• SEPTEMBER 3, 2004

Indian Hotels: Welcome to India!

The second half of FY04, especially 4QFY04, was a favorable period for Indian Hotels, the leader in the domestic hospitality sector. With occupancy levels touching as high as 82% in 4QFY04 and the momentum sustaining, net profit in 1QFY05 grew by 70% YoY. Here are the key extracts from the latest annual report of the company.

Standalone performance:

As per the company, international travel into the country stood at a record level of 2.9 m in FY04. At the same time, domestic travel also grew by more than 15% for the second year in succession. The combination of both these factors resulted in average room rate (commonly referred to as ARRs) for the company's luxury division increasing by 5% in FY04. Since the luxury division contributed to as high as 83% of room and F&B revenues, the improvement in ARRs is a positive. Another key noticeable factor is the improvement in gross operating margin of the leisure division (37% in FY04 from 24% in FY03).

After three years of a difficult phase, FY04 was a year of turnaround in fortunes for the hotel sector. As far as the outlook is concerned, though the company expects a substantial increase in room supply in metros like Mumbai, occupancy levels are expected to remain strong. As a matter of fact, we expect average occupancy rates in excess of 72% in FY05. The company also expects robust ARRs in the second half of the fiscal year, which is a positive as far as the margin outlook for FY05 is concerned.

Apart from expansion of rooms in the domestic market (the budget hotel initiative is a part of this exercise), the company hopes to increase its presence in the international markets (especially South East Asia) through a combination of developing new properties as well as acquiring more management contracts.

Consolidated performance:

The contribution to revenues and profitability from the company's subsidiaries and associates to the consolidated entity cannot be understated. As is evident from the table below, revenues from subsidiaries, associates and joint ventures are significantly higher for FY04. While contribution has been higher at the topline level, at the net level also, the contribution ahs improved. Indian Hotels has been restructuring subsidiaries for over three years now and the results of this exercise is apparent (consolidated net margins increasing from 3% in FY03 to 6% in FY04). Going forward, international expansion is likely to be routed through associates, subsidiaries and joint ventures and therefore, the consolidated picture is important.

(Rs m) FY03 FY04
Sales PAT Net margin Sales PAT Net margin
IHCL 5,907 405 6.9% 6,961 607 8.7%
Subsidiaries 2,315 (245) -10.6% 2,610 (185) -7.1%
Associates 3,855 90 2.3% 4,690 143 3.0%
Joint ventures 2,342 187 8.0% 2,833 423 14.9%
Total 14,419 437 3.0% 17,095 987 5.8%

The stock currently trades at Rs 378 implying a price to earnings multiple of 24.6x its FY04 consolidated earnings. While we remain optimistic about the long-term growth prospects of the company (arising out of increased tourist arrivals and sustained growth in domestic tourism), the industry is highly vulnerable to geopolitical factors. But we expect the strong growth in domestic tourism to insulate the company from global events in the future, albeit to an extent. More importantly, post the FCCB issue, the company's balance sheet allows it to invest/acquire assets at a faster rate than in the recent past. Overall, amidst the high risk profile of the sector, the long-term outlook remains positive.

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