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Indian Hotels: Early signs of recovery, but... - Views on News from Equitymaster
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Indian Hotels: Early signs of recovery, but...
Oct 31, 2009

Performance summary
  • Net sales decline 17% YoY during 2QFY10, 21% YoY during 1HFY10. Lower room occupancies due to slowdown in the travel industry and ongoing renovation at the landmark Taj Mahal Palace and Tower dent topline performance.
  • Operating margins decline to 16.6% in 2QFY10, from 24.4% in 2QFY09 - higher staff costs and other expenditure (both as percentage of sales) the key culprits here.
  • On the back of decline in sales and weaker operating margins, net profits crash by 77% YoY during the quarter. Higher interest costs also aid to the bottomline trouble.
  • Performance for the first half (1HFY10) equally weak with sales and profits declining by 21% YoY and 75% YoY respectively.


Standalone financials
Rs m 2QFY09 2QFY10 % Change 1HFY09 1HFY10 % Change
Net sales 3,678 3,072 -16.5% 7,447 5,921 -20.5%
Expenditure 2,779 2,561 -7.8% 5,382 5,065 -5.9%
Operating profit (EBDITA) 899 511 -43.2% 2,066 856 -58.6%
Operating profit margin (%) 24.4% 16.6%   27.7% 14.5%  
Other income 316 225 -28.8% 527 316 -40.0%
Interest (net) 225 378 68.1% 460 754 64.1%
Depreciation 226 252 11.4% 429 503 17.2%
Profit before tax 764 105 -86.2% 1,704 -85 -105.0%
Extraordinary item -94 82 -187.3% -154 515 -434.3%
Tax 163 69 -57.9% 431 147 -65.9%
Profit after tax/(loss) 507 119 -76.6% 1,119 283 -74.7%
Net profit margin (%) 13.8% 3.9%   15.0% 4.8%  
No. of shares (m) 723.4 723.4   723.4 723.4  
Diluted earnings per share (Rs)*         2.1  
Price to earnings ratio (x)*         36.6  
* On a trailing 12 months basis

What has driven performance in 2QFY10?
  • While there was a marginal improvement in the demand scenario during 2QFY10, it was not enough to prop up Indian Hotels’ (IHCL) business. Sales for the company during the quarter dropped by 17% YoY, owing to both decline in occupancies and weak room rates. The company’s room revenues declined by a big 30% YoY during the quarter. While this was still better than the 39% YoY decline that was seen in room revenues in 1QFY10, the overall situation remained grim. As compared to 1QFY10, the company’s revenue per available room improved for regions like South Mumbai (up 2%), Delhi (13%), Bangalore (2%), Chennai (8%), Hyderabad (7%), and Kolkata (11%). The company also saw marginal improvement in occupancies across these regions as compared to 1QFY10. But the performance over 2QFY09 remained weak.

  • As for the revenues from sale of food and beverages, these declined by 14% YoY during the quarter. This was still better than the 22% YoY decline that was seen in 1QFY10.

  • IHCL’s operating profits declined by around 43% YoY during 2QFY10. Apart from the weakness in sales, this was also owing to a less than equivalent decline in staff costs. These costs, as a percentage of sales increased to 28% in 2QFY10, from 24.6% in 2QFY09. Operating margins subsequently fell to 16.6% during the quarter, as compared to 24.4% in 2QFY09. These margins were however better than 12.1% that the company had earned in 1QFY10.

  • On the back of lower sales and weaker operating margins, IHCL’s profits declined by 77% YoY during 2QFY10. Higher interest charges (up 68% YoY) also impacted the net profit picture.

What to expect?
At the current price of Rs 82, the stock is trading at a multiple of 29.1 times our estimated FY12 earnings. While the 2QFY10 performance seems grim in absolute terms, it is still better than the performance that IHCL had reported during the previous quarter, thereby signalling some improvement in the business scenario. But we keep our fingers crossed. The coming two quarters are expected to be even better for the company owing to the seasonality factor, but sustenance of the recovery will still take some time. We had recommended the stock in November 2008 and it is up around 64% since then, though still around 30% lower from our target price. At these levels, we have a ‘hold’ view on the stock.

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