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'Other Income' boosts ITC Hotels' performance - Views on News from Equitymaster
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  • Sep 4, 1999

    'Other Income' boosts ITC Hotels' performance

    ITC Hotels - a subsidiary of tobacco major ITC Limited, reported an impressive 67% increase in net profits to Rs 11 m in the first quarter of the current financial year. The turnover of the company rose by 4% to Rs 271 m during the same period.

    ITC Hotels (FY99 turnover: Rs 1.2 bn) owns two five-star hotels in Bangalore and Jaipur and operates 9 other properties on license basis. The company also manages the Welcome Group chain of hotels. It has made sizeable investments in real estate in Bombay (about Rs 1.5 bn for over 17 acres of land) and Calcutta (Rs 500 m for over 4 acres). About 50% of this planned capital expenditure is to be made by the parent ITC Limited and the balance will be met by ITC Hotels along with its associates, subsidiaries and joint venture partners. The company currently has 2 JVs-with Fortune Park Hotels and Welcome Heritage Hotels. These investments will double ITC Hotels' room capacity from the present 3,077 rooms by March 2001.

    ITC Hotels' performance seems creditable when compared to those of other companies in the sector. The first quarter of the current year saw Indian Hotels recorded an 8% dip in its net profit, while EIH saw its net profit plummet by 34%. But a scratch below the surface reveals that the company on an operational basis has fared no better than its peers. Like other hotel majors, its occupancy rates were also under pressure in the first quarter. What saved the day for ITC Hotels was a 33% surge in its other income. A sharp decrease in depreciation (about 7%) also helped.

    ITC's performance underlines the need for the sector to look at other sources of income besides room rentals. The industry has already realised this and hotel majors have adopted various strategies to enhance returns. Industry majors have envisaged Investments worth Rs 20 bn over the next five years. A major portion of this investment will be directed towards hotel ancillary services like restaurants, shopping malls, and health clubs.

    Market view:
    Analysts have re-rated the stock to a ' BUY' based on the company's performance and also on signs of an economic turnaround. Analysts are also viewing the upcoming hotel in Bombay positively, as they expect it to be a major revenue contributor in future. Some analysts are however not so optimistic. They view that the company is over dependent on its parent ITC Limited and has no financial backbone of its own. The recent rally saw the stock appreciate by over 55% to the current Rs 90 plus levels.



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