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Indian Hotels: Losses continue to extend
Nov 11, 2013

The Indian Hotels Company Limited (IHCL) has announced its standalone and consolidated results for the quarter ended September 2013. On a standalone basis, the company has reported 3.1 % YoY increase in net sales and net loss of Rs 4526 m in 2QFY14. Here is our analysis of the results.

Performance summary
  • Net sales for 2QFY14 increased by a modest 3.1% YoY on account of decline in revenue per available room (RevPAR).
  • Operating margins increased by 1.2% YoY. Operating profits increased by 26.2% YoY.
  • The company posted a wider net loss of Rs 3 bn in 2QFY14 as compared to a net loss of Rs 64 m in 2QFY13.
  • On a consolidated basis, for the half year ended 2013, the company reported 8.3% YoY increase in net sales and a net loss of Rs 4.5 bn as compared to Rs 908 m net loss in the same period last year.

Standalone and Consolidated financials
  Standalone Consolidated
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 3,790 3,909 3.1% 16,664 18,046 8.3%
Expenditure 3,588 3,655 1.8% 15,265 16,600 8.7%
Operating profit (EBDITA) 202 255 26.2% (3,006) 383 NA
Operating profit margin (%) 5.3% 6.5%   -36.9% 4.3%  
Other income 258 158 -38.7% 350 474 35.2%
Interest (net) 233 279 19.6% 818 854 4.5%
Depreciation 321 302 -5.9% 1,451 1,536 5.8%
Profit before tax (95) (169) NA (520) (470) NA
Exceptional Item (3) (2,938) NA 13 (3,822) NA
Tax (34) (104) NA 87 26 -69.8%
Profit after tax/(loss) (64) (3,003) NA (594) (4,319) NA
Minority interest       (247) (116) NA
Share of profit of associates       (68) (91) NA
PAT after minority and sh. of assoc. profit (64) (3,003) NA (908) (4,526) NA
Net profit margin (%) NA NA   NA NA  
No. of shares (m)   808        
Diluted earnings per share (Rs)   -3        
P/E ratio (x)*   NA        
(* On a trailing 12 months basis)

What has driven performance in 2QFY14?
  • IHCL's standalone revenue for 2QFY14 increased by 3.1% YoY. Room revenue was subdued, owing to continued new supply in a recessionary market. The second quarter of every fiscal is seasonally one of the weakest quarters for the hotel industry in India. Oversupply has put pressure on the occupancy rate (OR) and average room rates (ARR) during April-September 2013 compared to last year across all key metros, with the exception of Bangalore and Mumbai, which have seen occupancy growth, and Goa, which has seen ARR growth. However, lower other income due to lower dividend income and higher interest cost has increased losses.

    Cost break-up
      Standalone results Consolidated results
    As a % of net sales 2QFY13 2QFY14 1HFY13 1HFY14
    Total Cost of goods 9.7% 10.0% 10.5% 10.7%
    Staff cost 32.8% 28.9% 37.7% 36.9%
    License fees 7.0% 6.8% 5.3% 5.2%
    Power, fuel & light 10.8% 10.8% 8.6% 8.5%
    Other Expenditure 34.4% 37.0% 29.5% 30.8%

  • IHCL's operating (EBITDA) income increased by 26.2% YoY despite lower sales. Standalone EBITDA margins, for the quarter improved by 1.2% YoY. Margin expanded due to lower employee cost.

  • Robust sales growth in the international business of 16%, led by high occupancy of the US vertical (14.5% of consolidated sales), has helped Indian Hotels to report consolidated sales growth of 10% YoY in 2QFY14. Occupancy of Hotel Pierre in New York, Taj Boston and Campton Place in San Francisco has improved by 1,400 bp YoY to 77%, 700 bp YoY to 81%, and 100 bp YoY to 80%, respectively, in 1HFY14. However, higher marketing & advertisement, repairs & maintenance and other administration spend led to an EBITDA margin contraction of 44 bp YoY to 4.3% in 2QFY14.

  • Consolidated debt has gone up from Rs 38 bn (March 2013) to Rs 45 bn (September 2013), due to rupee depreciation. This led to a 17% QoQ increase in interest expense in 2QFY14.
What to expect?

IHCL board has finally decided not to pursue its US $1.9 bn OEH bid (made in October 2012). This is a welcome relief, in our view, given concern around the risk of the company overpaying for the acquisition, after the initial bid was rejected by OEH board. Given the MTM loss on OEH, IHCL has taken a write-down of Rs 3.7 bn in 2QFY14. Overall impact of the write-off although was offset by revaluation gains on a few international assets in London/Sydney/Maldives, which were held under the same holding company (Taj International Hotel HK). IHCL does not expect any further significant write-offs on account of OEH.

Capex commitment is limited with the majority of incremental room additions coming from management contracts & Ginger expansion. IHCL has only two owned hotels under construction (Dwarka/Guhawti) which are expected to be operational in F14/15, respectively. Overall, IHCL is looking to add 1500-1600 rooms in FY14-15.

IHCL reports continued good supply addition in FY14, which is putting pressure on occupancies and room rates. Management expects performance of domestic properties to pick up in 2HFY14 on the back of rupee depreciation and beyond due to sowing supply growth.

At the current price of Rs 49, the stock trades at around 0.5x our estimated FY16 book value per share. We maintain our Buy view on the stock. We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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