.9%
    Operating Profit (EBDIT) 272 339 24.6%
    Operating Profit Margin (%) 22.3% 24.2%  
    Interest 17 72 316.8%
    Depreciation 87 108 24.5%
    Profit before Tax 250 200 -19.9%
    Other Adjustments - -  
    Tax 28 26 -6.4%
    Profit after Tax/(Loss) 222 174 -21.6%
    Net profit margin (%) 18.1% 12.4%  
    * 1QFY00 & 1QFY01- first quarter financial year'00 and 01.

    To further its presence in this segment, the company has recently acquired hotels and entered into management tie-ups in Pune, Hyderabad and Ahmedabad. Its future strategy entails maximum expansion in this segment.

    There have been concerns regarding the falling returns on capital employed of IHCL over the last few years. This is the result of two reasons, falling profits due to the tough period the hotel industry faced in the last four years and the fact that it is investing aggressively in many new properties which will take time to yield results. The company's interest costs are expected to go up in the next two years, due to higher debt it has taken on its books for new acquisitions.

    Its not like the company has not made any mistakes in the past. Its investment in the US hotel market in the past was not very wise and was a drain on the domestic company. Also its investments and the guarantees its taken on for its poor performing Sri Lanka hotel, has not been the best of investment decisions.

    Net asset value on replacement cost for Indian Hotels
    1 Valuation of owned and leased land =Total area in sq ft X price per sq. ft
    = 3,364,682 area in sq. ft x Rs 1,737 per sq. ft
    Total value = Rs 5,846 m
    2 Valuation of hotels
    (Replacement cost excluding cost of land)
    = Number of rooms * average cost
    Value of hotels =Total 3,001 rooms x Rs 4.4 m
    construction cost per room = Rs 13,354 m
    3 Flight catering = 2x sales
    Flight catering = Rs 850 m x 2= Rs 1,700 m
    4 Add other cash and non cash assets Rs 7,829 m as at 30th March'2000
    5 Less all external liabilities Rs 4,323 m as at 30th March'2000
    Net asset value = 1 + 2 + 3 + 4 - 5 = Rs 24,406 m
    No. of shares o/s (m) = 45.1
    Net asset value per share = Rs 541

    The benefits of IHCL's three year long restructuring exercise have started to show up. The company sold of its US properties as they were not performing well. They renovated and repositioned the London hotel, which is currently enjoying an occupancy rate of 82 percent. In the domestic operations the focus has been on cost control and improved performance. The company's operating margins have improved in the past quarter to 24 percent.

    On the whole the future looks bright for IHCL, with occupancy rates in metro hotels looking up. IHCL gets over 75 percent of its profits from its hotels in Mumbai, Delhi, Calcutta and Bangalore. Its other advantages include prime hotels in excellent locations, capital cost advantage in metro cities, widespread hotel network and well established brand image. Its aggressive expansion plans both domestically and internationally will keep it moving ahead. This should hold it in good stead to cope with future competition in the industry.



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    More Views on News

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