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Indian Hotels: Margins expand - Views on News from Equitymaster

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Indian Hotels: Margins expand
Oct 29, 2007

Performance summary
  • On a standalone basis, the topline grows by 15.7% YoY led by higher room rates.

  • Margins expand by 4.2% YoY mainly due to cost control.

  • Stronger operating margins leads to the bottomline growth of 16% YoY in the current quarter.

  • International properties contribute 30% to the total revenues.

Rs m 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 2,950 3,414 15.7% 5,843 6,879 17.7%
Expenditure 2,219 2,425 9.3% 4,230 4,794 13.3%
Operating profit (EBDITA) 730 989 35.4% 1,613 2,085 29.2%
Operating profit margin (%) 24.8% 29.0%   27.6% 30.3%
Other income 263 252 -4.1% 367 431 17.5%
Interest (net) 156 257 64.4% 334 484 44.8%
Depreciation 219 207 -5.4% 438 420 -4.1%
Profit before tax 618 777 25.7% 1,208 1,613 33.5%
Tax 159 245 53.6% 355 533 49.9%
Profit after tax/(loss) 459 532 16.0% 853 1,080 26.6%
Net profit margin (%) 15.6% 15.6% 14.6% 15.7%
No. of shares (m) 600 603   600 603  
Diluted earnings per share (Rs)*       5.5  
Price to earnings ratio (x)*       25.7  
*trailing twelve month earnings

What is company's business?
Indian Hotels Company Limited (IHCL) is India's largest hotel chain with an estimated room inventory share of 25% in top seven cities in the luxury segment (room inventory share is the share of Indian Hotels of the total rooms available). On a consolidated basis, including properties under the management control, the total inventory in FY06 stood at little over 9,100 rooms. On a standalone basis, while the company derived over 50% of its net sales from room revenues in FY07, the food & beverages division contributed 39% to net sales and the rest was accounted for by management contracts.

What has driven performance in 2QFY08?
On the topline: The company witnessed a 16% YoY increase in the topline for 2QFY08. While the occupancy rate increased to 68% (67% in 2QFY08), the room rates jumped 18% YoY to touch Rs 8, 581. While in Bangalore, Chennai and Hyderabad, the hotel major witnessed a dip in occupancy rates (due to new supply in the city), the other cities witnessed robust sale in the rooms during the quarter. Further in this quarter, a fair number of rooms in its key properties were under construction, thereby leading to lower occupancy. However, rooms sold per day went by 1% YoY from 12,182 to 12,345. The company has shifted to a rupee based tariff effective September 2007. On the international front, the company is doing well with 30% of revenues coming from the same. However, IHCL plans to close down the rooms of Pierre for renovation starting January 1, 2008 for about 10 months. However, the banqueting business will continue. The total refurbishment capex estimate has been hiked from US$35 m to US$ 80 m. The performance of Taj Boston and St James Court is as per managementís expectations. The company expects Blue (Sydney) to become profitable in 2008. It has also increased its equity stake in Orient Express Hotels to 11% for a total consideration of US$ 232.9 m. The expansion plans of the company are well on track. We continue to remain positive on the topline front.

International Properties
Property Location Location ARR US$ OR (%)
Blue Sydney Sydney 200 70
Pierre New York 560 75
Taj Boston Boston 330 75
Campton Place San Fransico 340 66

Margins expand: IHCL continues to successfully improve its operating leverage. On a YoY basis, operating margins have witnessed strong expansion of 420 basis points (4.2%), which has been driven by a reduction in almost all the operating heads (as percentage of sales). The advertisement costs were marginally higher due to promotion of the Taj brand overseas.

Cost break-up
As a % of net sales 2QFY07 2QFY08 1HFY07 1HFY08
Total Cost of goods 8.6% 7.8% 8.7% 8.0%
Staff Cost 21.9% 21.4% 21.7% 21.0%
License fees 6.6% 5.8% 6.3% 5.6%
Fuel , power & light 7.3% 7.1% 7.2% 6.9%
Other Expenditure 30.9% 28.9% 28.5% 28.2%

Robust bottomline: The bottomline for the quarter grew by 16% YoY in tandem with the topline led by higher operating profits and lower depreciation charges. However, higher interest cost (due to debt raised for the acquisition of Campton Place) and lower interest income due to conversion of FCCBs resulted in subdued earnings to that extent. For 1HFY08, the bottomline has reported a 27% YoY growth.

What to expect?
At Rs 141, the stock is trading at a price to earnings multiple of 25.7 times its 12-month trailing earnings. The sector scenario continues to remain strong. With new supply of rooms not expected to come in the near future, the room rates are expected to remain robust. The company continues to expand its inventory on both the international and domestic front. It is also planning a rights issue to fund its capex plans. With the Taj brand expanding globally, the company continues to be our top play from the hotel sector.

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