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Indian Hotels: Annual report extracts - Views on News from Equitymaster

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Indian Hotels: Annual report extracts
Sep 2, 2009

Indian Hotels (IHCL), owner of Taj Hotels and India's largest hotel chain, has recently come out with its annual report for FY09. In this article, we shall look at some of the key facts mentioned in the report and the outlook going forward. "I have held my ground as human history has unfolded in its timeless procession of laughter and tears. Courage and cowardice, good and evil. I will prevail."

The annual report for Indian Hotels begins with the above quote. The company's prime property Taj Mahal Palace & Tower in Mumbai faced one of the worst terror attacks in November last year. IHCL did well to re-open the Tower Wing after refurbishment on December 21, 2008, while the Heritage block will be opened in phases during the current fiscal. This displays IHCL's determination to withstand any trouble that it may face.

Performance of the hotel sector: After witnessing good times for 3 years, the hotel sector had a tough 2008 due to the global economic slowdown and terror attacks. The travel & tourism growth in 2008 slowed down to just 1%. The global economic downturn impacted the Indian tourism and hospitality industry which saw a decline in the foreign tourist arrivals to India from 5.27 m in FY08 to 5.13 m in FY09, thereby resulting in a decrease of 3%. For the current year, the tourism sector is likely to contract further by 3.3%. The developing countries would see higher growth rates than the matured markets - most notably the Americas and Europe. This would thereby affect IHCL's properties in these regions.

Properties added: The company added 1,200 rooms during FY09 across segments. It commenced operations for the new brand "Vivanta by Taj" in Bangalore and has signed more contracts for properties under this brand. It has also entered into management contracts for several properties which will commence operations over the next few years both in the domestic and international markets. In the domestic sector, IHCL signed management contracts for hotels in New Delhi, Navi Mumbai and Cochin. On the international front, contracts were signed for hotels in Tangiers, Morocco and China. The Pierre, its landmark property in New York, re-opened on 1st June 2009 after being shut for one and a half year for renovation, which cost US$ 100 m. The hotel will be launched formally in the current month.

Under the 'Ginger' brand, seven new hotels were added taking the total to 19 hotels. In addition, several projects are at various stages of construction. During the year, IHCL launched a brand new concept in spa experiences, the first of its kind in the world - the Jiva Spa boat at the Taj Lake Palace, Udaipur in October 2008. The company is positive about this segment and has plans to increase its presence in the Spa segment.

Balance sheet picture: The total consolidated debt stood at Rs 46 bn as on March 31, 2009, up from Rs 11 bn last year. The increase in debt was on account of on going capital expenditure on new projects and renovations and investment in international subsidiaries. The company during the year raised Rs 8 bn by issue of equity and Rs 6 bn through the issue of secured non-convertible debentures on rights issue basis. Further, it also raised Rs 3 bn by issue of secured non-convertible debentures on a private placement basis. The debt to equity ratio for FY09 stood at 1.3.

Capex: During FY09, IHCL spent Rs 3.2 bn towards capital expenditure on 'Vivanta' by Taj, Bangalore, Faluknuma Palace, Hyderabad. While Indian Hotels is adding 15% of India's new supply in the coming three to four years, it is looking at handing over smaller properties to its group companies and looking at handling the bigger projects. The management has indicated that it would witness pressure on its cash flows on account of lower revenues. Further, on account of high debt levels it may have to either delay or rationalize its expansion plans. While there has been some pickup in tourist inflow in the last month, things are still expected to be tough during the year.

What to expect?
At the current price of Rs 64, the stock is trading at 22.9 times our FY12 estimated earnings. The outlook for the sector does not look very promising this year. For the next year, the management expects to see a muted growth of 0.3%. Tourism is expected to pickup with recovery in the global economy. Further, with events like the Commonwealth Games planned in Delhi in 2010, the hotel industry will benefit. IHCL, despite pruning its capex plans, would pursue its growth strategy both in the domestic as well as the international market at different price points. The company is likely to continue seeing cash flow pressure till the recovery happens in the segment. While some pick up is seen in tourist regions, business hotels which are the cash cows are still facing pressure. Further international properties too will see lower growth. While the long term fundamentals remain strong, the sector is highly dependent on external factors which could possibly mar its performance.

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