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Indian Hotels: Wah Taj ! - Views on News from Equitymaster

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Indian Hotels: Wah Taj !
Nov 1, 2006

Introduction to results
Indian Hotels (IHCL), the owners of the Taj chain of hotels, announced enthusing results for second quarter and half year ended September 2006. The topline (standalone) for the quarter grew by 27.8% YoY driven by healthy improvement in average room rates (ARR) and steady growth in food and beverages (F&B). An improvement in operating efficiency has aided margins, which have seen an expansion of 270 basis points. Net profits have grown at a higher rate of 75% YoY, also helped in part by drop in interest rates and rise in other income, apart from the jump in operating profits.

Rs m 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 2,086 2,667 27.8% 4,109 5,240 27.5%
Expenditure 1,694 2,094 23.6% 3,299 4,008 21.5%
Operating profit (EBDITA) 392 573 46.2% 810 1,232 52.2%
Operating profit margin (%) 18.8% 21.5%   19.7% 23.5%  
Other income 175 266 52.0% 224 393 75.6%
Interest (net) 53 37 -30.8% 111 77 -30.8%
Depreciation 149 170 13.8% 300 340 13.3%
Profit before tax 365 632 73.5% 623 1,208 94.1%
Tax 100 170 70.5% 189 361 91.5%
Profit after tax/(loss) 265 462 74.5% 434 847 95.2%
Net profit margin (%) 12.7% 17.3%   10.6% 16.2%  
No. of shares (m) 54.6 584   54.6 584  
Diluted earnings per share (Rs)*         3.9  
Price to earnings ratio (x)*         36.8  
* 12 month trailing earning            
Equity shares of the Company having face value of Rs 10 each were subdivided into 10 equity shares
of Re 1 each vide resolution passed by the members on September 21, 2006. Accordingly, the number
of shares shown under ‘Public Shareholding’ as at September 30, 2006 represents shares of Re 1 each
as against shares of Rs 10 each shown for the previous periods

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 FY06, the food & beverages division contributed 39% to net sales and the rest was accounted for by management contracts.

What has driven performance in 2QFY07?
Growth continues: Robust growth of 35% YoY in the ARR and steady growth in F&B segment helped the topline of IHCL grow by 27.8% YoY for 2QFY07. To put things in perspective, the ARRs of IHCL rose from Rs 5,639 per day in 2QFY06 to Rs 7,583 per day in 2QFY07. The occupancy rate too increased from 64% to 66% in this quarter. Cities like Bangalore, Hyderabad and Chennai witnessed a decline in occupancy rates on a YoY basis, as other hotel players added new room inventory in the cities.

IHCL’s property in Delhi and Mumbai also witnessed decline in occupancy rate due to renovations. However this is not worrying because the second half is the critical period for the sector. On half yearly basis, the room revenues grew by 36% along with a 16% YoY growth in F&B segment, while the management contract revenues were up by 40% YoY. In this quarter, the company commissioned 2 ginger hotels in Bhubneshwar and Haridwar. It expects to have 10 Ginger Hotels by FY07. Also, it has signed new management contracts in Goa, Bangalore, Doha and Dubai. During the quarter, the company also signed a deal to acquire Boston based Ritz Carton hotel for US$ 170 m (the revenues will start flowing from Jan 07). The company also merged 6 of its subsidiaries (effective from FY07), which will add to its room inventories by 10%. In our view, with Indian Hotels (on a consolidated basis) expected to add around 2,000 rooms over the next two to three years accompanied by robust demand, prospects look promising.

  2QFY06 2QFY07 1HFY06 1HY07
Occupancy rate 64% 66% 65% 66%
ARRs (Rs) 5,639 7,583 5,608 7,461

Cost Control: Hospitality being a fixed asset intensive business, operating leverage has played its part in perking up margins for IHCL during both 2QFY07. During the quarter, all the major cost heads (raw materials, staff and others) have witnessed declines as percent of sales. The operating profits were up 46.2% YoY in 2QFY07 as compared to last year, while the margins stood at 21.5% (18.8% in 2QFY06).

Cost break-up
As a % of net sales 2QFY06 2QFY07 1HFY06 1HFY07
Total Cost of goods 9.6% 8.8% 9.6% 8.9%
Staff Cost 23.1% 22.7% 23.3% 22.8%
License fees 10.2% 10.5% 10.2% 10.5%
Fuel , power & light 8.7% 7.2% 8.6% 7.2%
Other Expenditure 29.6% 29.3% 28.7% 27.1%

Bottomline soars: Strong growth in the topline, combined with expansion in operating margins has helped IHCL post a superlative growth of 74.5% YoY in bottomline during the quarter. Further, lower interest cost and higher other income due to forex gain, as also higher dividend from subsidiaries also provided a fillip to bottomline.

What to expect?
The stock is trading at Rs 142 at a price to earnings multiple of 37 times trailing twelve month earnings. The company has continued with its robust performance. Also along with domestic expansion, the company is spreading its wings across the globe. It is looking at newer areas and segments to increase its revenues. With strong cash flows and debt to equity ratio of 0.4x, the company is in strong position to fund growth. From a long term we are positive on the stock.

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