Reaping the benefits of foresight - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Reaping the benefits of foresight

Aug 19, 2000

'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.

Equitymaster requests your view! Post a comment on "Reaping the benefits of foresight". Click here!


More Views on News

THE INDIAN HOTELS Announces Quarterly Results (4QFY20); Net Profit Down 42.9% (Quarterly Result Update)

Jun 11, 2020 | Updated on Jun 11, 2020

For the quarter ended March 2020, THE INDIAN HOTELS has posted a net profit of Rs 668 m (down 42.9% YoY). Sales on the other hand came in at Rs 11 bn (down 14.6% YoY). Read on for a complete analysis of THE INDIAN HOTELS's quarterly results.

THE INDIAN HOTELS Announces Quarterly Results (3QFY20); Net Profit Up 21.4% (Quarterly Result Update)

Feb 1, 2020 | Updated on Feb 1, 2020

For the quarter ended December 2019, THE INDIAN HOTELS has posted a net profit of Rs 2 bn (up 21.4% YoY). Sales on the other hand came in at Rs 14 bn (up 3.7% YoY). Read on for a complete analysis of THE INDIAN HOTELS's quarterly results.

THE INDIAN HOTELS 2018-19 Annual Report Analysis (Annual Result Update)

Jun 5, 2019 | Updated on Jun 5, 2019

Here's an analysis of the annual report of THE INDIAN HOTELS for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of THE INDIAN HOTELS. Also includes updates on the valuation of THE INDIAN HOTELS.

THE INDIAN HOTELS 2017-18 Annual Report Analysis (Annual Result Update)

Dec 19, 2018 | Updated on Dec 19, 2018

Here's an analysis of the annual report of THE INDIAN HOTELS for 2017-18. It includes a full income statement, balance sheet and cash flow analysis of THE INDIAN HOTELS. Also includes updates on the valuation of THE INDIAN HOTELS.

Chalet Hotels IPO: Should You Bet on This High-End Hotel Chain Owner? (IPO)

Jan 29, 2019

Should you subscribe to the IPO of Chalet Hotels Ltd?

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 24, 2020 (Close)


  • Track your investment in THE INDIAN HOTELS with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks