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Indian Hotels: India operations disappoint - Views on News from Equitymaster

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Indian Hotels: India operations disappoint

Aug 26, 2013

The Indian Hotels Company Limited (IHCL) has announced its standalone and consolidated results for the quarter ended June 2013. On a standalone basis, the company has reported flat sales and 142.7% YoY increase in net profits in 1QFY14. Here is our analysis of the results.

Performance summary
  • Net sales for 1QFY14 remained flat on account of decline in revenue per available room (RevPAR).
  • Operating margins decreased by 4% YoY. Operating profits decreased by 19.2% YoY.
  • The company posted a 142.7% YoY increase in net profit for the quarter ended June 2013. This was driven mainly by 185% increase in other income
  • On a consolidated basis, for the quarter ended June 2013, the company reported 6.6% YoY increase in net sales and a net loss of Rs 76 m as compared to 188 m net loss in the same period last year.

Standalone and Consolidated financials
  Standalone Consolidated
(Rs m) 1QFY13 1QFY14 Change 1QFY13 1QFY14 Change
Net sales 3,965 3,966 0.0% 8526 9087 6.6%
Expenditure 3,304 3,433 3.9% 7511 8023 6.8%
Operating profit (EBDITA) 660 534 -19.2% 1015 1064 4.8%
Operating profit margin (%) 17% 13%   12% 12%  
Other income 75 213 185.2% 137 189 38.0%
Interest (net) 299 228 -23.7% 438 394 -10.1%
Depreciation 310 301 -2.8% 714 733 2.6%
Profit before tax 127 217 71.9% 0 127 NA
Exceptional Item (64) (46)   -91 -81 NA
Tax 22 74 236.4% 97 122 25.3%
Profit after tax/(loss) 40 98 142.7% -188 -76 NA
Minority interest - -   -81 -67 NA
Share of profit of associates - -   -65 -48 NA
PAT after minority and sh. of assoc. profit 40 98   -334 -191 NA
Net profit margin (%) 1% 2%   -4% -2%  
No. of shares (m)         808  
Diluted earnings per share (Rs)         -5.8  
P/E ratio (x)*         NA  
(* On a trailing 12 months basis)

What has driven performance in 1QFY14?
  • IHCL's standalone revenue for 1QFY14 remained flat YoY. Despite the launch of new hotels, the company reported flat growth in this quarter owing to low ARR and subdued occupancy rate. Occupancies were down 100 bps YoY to 59% while the average revenue per room declined 6.4% with the ARR subdued at Rs 8300, especially due to pressure emanating from Chennai and Hyderabad. Average occupancy level across business destinations (Delhi, Bangalore and Mumbai) improved marginally by 80 bps YoY. Among leisure destinations, occupancy levels remained flat vs. last year except Goa, which saw growth of 100 bps YoY.

    Cost break-up
      Standalone results Consolidated results
    As a % of net sales 1QFY13 1QFY14 1QFY13 1QFY14
    Total Cost of goods 9.2% 9.1% 10.5% 10.5%
    Staff cost 29.3% 29.1% 36.5% 36.2%
    License fees 6.4% 6.5% 5.0% 5.0%
    Power, fuel & light 9.7% 10.3% 8.1% 8.1%
    Other Expenditure 28.8% 31.5% 27.9% 28.5%

  • IHCL's operating (EBITDA) income declined by 19.2% YoY. Standalone EBITDA margins, for the quarter, declined 400 bps YoY. The higher other operating expenses and power & fuel cost led to EBITDA margin contraction. However, higher other income (include dividend from subsidiary and Tata Sons) and lower interest cost has helped in profit growth of 142.7% YoY. Indian hotels reported high occupancy of US vertical, 14.5% of consolidated sales. Occupancy of hotel in Pierre-New York has improved by 1200 bps YoY to 77% and in Boston and San Francisco has touched 80% in 1QFY14. This has managed to reduce consolidated loss from Rs 188 m in 1QFY13 to Rs 76 m in 1QFY14, despite dismal performance of domestic business.

  • The better performance of subsidiary, 12.3% YoY sales growth, 257 bps YoY EBITDA margin expansion, higher consolidated other income and lower consolidated interest cost helped in lowering consolidated loss of the group. EBITDA margin remained on almost same level YoY, thanks to the operating margin expansion of international subsidiary.

What to expect?
The improvement in US business, still a key overhang on Indian hotels might as well have seen the worst. Further improvement in international subsidiary and recovery in domestic business would give impetus to earnings. The stock might see trigger in the medium term for the following reasons: 1) restructure the overall overseas subsidiaries and bring all assets under its step-down holding company alongside subsequent funds mopup by stake sells to foreign investors 2) Sell of the US business.

At the current price of Rs 42, the stock trades at around 0.6x our estimated FY16 book value per share. We maintain our Buy view on the stock. We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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