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Indian Hotels: Profits remain elusive - Views on News from Equitymaster
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Indian Hotels: Profits remain elusive
Nov 26, 2014

The Indian Hotels Company Ltd (IHCL) has announced its results for the quarter ended September 2014. The company has reported 4.6% YoY increase in consolidated net sales and loss of Rs 977 m at the consolidated bottomline. Here is our analysis of the results.

Performance summary
  • Consolidated net sales for 2QFY15 grew marginally by 4.6% YoY on account of sluggish performance of the company's hotel portfolio in the developed world.
  • The consolidated operating margins decreased sharply by 2.8% YoY. The consolidated operating profits fell by 62.3% YoY due to a 6.5% YoY increase in employee expenses as well as an 11.8% YoY increase in SG&A expenses.
  • The company posted a consolidated net loss of Rs 977 m for the quarter ended September 2014 largely due to the poor operating performance as well as a 23.9% YoY fall in other income.


Standalone and Consolidated financials
  Standalone Consolidated
(Rs m) 2QFY14 2QFY15 Change 2QFY14 2QFY15 Change
Net sales 3,909 4,157 6.3% 8,959 9,370 4.6%
Expenditure 3,655 3,956 8.2% 8,577 9,226 7.6%
Operating profit (EBDITA) 255 201 -21.0% 383 144 -62.3%
Operating profit margin (%) 6.5% 4.8%   4.3% 1.5%  
Other income 158 258 63.3% 285 217 -23.9%
Interest cost 279 250 -10.6% 461 460 -0.2%
Depreciation 302 295 -2.4% 804 749 -6.8%
Exceptional Item (2,938) (47)   (3,741) (69)  
Profit before tax (3,107) (132)   (4,338) (916)  
Tax (104) (57)   (96) (6)  
Profit after tax/(loss) (3,003) (76)   (4,242) (910)  
Minority interest - -   (50) (41)  
Share of profit of associates - -   (43) (26)  
PATafter minority and sh. of assoc. profit (3,003) (76)   (4,335) (977)  
Net profit margin (%) -76.8% -1.8%   -48.4% -10.4%  
No. of shares (m)         807.5  
Diluted earnings per share(Rs)         (14.1)  
P/E ratio (x)*         N.A   
(* On a trailing 12 months basis)

What has driven performance in 2QFY15?
  • IHCL's standalone revenues for 2QFY15 increased by 6.3% YoY. This was a rather muted performance. Occupancy rates (OR) as well as average room rates (ARR) have still not witnessed a significant improvement despite the enthusiasm surrounding an economic recovery. The standalone operating performance continued to remain under pressure. The sharp fall in operating profit YoY was due to the rise in staff costs and power & fuel expenses (as a % of sales).

    Cost break-up
      Standalone Results Consolidated Results
    As a % of sales 2QFY14 2QFY15 2QFY14 2QFY15
    Cost of goods 10.0% 9.9% 10.9% 10.8%
    Staff costs 28.9% 30.5% 37.5% 38.2%
    License fees 6.8% 6.6% 5.3% 5.1%
    Power, fuel & light 10.8% 11.3% 8.9% 9.0%
    Other Expenditure 37.0% 36.8% 33.1% 35.4%
What to expect?

The company's standalone business continues to face pressure at the operating level. This is largely due to the fact that revenue growth remains muted. However, it must be kept in mind that we are entering the seasonally strong period of the year for the hotel industry. The expected economic recovery will help the standalone business get back into the green we believe. Despite this, the company's fortunes will be largely driven by the speed of the turnaround in the international business. A lot will depend on the new CEO and the strategic direction that the company takes.

During the quarter, the company completed its rights issue. IHCL allotted 181.8 m Compulsorily Convertible Debentures (CCDs) of Rs 55 each. It has raised RS 9999.1 m from the issue. The allotment of the CCDs was done on 1st September 2014. We had expressed our view about the rights issue in a note on 7th August 2014.

The company also sold off 100% stake in its premium 'Blue Hotel' in Sydney Australia. The buyer was Australia Hotels & Properties and the consideration received by IHCL was A$ 32 m. This is in line with the management's plan to divest certain loss making international properties.

We had recommended that investors Sell the stock and book profits in our note on 17 April 2014 as the stock had breached our target price of Rs 75. We are currently updating the financial estimates of the company from a FY17 perspective. Considering the risks and uncertainties that the company faces, we recommend that investors do not buy the stock at current levels.

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