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Indian Hotels: Interest income boost profits - Views on News from Equitymaster

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Indian Hotels: Interest income boost profits
Nov 2, 2011

The Indian Hotels Company Limited (IHCL) has announced its second quarter results for financial year 2011-2012 (2QFY12). The company has reported a 8.8% YoY and 228.8% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales for 2QFY12 increased by 8.8% YoY on the back of improved occupancy and higher ARR (average room rentals), at a time which is generally considered as an off season for the sector.
  • Operating (EBITDA) margins declined by 0.4% YoY during the quarter. This has been due to a increase in staff costs as well as increase in fuel, power & light cost (all as a percentage of sales).
  • The company reported a net profit of Rs 81 m in 2QFY12 as compared to a net loss of Rs 63 m during the same quarter last year. This was on account of a growth in operating income as well as higher other income. It was also helped by a significant increase in exceptional items.

Standalone financials
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 3285 3576 8.8% 6572 7271 10.6%
Expenditure 2919 3189 9.3% 5672 6203 9.4%
Operating profit (EBDITA) 366 387 5.6% 900 1,068 18.6%
Operating profit margin (%) 11.2% 10.8%   13.7% 14.7%  
Other income 150 177 18.1% 213 312 46.6%
Interest (net) 296 247 NA 636 458 NA
Depreciation 252 279 10.8% 506 555 9.6%
Profit before tax (32) 37 NA (29) 367 NA
Exceptional Item -49 96 NA -10 96 NA
Tax -18 52 NA -10 168 NA
Profit after tax/(loss) (63) 81 NA (30) 294 NA
Net profit margin (%) -1.9% 2.3%   -0.5% 4.0%  
No. of shares (m)         759  
Diluted earnings per share (Rs)*         2.27  
P/E ratio (x)*         30.35  
(* On a trailing 12 months basis)

What has driven performance in 2QFY12?
  • The company's top line grew by 8.8% YoY. Even though this quarter is considered as an off season time, sales improved on back of improved occupancy and some improvement in average room rates. During the quarter, the Company launched a new 327 room Vivanta by Taj hotel at Bangalore.

    Cost break-up
    As a % of net sales 2QFY11 2QFY12 1HFY11 1HFY12
    Total Cost of goods 9.3% 9.3% 9.0% 8.9%
    Staff cost 29.2% 32.6% 29.2% 31.2%
    License fees 6.3% 6.3% 6.2% 6.1%
    Power, fuel & light 8.7% 9.3% 8.8% 9.0%
    Other Expenditure 35.3% 31.7% 33.1% 30.2%

  • IHCL's operating (EBITDA) income grew by 5.6% YoY. But operating margins saw a decline of 0.4%. This was due to faster growth in operating expenditure (staff costs, power, fuel and light) as compared to growth in sales. Staff cost increased by 21.5% YoY and power, fuel and light cost increased by 16.6% YoY.

  • Other income saw an increase of 18.1% over the same quarter last year.

  • During the quarter, the company posted a net profit as compared to a net loss during the corresponding period last year. This was mainly due to increase in exceptional items which includes Rs 30.8 m being the charge in respect of accumulated capital expenditure on a project since discontinued for commercial reasons and interest income of Rs 137.2 m on a deposit refund received consequent to surrender of leasehold land in term of a Supreme court order on the disputed allotment.

What to expect?
At a price of Rs 70, the stock is trading at 12 times our estimated FY14 earnings. Despite the (standalone) debt being at same levels IHCL was able to bring down the interest cost with change in the currency mix and converting short-term loans into long term. The firm has a consolidated debt of Rs 34 bn and a standalone debt of Rs 23 bn. It does not have plans to raise fresh debt. The company also raised its room tariffs across properties by an average of 7-13% in September 2011. IHCL plans to add 13 hotels in the FY12 with 19 more under development in 2012-13 across India. We will soon review our estimates for the stock.

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