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Indian Hotels: High costs hits bottomline
Oct 27, 2010

The Indian Hotels Company Limited has announced its 2QFY11 results. The company has reported a 6.9% YoY growth in sales and a Rs 63 m loss. Here is our analysis of the results.

Performance summary
  • Net sales for 2QFY11 increased by 6.9% YoY on the back of higher occupancy.
  • Operating (EBITBA) margins fell by 5.4% during the quarter. This has been due to higher raw material costs, staff costs and other costs (all as a percentage of sales).
  • Net profit slipped into the red this quarter. This was due to fall in operating income, lower other income and an extraordinary loss (profit in the corresponding quarter last year) recorded during the quarter.


Standalone financials
Rs m 2QFY10 2QFY11 % Change 1HFY10 1HFY11 % Change
Net sales 3,072 3,285 6.9% 5,921 6,572 11.0%
Expenditure 2,561 2,919 13.9% 4,965 5,672 14.2%
Operating profit (EBDITA) 511 366 -28.2% 956 900 -5.8%
Operating profit margin (%) 16.6% 11.2%   16.1% 13.7%  
Other income 225 152 -32.6% 316 212 -32.8%
Interest (net) 378 296 -21.8% 754 636 -15.7%
Depreciation 252 252 0.0% 603 506 -16.0%
Profit before tax 105 (30)   (85) (30)  
Extraordinary item 82 (52)   515 (10)  
Tax 69 (18)   147 (10)  
Profit after tax/(loss) 119 (63)   283 (30)  
Net profit margin (%) 3.9% -1.9%   4.8% -0.5%  
No. of shares (m) 723 724   723 724  
Diluted earnings per share (Rs)*         1.7  
Price to earnings ratio (x)*         58.3  
* On a trailing 12 months basis

What has driven performance in 2QFY11?
  • The company had a muted top line growth. This was a combination of the second quarter of the year being the slowest of the year and loss of insurance benefit for Taj Mahal Palace, Mumbai. The company witnessed improvement in occupancy this quarter. However, the company suffered because its flagship property, Taj Mahal Palace & Tower was operational for only part of the quarter due to renovation.

    Cost break-up
    As a % of net sales 2QFY10 2QFY11 1HFY10 1HFY11
    Total Cost of goods 7.90% 9.30% 7.80% 9.00%
    Staff Cost 28.00% 29.20% 29.20% 29.20%
    License fees 6.20% 6.30% 6.10% 6.20%
    Fuel, power & light 8.10% 8.70% 8.40% 8.80%
    Other Expenditure 33.20% 35.30% 34.00% 33.10%

  • IHCL's operating (EBITDA) income fell by 28% YoY. This was due to increase in raw material costs, higher staff costs and a sharp rise in other expenditure (all as a percentage of sales). Increase in staff costs relate to hiring of new staff for the properties due to open in the coming quarter and higher increments. Other expenditure was higher as a result of branding exercise carried out by the group for launching Vivanta by Taj.

  • IHCL's profits slipped in the red during the year on the back of higher costs incurred by the company.

    What we expect?
    At a price of Rs. 98, the stock is trading at 21 times our estimated FY13 earnings (RPro subscribers click here). While the results look bad, there is an improvement in business as a result of higher demand. The company is growing aggressively and is on an average, opening a new hotel every 4 weeks. IHCL has a large debt on its books. As a result of which the company is burdened with a large interest component. However, the company is taking steps to reduce it and deleverage its balance sheet. The company is issuing up to 48 m convertible warrants to Tata Sons on a preferential basis. The convertible option will be exercisable after 1st April 2011 but not later than 18 months from the date of issue. The money raised from this issue will be used to pay off debt. Nevertheless, this will dilute the earnings of the company. Moreover, the stock price has run up quite a bit. For these reasons, we recommend subscribers to be CAUTIOUS on this stock.

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