Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Hotels: Destination India... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Nov 15, 2006

    Hotels: Destination India...

    Hotel majors have announced their September quarter results amidst much excitement and expectations. Both, the expectations and excitement was high due to the prospects of India as an exciting tourist and business destination, justified in part by the robust performance in the last two years. The growth momentum in tourist inflow and the high room rates continue unabated.

    In terms of operating metrics, topline growth was fairly robust, on a year-on-year basis. Margins saw an impressive expansion as well. Operating leverage has played its part in perking up margins during 2QFY07. Due to considerably higher other income this quarter, and lower interest charges, the bottomline growth outperformed the topline and operating profits, by a wide margin.

    Rs m 2QFY06 2QFY07 Change
    Net sales 5,789 7,164 23.8%
    Expenditure 4,240 5,083 19.9%
    Operating profit (EBDITA) 1,549 2,081 34.3%
    Operating profit margin (%) 26.8% 29.0%
    Other income 222 387 74.3%
    Interest (net) 372 327 -12.1%
    Depreciation 431 466 8.1%
    Profit before tax 968 1,675 73.0%
    Extraordinary item (9) 144  
    Tax 251 504 100.8%
    Profit after tax/(loss) 708 1,315 85.7%
    Net profit margin (%) 12.2% 18.4%

    (the companies included are Indian Hotels, EIH, Oriental Hotels, Taj GVK, Leelaventure, Asian Hotels)

    What has driven the performance in 2QFY07?

    Incredible India: The foreign visitor arrivals till August 2006 reached 2.8 m and are expected to touch a record 4.4 m by the end of the year. The strong tourist inflow is attributable to some fundamental reasons such as a strong business and investment confidence in India, strong GDP performance, opening of sectors of the economy to private and foreign investment. Domestic travel, both business and leisure have benefited from a strong corporate performance in India, and the overall sense of optimism with regard to the economy. Furthermore, India's growing recognition as an exciting place to visit has helped boost its image as a leisure destination.

    The topline on a consolidated basis grew 23.8% YoY led by higher room rates and occupancy rate. For the third year in a row, most markets across categories witnessed an increase both in terms of occupancy and average rates. Though, the occupancy growth was moderate than in the past few quarters, average rates, on the other hand, saw exceptionally strong increase over the previous year. This was mainly due to the demand-supply imbalance in certain cities like Delhi, Hyderabad and Goa, which enabled hotels in these cities to charge higher tariffs. Also, the seasonality impact was rather muted during the quarter. This can be brought out from the fact that even during the second quarter, which is a lean season, the hotel chains witnessed 65% to 70% occupancy rates. Going forward, in view of the continued shortage in room supply across various cities, we believe prices will continue to go up, for perhaps another two years. The planned addition to supply across most cities will start a rate rationalisation process and rates are likely to flatten by late 2008. Till then, the hotel majors will continue to enjoy higher topline growth.

    Demand Supply Gap Demand Supply
    Hyderabad 8,000 5,400
    Goa 6,500 2,800
    Chennai 7,500 5,000
    Bangalore 20,000 6,800
    Delhi 20,000 6,000

    Leveraging benefits: Hospitality being a fixed asset intensive business, operating leverage has played its part in raising up margins for the hotel majors during 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 34% YoY in 2QFY07 as compared to last year, while the margins stood at 29% (26.8% in 2QFY06). Hotel Leela led the way with an impressive 49.9% operating margins, while Indian Hotels' margins increased by 270 basis points.

    It's party time: There has been a substantial increase in bottomline during the quarter, primarily on account of higher operating profits and higher other income. Also, a decrease in the interest cost further aided the bottomline growth which grew by 85.7% YoY. However, if one has to exclude the extraordinary items, the bottomline grew by 65.8% YoY, which is by no means unimpressive.

    What to expect?
    The outlook for the tourism industry is encouraging, at least for the next two to three years. The increase in government investment, stable political and economic climate worldwide and strong corporate performance, will continue to boost tourist flow into the country. The domestic travel is also likely to witness strong growth and will be the real driving force for this industry over the coming years. The acute shortage of rooms will prevail in the larger markets, at least for the next three years, which will result in demand outstripping supply, thereby raising the room rates over the next few quarters.

    As far as valuations are concerned, we would advise investors to screen each company and then arrive at a decision considering some key sector specific fundamentals. Diversification in terms of location as well as business mix, expansion plans and financial leverage are some of the important parameters that we would look at.



    Equitymaster requests your view! Post a comment on "Hotels: Destination India...". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process) (The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 03:37 PM