• OCTOBER 25, 2001

Indian Hotels: Abyss likely to deepen

A slowdown in the global and domestic economy were enough a challenge to cope with but the Indian hospitality industry, as worldwide, has been hit with the aftermath of September 11 incidents. However, with approximately 75% of 2Q completed prior to the terrorist attacks the results could largely reflect the challenging times faced by the company anyways.

(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Sales 1,429 1,473 3.0% 2,833 3,053 7.7%
Other Income 64 81 26.9% 105 133 26.6%
Expenditure 1,127 1,209 7.3% 2,191 2,396 9.3%
Operating Profit (EBDIT) 303 264 -12.7% 642 656 2.3%
Operating Profit Margin (%) 21.2% 17.9%   22.7% 21.5%  
Interest 86 124 45.0% 158 248 56.9%
Depreciation 110 123 12.3% 217 246 13.1%
Profit before Tax 171 98 -42.8% 371 296 -20.4%
Extraordinary items (4) 842   (4) 818  
Tax 83 114 38.0% 135 167 23.2%
Profit after Tax/(Loss) 85 826 875.3% 232 947 307.8%
Net profit margin (%) 5.9% 56.1%   8.2% 31.0%  
No. of Shares (eoy) 45 45   45 45  
Diluted Earnings per share* 7.5 73.2   10.3 42.0  
P/E Ratio   1.8     3.2  
* annualised            

Although for 1HFY02 Indian Hotels has reported a moderate growth, the extent of slowdown can be gauged from the drop in YoY turnover growth over the past two quarters. Topline growth, YoY, in 1QFY02 was 12.5%, which has fallen to a marginal 3% in 2QFY02. The company is likely to continue to face a challenge in achieving topline growth for rest of the fiscal with business & tourist travel expected to slowdown, as a fallout of the terrorist attacks. Also, the industry tends to hike average room rates (ARRs) in the second half of the fiscal, as peak tourist season starts in India. However, with the existing uncertainty and expected decline in inbound travel (travel into the country) hospitality companies are not likely to raise room rates. Consequently, any YoY growth, if not decline, is likely to become even more challenging.

Another worry for the company is that despite lower business volumes operating costs continue to rise. Although the company had carried out a voluntary retirement scheme (VRS) last fiscal, staff costs for 2QFY02 has increased by 9%. Other operating expenditure for the same period has increased by 9.5%. This is due to the ongoing IT initiative undertaken by the company. Also, inclusion of the Lake Palace, Udaipur property on license basis has added to the costs. As a result operating margins have declined by 330 basis points in 2QFY02 and 120 basis points for half year ended September '01.

As part of the strategy to improve service offerings the company has undertaken inorganic growth and renovations at its key sites. This has led to substantial amount of capital expenditure over the last two fiscals. Consequently, interest and depreciation expense has increased in the current financial year.

With lower operating profits and higher fixed costs pre-tax profits have fallen substantially over the quarter and half year ended September '01. Quality of earnings has been severely impacted in the current quarter, which is reflected by pre-tax profits being almost wiped out on removing the other income effect. That said, post tax profits have been salvaged by extraordinary items. Indian Hotels transferred the air catering business to a separate company in which Singapore Airlines is expected to acquire 49% stake. The sale of business has accrued pre-tax profits of Rs 886.4 m. Other extra-ordinary items pertain primarily to amortisation of VRS expense, which is to be written off over five years. Earlier, the income tax act allowed immediate provisioning of VRS expense. However, under Finance Act 2001, VRS expenses are to amortised over a five year period.

As per Accounting Standard-22, deferred tax upto March '01, amounting to Rs 766.6 m, has been adjusted against general reserve. Tax provisioning in the current fiscal is inclusive of any deferred tax liability/asset. On adjusted annualised earnings for 2QFY02 the company is trading on a multiple of 15.6x.

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