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Indian Hotels: De risking benefits - Views on News from Equitymaster
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Indian Hotels: De risking benefits
Oct 20, 2008

Performance summary
  • Topline grows by 8% YoY each in 2QFY09 and 1HFY09. Average room rates increase by 15% YoY.

  • Operating margins decline by 4.5% and 2.6% respectively in 2QFY09 and 1HFY09 on account of higher costs (as a percent of sales).

  • Excluding the extraordinary item during both the periods, the bottomline is up 27% YoY for 2QFY09 and 44% YoY for 1HFY09.

  • IHCL launched its fourth brand ‘Gateway’ in 2QFY09. The company has 18 hotels under operation and expects to build 50 hotels by 2011.



Standalone financials
Rs m 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 3,406 3,678 8.0% 6,863 7,447 8.5%
Expenditure 2,417 2,779 15.0% 4,778 5,382 12.6%
Operating profit (EBDITA) 989 899 -9.1% 2,085 2,066 -0.9%
Operating profit margin (%) 29.0% 24.4% 4.6% 30.4% 27.7% 2.6%
Other income 193 316 64.0% 235 527 124.6%
Interest (net) 257 225 -12.3% 484 460 -5.0%
Depreciation 207 226 9.3% 420 429 2.2%
Profit before tax 718 764 6.4% 1,416 1,704 20.3%
Extraordinary item 59 (94)   196 (154)  
Tax 245 163 -33.4% 533 431 -19.1%
Profit after tax/(loss) 532 TD> 507 -4.8% 1,080 1,119 3.6%
Net profit margin (%) 15.6% 13.8%   15.7% 15.0%  
No. of shares (m) 602.9 723.4   603 723.4  
Diluted earnings per share (Rs)*         4.1  
Price to earnings ratio (x)*         14.5  
*trailing twelve month earnings

What has driven performance in 2QFY09?
  • Indian Hotels reported a topline growth of 8% YoY for both the period under consideration. The room revenues grew by 10% YoY, while the F&B segment reported 8% YoY growth. The management contract however grew marginally by 2% YoY. The average room rates for 1HFY09 increased by 15% YoY (to nearly Rs 9,800 per room), while the occupancy rates were lower by 2% to 3% (to nearly 65%). The company’s international properties are performing in line with management’s expectations. Since Pierre (New York) and Taj Coral Reef (Maldives) were closed for renovation, to that extent the growth was lower.

  • IHCL launched its fourth brand ‘Gateway’ in this quarter. Targeted at the upscale segment, the company currently has 18 hotels under operation and expects to build 50 hotels by 2011. The room rates for this brand would be in the range of 3,500 to Rs 8,000 depending on the location. The move is part of its strategy to not dilute the ‘Taj’ brand and also have presence across different segments

    As a % of net sales 2QFY08 2QFY09 1HFY08 1HFY09
    Total Cost of goods 7.8% 8.2% 8.0% 8.2%
    Staff Cost 21.6% 24.6% 21.2% 23.6%
    License fees 5.8% 6.3% 5.6% 6.0%
    Fuel , power & light 7.1% 6.9% 6.9% 6.8%
    Other Expenditure 28.6% 29.5% 27.9% 27.6%

  • The operating margins declined by 4.6% during 2QFY09 and 2.6% during 1HFY09. On account of the launch of the Gateway brand, the company had to incur higher expenses. Also, the staff cost was higher due to new expansions.

  • Excluding the extraordinary items (foreign exchange gain/loss) during both the periods the profits grew by 27% YoY for 2QFY09 and 44% YoY during 1HFY09. The other income was higher mainly on account of higher dividend income and surplus from of the rights issue. The jump was further aided by lower interest costs and tax rates (as the dividend income was tax free).

What to expect?
At Rs 60, the stock is trading at a price to earnings multiple of 8.6 times our FY11 estimates. IHCL will continue with its capacity expansion plans. The company had earlier planned an aggregate investment of Rs 13 bn out of which Rs 8 bn has already been spent and the rest Rs 5 bn would be invested in the next two years. By the end of this year, new room inventory will be introduced in metros and Tier I and Tier II cities, which will be a mix of greenfield as well as brownfield expansion. The company has hiked its room rates with effect from September 2008 and does not plan to reduce it in the peak season (2HFY09). While the management indicated of occupancy levels falling, its wide presence across segments and brand equity would benefit the company in the longer run.

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