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Indian Hotels: High costs tank profits
Nov 8, 2012

The Indian Hotels Company Limited (IHCL) has announced its standalone results for the quarter ended September 2012. The company has reported a 6% YoY growth in sales. The company has also reported a net loss as compared to a net profit for the same period last year. Here is our analysis of the results.

Performance summary
  • Net sales for 2QFY13 increased by 6% YoY. This is despite the first two quarters usually being the leanest period for the industry.
  • Operating margins saw a decline of 5.5% YoY. This has been due to increase in overall costs which saw a rise of 12.5% YoY. Operating profits declined by 47.6% YoY.
  • The company posted a net loss as compared to a net profit for the same period last year. This was due to surging operating costs and high tax provisions and the global economic uncertainty which curbed spending on travel.
  • On a consolidated basis, for the half year ended September 2012, the company reported a 14.5% YoY increase in net sales and a wider net loss of Rs 909 m as compared to a net loss of Rs 703 m in the same period last year.


Standalone and Consolidated financials
  Standalone Consolidated
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 3,576 3,790 6.0% 14,555 16,664 14.5%
Expenditure 3,191 3,588 12.5% 13,032 15,265 17.1%
Operating profit (EBDITA) 385 202 -47.6% (1,970) 384 NA
Operating profit margin (%) 10.8% 5.3%   -26.5% 4.7%  
Other income 205 258 26.1% 398 350 -12.0%
Interest (net) 276 233 -15.3% 1,105 818 -26.0%
Depreciation 279 321 15.1% 1,293 1,451 12.2%
Profit before tax 34 (95) NA (477) (520) NA
Exceptional Item 98 (3) -102.8% 43 13 -70.0%
Tax 49 (34) -169.9% 271 87 -67.8%
Profit after tax/(loss) 83 (64) -176.4% (705) (594) NA
Minority interest       (106) (247) NA
Share of profit of associates       107 (68) -163.3%
PAT after minority and sh. of assoc. profit 83 (64) -176.4% (703) (909) NA
Net profit margin (%) 2.33% NA   NA NA  
No. of shares (m)   808        
Diluted earnings per share (Rs)   987        
P/E ratio (x)*   0.06        
(* On a trailing 12 months basis)

What has driven performance in 1QFY13?
  • Net sales of the company rose 14.5% YoY on a consolidated basis and 6% YoY on a standalone basis. Growth in standalone topline was supported by additional revenue from new room additions (in Yashwantpur) and flat RevPAR. Baring few cities like North Mumbai, Kolkata, Goa, Pune and Agra, all other major cities reported marginal fall in average occupancy. Income from room sales increased 3% in 1HFY13 on account of surge in average daily rooms sold including capacity increase. F&B sales up 10% YoY due to rise in restaurant sales and banqueting business.

  • During 2QFY12, ARR across business destination declined marginally except North Mumbai and Chennai that saw marginal recovery in 2QFY13. Among leisure destinations ARR improved marginally in Goa and Agra due to low base effect of last year.

      Standalone results Consolidated results
    As a % of net sales 2QFY12 2QFY13 1HFY12 1HFY13
    Total Cost of goods 9.3% 9.7% 11.0% 10.7%
    Staff cost 32.6% 32.8% 37.2% 37.7%
    License fees 6.3% 7.0% 4.6% 5.0%
    Power, fuel & light 9.3% 10.8% 8.1% 8.6%
    Other Expenditure 31.7% 34.4% 28.7% 29.6%

  • At the operating level, Standalone EBITDA of Rs 202 m was down 47.6% YoY, even while revenues were up 6% YoY on new room additions. EBITDA margin at 5.3% was lowest reported by the company in recent history. The company attributed this to initial start-up losses in new hotels (Bangalore/Hyderabad) and higher fuel & power cost (up 24% YoY). Other expenditure was higher YoY primarily due to increase in advertisement & promotion expenses.

  • On consolidated basis net loss widened YoY to Rs 909 m. Weak domestic business performance coupled with losses on US portfolio, adversely impacted the consolidated profitability. International hotels have fared well in 1HFY13 with RevPARs higher by 2-10% vs. last year. However, we think a US turnaround is still some time away and is predicated on Pierre hotel bridging USD $200 ARR gap to its comparable luxury hotels.

What to expect?
The sector continues to face pressure on demand due to the current economic environment, which in turn had kept the room rates subdued. The company expects to open Vivanta by Taj Gurgoan as also its first prototype the Gateway Hotel at Kolkata later in the year. There has been overall a 23% increase in supply in 1HFY13 compared to last year. The demand -supply mismatch has put pressure on occupancies. Demand growth has been moderate at 20% in summers and expected to pick up in 2HFY13 and winters. Till now, the company has opened 5 hotels and 509 rooms in 2012-13. The company is planning to develop 13 new hotels and 1521 rooms in 2013-14.

At the current price of Rs 62, the stock trades at around 1.2x our estimated FY15 book value per share. We maintain our Buy view on the stock.

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