India's two biggest hotel chains may see dip in profits

Indian Hotels (IHL) and East India Hotels (EIH), two of the country’s biggest hotel chains, may post their first annual drop in profits for the first time in five years. The global economic slowdown and a spate of cancellations following the November 2008 terror attacks has led to decline in occupancy rates.

Indian Hotels, which owns the luxury Taj brand of hotels, may see its profit decline 47 per cent to Rs 200 crore from Rs 377 crore last year for the fiscal ending March. EIH, a part of the Oberoi Group, is likely to see a profit figure of Rs 154 crore from Rs 223.6 crore, a fall of 31 per cent, a survey of analysts has said.

Occupancy has dropped to as low as 55 per cent, pulling down some of the stocks in the sector by around 55-60 per cent.

In January, the average occupancy rate of hotels fell to 58 per cent as against 78 per cent in January 2008, according to a Citigroup report.

“Average room rentals (ARR) came down by 14 per cent year-on-year in 10 key cities across India, with Banglore and Pune reporting the least occupancy for January, at 49 per cent and 43 per cent , respectively,” said the Citigroup report on hotels sector.

Further decline in ARRs will impact the profits of the company in (2009-10) FY10 by around 5 per cent.

IndiaInfoline expects the hotel sector’s margin to remain subdued for the next two years.

Owing to the slowdown, Indian Hotels has pulled back some of its earlier uncommitted capital expenditure plan in Mumbai and Noida, analysts said. The chain was expected to add around 2,078 rooms to its portfolio by the end of FY10.

However, Indian Hotels stands a better chance compared with EIH during this downturn, as 64 per cent of its new inventory is coming in the Ginger hotels and management contracts.

“Indian Hotels is present in all segments, which insulates the company to a certain extent against a long term profit decline. Ginger hotels, a low-end hotel chain, is providing volumes to the company when its premium segment hotels are not doing well”, said Himani Singh, an analyst at Centrum Broking Pvt Ltd.

However, Singh is not bullish on the medium to long term prospects of EIH, due to its presence in the luxury segment only.

“EIH’s major chunk of revenue comes from its Mumbai property, which has been the target of terror attack. Over the next year, the company will add only 220 rooms in its portfolio, which is not enough to boost its volumes in the FY10.”, Singh added.

The two hotels chains are expected to get over Rs 400 crore of insurance claim in June-August 2009. According to analysts, EIH will take the decision of utilising the insurance claim after receiving the full payment, while Indian Hotels is expected to use the amount to improve its cash flows.

According to sources, both companies have received around Rs 25 crore each as a part of immediate payment from insurance providers.