Xanadus on Earth?
The hotel industry, in the main the 7 and 5 star luxe segment, spews glitz and glamour, and represents the 'stuff' that dreams are made up of. And, to add to its aura, the industry is advertised as a veritable 'Xanadu' on earth. Indian Hotels in its latest annual report to the shareholders, crows that the re-opening of The Pierre, New York, was attended by the city's cognoscenti, including such celebrities as Michael Douglas and Tina Brown. One would also be tempted to think that this is an industry which can therefore weather any storm. Not by a mile. In reality, it is a sector which is buffeted by acute pulls and pressures. It is also characterized by high value addition, but not necessarily accompanied by high margins. Global and country specific slowdowns, recessions, terrorist activities, pandemics, travel advisories arising from a variety of adverse political and social upheavals, increasing competition, the periodic renovation and repositioning of properties and at some cost at that, and such like, are among the many hiccups that confront this sector. Add to this the high capital costs, and the long gestation periods, and one gets the complete picture. For example, on a rough basis, on a gross fixed asset base of Rs 24 bn, the company was able to rustle up an operating income of only Rs 14.7 bn. Or take the case of its subsidiary, St. James Court Hotels. On a fixed assets base of Rs 6 bn, it could generate an income of only Rs 2 bn.
Or consider even the consolidated results of the group. For the financial year ended March 2010, it reported a consolidated total income (including income from air catering and from ready to eat, ready to cook businesses) of Rs 26 bn against Rs 27.8 bn in the preceding year, but the bottom-line disclosed a net loss of Rs 1.4 bn, against a profit of Rs 120 m in the preceding year. These are niggling margins by any yardstick, and a total anticlimax at the end of it all. These results also incorporate the financials of 16 subsidiaries, including 9 overseas entities, and, 7 jointly controlled companies, including 2 videsi companies. (The company also separately has 13 associate companies-10 in the domestic sector and 3 in the international sphere). For the matter of record, the inventory of the Taj group as on March 31, 2010 consisted of 103 hotels and 12,243 rooms, classified under the categories of Luxury hotels, Premium hotels, the Gateway Hotels, and Ginger Hotels. The working result of the standalone company however makes for much better reading. On a gross income of Rs 15.6 bn, it was able to register a profit before tax of Rs 2.2 bn.
The many faces of the company
One wonders how companies of this size and magnitude get to manage the multitude of businesses and get something out of it all at the end of the day. The Taj group for one is definitely not getting the bang for the buck, from the raw data that it has made available. It has furnished as per law the brief financials of the sixteen subsidiaries, and the barer details of its jointly controlled companies. There is of course no information on its associate hotels. The financials of the subsidiaries make for depressing reading. Some twelve of the sixteen companies are 100% owned subsidiaries, while one, St James Court is a 54% subsidiary and two others; Residency Foods and Innovative Foods are 99% and 69% held subsidiaries. Of this lot of 16 companies, 7 are incorporated in India while the balance 9 is incorporated abroad. The sixteen companies collectively have an equity base of Rs 26 bn, but have collectively negative reserves of Rs 4.1 bn. Singly or collectively, none of these eminences appear to have declared and payed any dividend. On a total income of Rs 9.8 bn, the subsidiaries totted up a pre-tax loss of Rs2.3 bn, and a post tax loss of Rs 2.5 bn. As many as 7 of the 16 subsidiaries have shown losses, though some of these non entities have posted very marginal losses. The companies posting marginal losses also boast marginal turnovers!!!
The colorful subsidiaries and affiliates
The most highly capitalized company of this lot, International Hotel Management Services Inc, and incorporated in the US, is also the biggest contributor both to the turnover and to the losses. Presumably this company, as the name implies, is into the business of hotel management services. On a capital base of Rs 15.8 bn, it had negative reserves of Rs 5 bn. It has fixed assets of Rs 14.6 bn, (why does a hotel management services company require fixed assets of this magnitude?) and generated a turnover of Rs 3.5 bn, but recorded a loss of Rs 1.8 bn. This is definitely some sort of a forgettable achievement. In similar vein, IHMS Australia is in no better shape. The bigger mystery is Samsara Properties, which presumably is a hotel chain. On a capital base of Rs 900 m, it had negative reserves of Rs 2.1 bn. It has investments of close to Rs 12 bn, and is the recipient of secured and unsecured loans of Rs 14.3 bn. But all it could on the turnover front was to record a pip squeak income of Rs 1 m and rack up a loss of Rs1 bn. Now, this is a performance which even the magician, Chris Angel, will not be able to emulate.
There are a few other colorful subsidiaries of such hue, and another entity that stands out is Taj International Hotels (HK). By meandering thru the schedules, one finds that the parent has deposited at year end Rs 13.45 bn with the subsidiary, though the subsidiary's accounts show borrowings of only Rs 9.5 bn. Quite apparently the parent is planning a big thrust in the Hong Kong arena. But for the present, and given the input of funds, both in the form of equity and loans, the Hong Kong subsidiary is an indifferent performer by any stretch of imagination. And wait, there is more to this masala mix. Indian Hotels is raising money thru issue of capital or thru internal accruals and splurging it like confetti on its numerous properties. The parent at year end had placed long term deposits of Rs 8.5 bn with the subsidiaries, a further sum of Rs 1.4 bn in hotel properties, and advanced another Rs 77 m to them. Of the total amount of Rs 14.5 bn that it raised thru the rights issue in 2008-09, Rs 7 bn has been invested in subsidiaries and associates, and a further Rs 3 bn has been invested in domestic companies. That is a neat 70% of the funds raised. That is the bottom-line as regards the subsidiaries.
Then there are 7 jointly controlled entities, 5 of them incorporated in India, and 1 each incorporated in Hong Kong and South Africa respectively. The South African entity goes by the acronym of IHMS Hotels-expanded it could well mean International Hotel Management Services. The percentage holding in the capital of these 7 ventures ranges from a lowly 21.1% in Taj Karnataka Hotels, to a high of 50% in IHMS. This motely bunch appears to be putting on a much better show than the subsidiaries. Indian Hotels holds assets worth Rs 3 bn, and its share of income came to Rs 1.4 bn, with its share in the expenditure at Rs 1.1 bn. In other words its share in the bottom-line is inked in black. However, all that the parent has got to show from this massive exercise of giving to its many affiliates is a paltry dividend income of Rs 170 m.
An accounting exercise
Interestingly enough the schedules show the parent as having received operating fees of Rs 760 m from the many hotels that it services across the globe, but how it has accounted for this income in the main body of the income schedule, is not clearly evident. Further, the deposits and advances that it has made to subsidiaries and to other companies, does not appear to have coupon rates attached to them (there is a innocuous interest accrual of Rs 52 m from intercorporate deposits.) There is also no immediate sign as yet that the funds raised thru the rights issue has had much of a positive impact on the well being of the siblings. It has also bought and sold debt securities of a very large order during the year, but appears to be equally inept at trying to profit from this exercise. With so much of negativity happening all around is it any surprise that there is pressure on the company's bottom-line? More pertinently, what is the larger message that the management is sending out?
As it is the company complains that the competition from international hotel chains opening up in India is hotting up the competition as they seek to address the demand supply equation. The success of the Taj group it says will be dependent on its ability to compete in all areas that make up this industry. It will help id it also manages simultaneously to pan out its funds in manner which will help to compete with this competition.
PLEASE NOTE THAT I AM NOT A SHAREHOLDER OF THS COMPANY
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.