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Indian Hotels: Losses continue to mount
Aug 26, 2014

The Indian Hotels Company Ltd (IHCL) has announced its results for the quarter ended June 2014. On a standalone basis, the company has reported 0.3% YoY increase in net sales and loss of Rs 72 m at the bottomline. Here is our analysis of the results.

Performance summary
  • Net sales for 1QFY15 remained flat on account of decline in revenue per available room (RevPAR).
  • Operating margins decreased by 4.7% YoY. Operating profits decreased by 34.1% YoY due to a 5.6% YoY increase in operating expenses.
  • The company posted a net loss of 72 m for the quarter ended June 2014 largely due to the poor operating performance as well as a 44.8% YoY fall in other income.
  • On a consolidated basis, for the quarter ended June 2014, the company reported 3.2% YoY increase in net sales and a net loss of Rs 243 m as compared to a net loss of 76 m in the same period last year.

Standalone and Consolidated financials
  Standalone Consolidated
(Rs m) 1QFY14 1QFY15 Change 1QFY14 1QFY15 Change
Net sales 3,966 3,978 0.3% 9,087 9,375 3.2%
Expenditure 3,433 3,626 5.6% 8,023 8,578 6.9%
Operating profit (EBDITA) 534 352 -34.1% 1,064 797 -25.1%
Operating profit margin (%) 13.5% 8.8%   11.7% 8.5%  
Other income 213 117 -44.8% 189 175 -7.5%
Interest cost 228 247 8.1% 394 445 13.1%
Depreciation 301 297 -1.2% 733 698 -4.8%
Exceptional Item (46) (46)   (81) (61)  
Profit before tax 172 (121)   46 (232)  
Tax 74 (50)   122 11 -91.1%
Profit after tax/(loss) 98 (72)   (76) (243)  
Minority interest - -   (67) (77)  
Share of profit of associates - -   (48) (28)  
PAT after minority and sh. of assoc. profit 98 (72)   (191) (348)  
Net profit margin (%) 2.5% -1.8%   -2.1% -3.7%  
No. of shares (m)         807.5  
Diluted earnings per share (Rs)         (7.1)  
P/E ratio (x)*         N.A  
(* On a trailing 12 months basis)

What has driven performance in 1QFY15?
  • IHCL's standalone revenue for 1QFY15 increased by 0.3% YoY. This was due to the fact that both occupancy rates (OR) as well as average room rates (ARR) did not see any significant improvement in the quarter on a YoY basis. However, the standalone operating performance left a lot to be desired. The sharp fall in operating profit was down to the rise, almost across the board, in operating expenses (as a % of sales).

    Cost break-up
      Standalone Results Consolidated Results
    As a % of sales 1QFY14 1QFY15 1QFY14 1QFY15
    Cost of goods 9.1% 9.9% 10.5% 10.9%
    Staff costs 29.1% 30.2% 36.2% 37.5%
    License fees 6.5% 6.0% 5.0% 4.7%
    Power, fuel & light 10.3% 11.3% 8.1% 8.7%
    Other Expenditure 31.5% 33.8% 28.5% 29.7%
What to expect?
The company's standalone operating performance was unimpressive. The cost pressures at the operating level were largely responsible for the poor performance. This is disappointing as the domestic business was showing signs of a revival. However, it must be kept in mind that the peak supply situation in the domestic market is well and truly behind the company. The international operations will still need a few years to recover.

In a surprise decision, the company's long time chief executive Raymond Bickson resigned on 7th August. His resignation will be effective on 31st August 2014. This was unexpected as he had received a 5 year contract extension in 2013. The company's new CEO will be Rakesh K Sarna, a veteran of the Hospitality industry. It remains to be seen how the new CEO will turn around the company especially the international operations. The company also went ahead with its rights issue during the quarter.

We had recommended that investors Sell the stock and book profits in our note on 17 April 2014 as the stock had breached our target price of Rs 75. Considering the risks and uncertainties that the company faces as well as the valuations, we recommend that investors do not buy the stock at current levels.

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